Remerciez-le!

Remerciez @Admin pour avoir partagé cet document gratuitement, de la manière la plus simple, en partageant sur les réseaux sociaux.

GUIDANCE NOTE ON RISK MANAGEMENT B.M.SHARMA THE INSTITUTE OF COST AND WORKS ACC

GUIDANCE NOTE ON RISK MANAGEMENT B.M.SHARMA THE INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIA PRESIDENT (Established by an Act of Parliament) 12, Sudder Street, Kolkata-700016 Phones:91-33-2252-1021/34/35.2252-1602/1492 Fax: 91-33-2252-7993/1026 E-mail: president@icwai.org Website: www.icwai.org Foreword Across the world, Risk Management has increasingly become integral to the management of businesses. In our country, while awareness of the need for proactive risk management is growing steadily, actual progress has been limited. However our country is moving rapidly up a growth curve in an increasingly borderless and turbulent world. While competitive forces compel focus on “better, faster, lower cost”, steering a business in this exciting scenario requires a thorough understanding of risks and their mitigation. Members of our Institute have always played an active role in assisting managements to meet the expectations of their stakeholders. The prime demand from stakeholders is improvement in returns with minimum volatility. Effective management of risk is a prerequisite to meet this need. This Guidance Note provides a comprehensive overview of the subject and will enable our members to play a complimentary role in enabling organizations to meet their stakeholders’ expectations. It is heartening to note that the Professional Development Committee of our Institute has brought out this Guidance Note as our Institute’s continued contribution towards enabling our Members to enrich their organizations and remain contemporary with world trends. I place on record by sincere appreciation to Shri Kunal Banerjee, Chairman of the Professional Development Committee and to all the members of the Committee for overseeing the preparation of this publication and to Shri Prodipto Banerjea, our member, who has authored it. I also thank the PD Directorate and Studies Directorate for their contribution in bringing out this publication timely. I hope the Regional Councils and Chapters will come forward to conduct programmes to enable all our members to develop the required competence in this area. With Best wishes, B.M.Sharma President 18th July, 2011 KUNAL BANERJEE THE INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIA Chairman (Established by an Act of Parliament) 12, Sudder Street, Kolkata-700016 Professional Development Committee Phones:91-33-2252-1021/34/35.2252-1602/1492 Fax: 91-33-2252-7993/1026 E-mail: banerjee.kunal@gmail.com Website: www.icwai.org Preface The process of Risk Management was formally introduced by SEBI for all listed companies by revising Clause 49 of the listing agreements with the stock exchanges. As a result, with effect from December 31, 2005, it became necessary for every listed company to meet the following requirement - “The company shall lay down procedures to inform Board members about the risk assessment and minimization procedures. These procedures shall be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework” While management of business invariably necessitates management of risks, formal processes were absent and silo based activities was the norm. The SEBI intervention requires a comprehensive approach which has been delineated in this Guidance Note. A detailed overview has been provided to members to enable appreciation of the nuances involved and a structured approach to the risk management process has been suggested. We hope our members emerge as important resources in the risk management processes of their organization. I have the pleasure in introducing the title “Risk Management”. This publication shall act as a ready reference to assess the risk involved. I express my sincere thanks to Sri Prodipto Banerjea, a fellow member of our Institute, a pioneer in this field of Risk Management, who has authored the Guidance Note. I would like to thank my fellow members on the Professional Development Committee for their enthusiastic participation in the preparation of this Note I appreciate the timely efforts put in by the officials of the Secretariat in arranging for the release of the material. I hope that this publication will be a very useful reference to all the concerned. With Best wishes, Kunal Banerjee Chairman, Professional Development Committee 18th day of July, 2011 GUIDANCE NOTE ON RISK MANAGEMENT INDEX Ch. No. Title Page Nos. I Introduction 1 II Understanding Risk 2 III The Management Process 5 IV Environmental Risks 9 V Strategic Risks 11 VI Operational Risks 13 VII Financial Risks 19 VIII Governance and Risk 22 IX Internal Controls 24 X Driving Stakeholder Value 27 XI Setting up the Risk Management System 29 Guidance Note on Risk Management The Institute of Cost and Works Accountants