Risk management and corporate governance are some of the systems that are being used today by organizations. Such systems are significant to the survival and stability of an organization. Though corporate governance and risk management are ideal, there are some costs and implications that are faced by a company that adopts these procedures. For a company to enjoy the benefits of corporate governance, it has to suffer the implications and the costs associated with it.
Risk management calls for computations regarding the risk so as to be able to identify the magnitude of the damage it can cause to the organization. Calculations are normally complicated more so in large organizations (Chance and Brooks 2015, p. 23). The calculations call for competent employees in the organizations. Organizations must spend more funds to retain competent employees in the company, who can identify and assess the risk that is associated with the operations of the company. An intricate calculation demotivates the workers and leads to more costs.
Risk management gives an organization the ability to identify the risks, evaluate them and then come up with ways of mitigating them. The ability to identify the risk has implications for the company (Sadgrove 2016, p. 21). The company is now responsible for the management of all the risks that are predicted. When an organization does not manage all the risks, the ones that occur due to mismanagement, it becomes the responsibility of the organization to cater to them. Unmanaged losses being the sole responsibility of the company are devastating; this is not the fact when the company is operating without a risk management program.
If a company chooses corporate governance as a way to lead its company, then it must ensure that it audits its financial statements from time to time. The company can engage in an internal audit or an external audit. There are some requirements that must be fulfilled before incorporating an effective audit. The internal and external Audit procedures include;
Both the internal and the external audit should be bestowed with independence. It is important for an audit team to give a true and fair opinion on the state of the financial statements. The influence by the management especially in the case of an external audit can have serious implications for the company. The external auditor during the AGM is required to give his opinion regarding the financial statements. If the auditor is influenced by the management, then he will misrepresent the facts of the company (McNeil 2015, p. 18). The shareholders will be unable to know what the position of the company is. The decision-making processes are inhibited in the case of influenced audit opinions. The management thus is required to support the auditing process regardless of their self-interests.
In the case of an internal audit, a company appoints an audit committee which consists of the employees of the firm. The company thus must engage funds in the training of the employees more so in accounting skills so that they can carry out the responsibilities given to them with ease. Continuous training means more time will be spent out of work and thus the organization’s operations will be slowed down (Pritchard and PMP 2014, 56).
Due care refers to ensuring quality and responsibility for actions concerning your line of duty. Both the internal and the external auditors require incorporating reasonable care in their line of duty. Neglect of the sole responsibilities makes the auditors responsible for any misleading information. For example in the case that an auditor received all the information that he or she required and to his best of knowledge knew that there were instances of misappropriations and yet he went ahead to give a statement that the financial statements were correct. The auditor will be held liable for the misleading information that he gave to the management and shareholders. The same applies to the internal audit committee, their independence is critical, and thus there is need to apply professional due care to avoid liability to the losses sustained due to the breach of audit procedures.
The internal audit has the requirement of planning before starting off. The planning is for the purpose of identifying the areas of concern, allocating the resources that will be required for the audit and ensuring that sensitive areas are prioritized. Planning ensures that the objectives of the audit will be achieved. Also, a company has to engage in a lot of recording that is time-consuming and costly to the organization (Saunders and Cornett 2014, p. 17). Same applies to an external audit where the concerned parties should make available all the information that the external auditor sees as important. Most of the time the normal operations of the organization are disrupted when auditing is going on.
The external auditor must depend on the internal control systems. The internal controls must be part of the internal auditor’s responsibility where they should ensure that they are efficient and in the bid to achieve the objectives of the management. It is also significant to ensure that all the statutory procedures adhere to the later (Rothaermel 2015, p. 33). The internal control duties are tedious to the organization as an implication of corporate governance.
To give an opinion on the true and fair view of the financial statements, there must be evidence. The shareholders and the management want to know why you came up with such an opinion (Knepper 2016, p.22). The evidence most of the time is in the form of the working papers. The auditor thus must ensure that the working papers are properly organized and due care incorporated for an efficiency of his work.
Corporate governance must be characterized by reporting of the outcomes of the audit procedures. The reporting is relevant to the management and the shareholders. Shareholders want to know the financial position of the company. Also, they want to know if the organization is performing or not. Reporting most of the time is a pinch to the management who want to appease the shareholders (McCahery 2016, p .11). When a loss is reported or a fraud then the management stands to lose. The implication of corporate governance is that more transparency in the management is exposed to scrutiny by the owners of the company. The scrutiny can lead to misrepresentation of the financial statements so as to save their jobs.
Benefits of Risk Management and Corporate Governance Strategies
The requirement by corporate governance to give annual reports in AGMs has brought transparency in organizations. Organizations now are keener and honest in all their dealings. The management now fears that they are going to lose their jobs if they fail to accomplish the objectives of the organization. Transparency has translated to more profits for organizations thus growth and survival (Cohen and Dey 2013, p. 1298).
The integration of auditing in governance has helped in the efficiency of organizations. Organizations have to carry out follow-up procedures to make sure that all outcomes are looked into. To be able to identify if the laid out procedures are working, it is essential to follow up to ensure to determine if the company is on the right track or not. If there are any variations, then there should a laid out procedure to correct the situation. Follow-up procedures have made sure that companies attain their objectives.
Risk management has helped in the identification of potential hazards. It is evident that when risks are identified, they are corrected through the policies that are formulated by the company. In the end, the numbers of risks are reduced (Clayton 2016, p. 24). In the end, the company only suffers fewer risks, and most of the objectives of the organization are accomplished.
When a majority of the risks are mitigated, then it is evident that resources will be used efficiently. Time as a resource will be utilized on other strategic factors that are beneficial to the company. The time that otherwise could have been used in dealing with a risk that has already occurred can be used in the accomplishing of other tasks (Hopkin 2017, p. 67). Resources are saved when they are used in tasks that have no risks associated with them because the risk has been identified and mitigated.
Risk management creates opportunities for organizations. Mitigating of risks leaves a lot of resources at the disposal of the organization. The organization can now use the resources to venture into new ideas and even in embracing change. With risk management, the organization can advance and also have a competitive advantage (Lam 2014, p. 32).When an organization can compete fairly with its rivals, then it is an achievement on its part.
Corporate governance has ensured that there is the separation of ownership. Separation of ownership has enabled organizations to be owned by many individuals. When an organization is run by many people, then there is accountability (Honoré et al. 2015, p .535). Power is not vested only in a few individuals but on some people that have interests in the going concern of the organization. The shareholder’s interests are now prioritized because of the presence of corporate social responsibility.
Conclusion
Risk management and corporate governance are crucial issues to the effectiveness of operations. There are implications that must be looked into before embarking on the two strategies. The benefits are fulfilling, but they must be weighed against the costs. Risk management and corporate governance help in the achievement of the objectives of the organization.
References:
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processes, internal audit may not be able to continue to stand alone,’ Internal Auditor,
vol. 73, no. 2, pp. 22-24.
Honoré, F., Munari, F. and de La Potterie, BVP. (2015) ‘Corporate governance practices and
Companies R&D intensity: Evidence from European countries,’ Research Policy, vol. 44,
Hopkin, P. (2017) Fundamentals of risk management: understanding, evaluating and
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