Risk Management and Technology

Uploaded On: 12 Mar 2024 Author: CA Tanmay Bodhe Like (81) Comment (0)

Today every single organization is facing varying uncertainties on account of technological changes, political impacts, market competition, and other disruptions. These uncertainties, if not identified and addressed on time can pose a direct impact on the organization's objectives.

Risk Management in precise terms, means particular efforts taken for minimizing / mitigating the risks. It encompasses a systematic and disciplined approach to mitigate risk and add value to meet the organization’s objectives. Effective risk management can help organizations reduce costs, improve efficiency, and increase profitability, amongst other benefits. It can also help organizations make learned decisions based on transparent and reliable information enabling business expansions.

Organizations face various risks that can impact their operations, finances, and / or reputation. Some of the common types of business risks include :

  1. Strategic risk: This occurs when a company’s business strategy is faulty, or its executives fail to follow a business strategy. A company may fail to reach its goals due to strategic risks. Usually, such risks have long term impacts on the overall objectivity.

  2. Compliance risk: This is the risk of violating external laws and regulations or even internal standards, which can result in financial penalties or exposure to legal consequences.

  3. Liquidity risk: This risk arises when assets or securities of the organization cannot promptly liquidate to overcome downturn in volatile market. Ineffective credit management, fund utilization, investment and disinvestment strategies are some of the factors leading to increased liquidity risks.

  4. Reputational risk: This is the risk of damage to a company’s reputation due to negative publicity, customer complaints, financial misrepresentation or frauds etc.

  5. Operational risk: This is the risk of loss or inefficiencies due to inadequate or failed internal processes, people, or systems, or from similar external events affecting the operations of the Company. Such cases not only impact the transparency or reliability but also affect the efficiency, productivity and/or profitability of the Company.

There are multiple stages in the risk management framework. These primarily include:

  • Risk Identification: Organizations should regularly identify potential risks that could impact their operations, such as financial uncertainty, legal liabilities, strategic management errors, accidents, and natural disasters.

  • Prioritize Risks: The risk assessment framework requires prioritizing the risk prone activities to provide a constructive approach and address key issues as a priority. Nevertheless, the risk assessment framework does not ignore the allied issues which may in consolidation have wider impacts. The risk of fraud perpetration is pivotal in the assessment of the organization's mitigation plans & accordingly should be always prioritized first.

  • Risk assessment: Organizations should develop strategies to reduce the likelihood and impact of identified risks, which can be done through periodical assessments. These assessments ensure adherence to laid down procedures, identify inefficiencies, opportunities for cost savings, and potential for alignment with best practices. Periodical assessments also help companies in predicting the trends for corrective/ preventive actions. 

  • Monitoring: Organizations should monitor the risk mitigation plans for their coverage and effectiveness. An alternative course of action such as implementing suitable well defined policies and procedures, safety protocols, system checks and balances, segregation of duties, diversifying investments, and adequate insurance coverage helps enhance the control procedures.

  • Set Mitigation Plan: Each risk exposure not supported by adequate and effective control procedures is subjected to alternative mitigation plans. Such plans should be cost effective, effectively implementable, and address the risks suitably.

  • Monitor the Risk Compliances: Periodic evaluation of the risk mitigation procedures implemented enhances the control environment and sets a disciplined and transparent flow of information. It further improves resource optimization and protects organizations from any uncertainties.

  • Establish a risk management culture: Organizations should establish a culture of risk management, where all employees are aware of the importance of risk management and are encouraged to participate in the process. Code of Ethics, HR and Compliance policies, Training for employees, System enhancement for automation, process flows and procedures, and exception handling procedures are required to be well set to involve each employee's participation in implementing such a culture.

Risk management is not a one-time activity, but a continuous and dynamic process that requires constant vigilance, adaptation, and improvement. Combined with suitable technology, the function can outperform.

Over the years the risk management practice has undergone a dynamic change. With the technology advancement, innovative practices are adopted to address the risk assessment process. There are various tools including audit management, documentation, and analysis which advance the audit process, and maintain the flow of the audit planning, execution, and reporting. 

The planning and documentation tools address the team structuring, audit schedule, resource allocation, cost management, and documenting the risk control matrices for the organization. They also help establish audit trails and ensure systematic adherence to the standardized workflow and timely and collaborative reporting.

Prominently, various CAAT tools, macros, power BI, and Excel are also being developed/ used where voluminous data is being analyzed for trends, outliers, and exceptions. These tools are at times linked to the accounting and ancillary packages for addressing real-time deviations and setting corrective/ preventive actions. Such tools are also known as the ‘Continuous Auditing and Continuous Monitoring’ tools. These tools have also helped in the identification of potential frauds through analytics creating work files for a determined approach.

With the introduction of AI, enormous data points can be analyzed for predicting future risks, tracking machine health, studying consumer buying patterns and footfalls, crop patterns based on environment and soil, and more. Chat GPT and allied tools have eased the extraction of specific information in one place through public domain data to reduce the efforts on compiling & crystallizing key records. 

In a nutshell, risk management and technology are not static or isolated phenomena but are dynamic and interdependent processes, designed by the management and stakeholders with the goals of organizations. Risk Management and technology are both challenges and opportunities for organizations, as they can offer solutions to complex problems, but may also require dealing with new uncertainties and dilemmas. Therefore, risk management and technology require careful planning, evaluation, and governance to ensure they are well-aligned with the values, interests, business objectives, and needs of the relevant parties.

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