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Duties and Responsibilities in Risk Accounting

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Chapter 3


The accountants mission in risk control

A basic law of capitalism is that money will migrate to the environment it considers to be more secure, and/or the highest return is to be had. The pressure is relentless on money managers to care for the assets entrusted to them, and to do so better than they have done in the past. Also, there is a parallel pressure on the most successful companies to continue their fast growth performance, despite their increase in size following years of rapid growth. Along with expanding business opportunities, two types of controls contribute to better results:

Cost control, sustained through cost accounting, and Risk control, promoted by means of risk accounting, as we saw in Chapters 1 and 2.

Reporting along the risk accounting and cost accounting lines of reference is necessarily based on both qualitative and quantitative criteria, for which the accounting Buy this file from component must provide metrics. An additional requirement is that of dependable information on the monetization of risk exposure and on projected and realized returns for risks taken which must be performed in a most disciplined way under company-wide standards. Discipline is always a key factor to success, even more so when volatility and uncertainty increase the demands posed on risk control procedures. Therefore, management must encourage a disciplined accounting culture by promoting integrity, high ethical standards, segregation of duties, clear lines of responsibility, appropriate supervision and a clear set of standards. Because in all issues related to risk control (and cost control) accounting acts as a registration and monitoring system, another important ingredient of sound management is comprehensive internal controls, with activities such as approvals, authorizations, compliance checks and follow-ups on non-compliance clearly defined at every level of activity.

If the entity is to achieve sustained success, then confidence and trust, built up over many years, are most vital, and Reputation, expertise, experience, integrity and intellectual honesty not just profits are crucial elements that contribute to growth and survival.

To effectively contribute in controlling exposure, accountants must understand the risk universe of their firm, its flow of business and the accompanying flow of

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Risk Accounting and Risk Management for Accountants

risks. This means that their systems and procedures must clearly delineate (and follow up on) risk elements, allow efficient management of the limits system, keep close track of counterparty and financial market risks, and manage assets and liabilities in a consistent and secure manner. Prerequisites to doing so go well beyond the availability of a system of accounting and of technology for data capture, mining and reporting. Peter Drucker is credited with the principle that every policy, every programme, every activity and the people responsible for its execution, as well as record keeping, should be controlled with a number of critical questions:

What is your mission? Is it still the right mission? Is it still worth doing it?

Druckers principle defines a procedure that permits critical examination of the accountants responsibilities associated with the management of risk. Have we considered each major risk individually? Did we set margin of error on major Buy this file from risks (see Chapter 4)? Have we tested correlations among major risks? Have we established the correlation prevailing between first-order and second-order (major and secondary) risks? The answers to be provided to these questions must be given in the most disciplined and well-documented manner. One of the experts who contributed to this book suggested that the accountants action in this regard presents several characteristics of an officers duty in battle. The function of disciplined movement is to produce:

In the minds of friends the assurance that they cannot lose, and In the minds of foes the conviction that they cannot win.

Certain practices, like creative accounting (section 2), and those who practice it are the accountants foes. Industrial engineering provides a lesson on how to control such deviations. Productivity standards specify that in work on the production floor performance typically varies between 80% and 220% of a given standard. The reason for performing below this may be loafing and above it might be some sort of cheating. Because nothing proceeds in a straight line, productivity varies from person to person and workpost to workpost but there are limits. This is a basic principle in cost accounting. Likewise, risks follow a distribution characterized by a main body and outliers. To learn about what underpins exposure, including unusual

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