of India Page 1 Chapter I Introduction In 1975, Peter Drucker had stated that “Economic activity is the commitment of existing resources to future expectations. It is a commitment, therefore, to risk and uncertainty.” While this recognition of risk was generally accepted, the traditional view was that the returns from the activity should compensate for the risk and the focus was almost entirely on return maximization. The floating of currencies in 1978 created the need for currency management. Within the next decade, floating interest rates were introduced. In a short time, management of exchange and interest rates became a specialized area heralding vast opportunities for risk managers and creating a general awareness of this need. Various theoretical structures were put forward and thanks to the ubiquitous use of computers, complex calculations are now completed in moments and are used extensively for such risk optimization. Developments in computational theory have helped in creating derivatives and new instruments leading to a phenomenal growth in the financial services sector. The last decades of the twentieth century also provided an excellent example of risk mitigation, in the case of the Y2K problem. In the late seventies, early eighties people started realizing that the use of two digits to denote the year for the date in computer systems would result in a problem in the year 2000, as the date 01-01-00 would create a confusion in the computer, since it would not be possible for it to distinguish 01-01-1900 from 01-01-2000. To resolve this problem, extensive reprogramming work was required and software professionals around the world were involved. To the credit of the software industry it must be accepted that when D-Day finally arrived, there was not a single mishap. It thus became evident that, with effective management, risk could be mitigated. Over the last quarter of the twentieth century this awareness of the scope of risk mitigation grew in leaps and bounds, and today in the twenty-first century, the management of risk has become an integral part of business management. Guidance Note on Risk Management The Institute of Cost and Works Accountants of India Page 2 Chapter II Understanding Risk I. Risk is the chance that expected objectives will not be achieved. It has been defined as the effect of uncertainty on objectives (ISO Guide 73: 2009). There are therefore two dimensions of risk, probability and impact. The origin of the word is believed to be from the Italian “risicare” which means “to dare”, implying a choice. A risk is a choice made, which would imply that if successful there would be a gain or a reward. The link with reward is thus implied in the word risk itself. Although traditionally, the word ‘risk’ was associated with adversity, current thinking has focused on the choice aspect, including both threats and opportunities. A quote from an ancient treatise provides an interesting perspective on Risk Management. “Sizing up opponents to determine victory, assessing dangers and distances is the proper course of action for military generals.” Sun Tzu, The Art of War, “Terrain” Since the world of business management has often been compared to wars, these activities would seem appropriate for managers as well. Uncertainty refers to the doubts that arise because of lack of knowledge or changing conditions or even varying attitudes. Uncertainty governs our lives. From the unknowns of living with terrorism or other law and order issues, or natural disasters, even routine problems of traffic add to the uncertainty in our lives, compelling us to cope. As soon as any risk is recognized, it creates an uncertainty. However, risk is not just the uncertainty alone, it includes the impact of the uncertainty on the objectives. Risk is an uncertainty that can be understood, measured, monitored, mitigated and ultimately leveraged. Some other terms that are often used in this context include peril and hazard. A Peril is the cause of a loss. Fire, earthquakes, tornados, floods are all perils since each of these cause losses. A Hazard is a source of potential harm, a condition that may create or increase the chance of a loss, such as, i) Physical Hazards – These consist of physical attributes that increase the chances of losses such as location, quality of building construction, nature of electrical connections and the like. Guidance Note on Risk Management The Institute of Cost and Works Accountants of India Page 3 ii) Moral Hazards – These comprise issues of integrity and include dishonesty, frauds and the like. iii) Morale Hazards – These relate to relationships between employer-employee, or amongst employees II Risks can be categorized into two groups viz., 1) Pure Risks – These are cases where there are chances of loss with no possibilities of gain. Typically these relate to losses from perils such uploads/Management/ guidance-note-on-risk-management.pdf