There are several areas of risk when running a business and these risks can have a significant effect on business operations. It is imperative to perform internal risk assessments to properly monitor and implement controls that can mitigate these risks.
A risk is the possibility of an event occurring that will have an impact on the achievement of objectives. A risk assessment is the consideration of the probable material effects of uncertain events occurring and the proper identification, measurement, and prioritization of such events. Common categories of organizational objectives include the reliability and integrity of financial and operational information, effectiveness and efficiency of operations, compliance with laws and regulations, and safeguarding of assets.
The first, and arguably most important, step is identifying risks. Consider the industry in which your organization operates and external factors that are beyond your control. Industry factors include economic cycles and market conditions, advancement in technology affecting the organization’s products or services, and supply costs. Is the industry in which you operate experiencing growth (expansion) or decline (recession)? Are supply costs increasing? It may be necessary to scale your business and prepare to implement a leaner operational focus. It’s also important to consider the general nature of the entity, such as its nature of operations, ownership structure, organizational governance, and overall financial health. Business operations include revenue sources and product or customer markets, outsourcing activities, geographic dispersion, key customers or suppliers, and related parties.
Consider legal and regulatory factors. Such risks facing an organization include the industry-specific business practices, laws and regulations significantly affecting operations, tax-related considerations, government policies, and environmental requirements. Has the government passed new laws that will affect your operations, how you do business, or perhaps increase taxes? It is important to stay well-informed on these issues and changes in the legal and regulatory environment may causes you to rethink the way your organization conducts business.
Another major area of risk to evaluate is financial reporting. These factors include accounting principles, revenue recognition standards, fair value reporting requirements, foreign transactions, and accounting for unusual or complex transactions, just to name a few. It is vital to develop a solid understanding of the factors affecting your organization’s financial statements in order to present a complete picture of the financial condition and results of your business. Standards of accounting and reporting are ever-changing and require proper implementation. If the accounting is not performed in accordance with the applicable standards, you may have a skewed image of the financial health of your business. This could lead to improper business decisions that could severely impact the organization.
Understanding business performance measures and how your organization reviews financial performance is equally important. What key performance measures are used to evaluate success or used to motivate or compensate employees? How might employees influence performance measures for personal gain?
Employee theft can be a significant risk factor in an organization. Implementing an internal control system to protect company assets is imperative. Depending on the size of your organization, this can be a large undertaking. However, if not performed could lead to misappropriation of assets, errors, fraud, and material misstatements in the reporting in the financial statements.
Risk factors can continually change, so remember to evaluate the risk areas facing your organization and be diligent about performing a risk assessment as frequently as needed. Previously unknown risks may be identified during this process. Only by performing a thorough risk assessment, are you able to properly plan for and prepare your organization to minimize the impact of risks on the achievement of your organization’s objectives. For more information on performing an internal risk assessment, please contact Kristi Yanover, Audit Partner, at (858) 558-9200.