How can operational and risk assessments help business owners save money?
Operational assessments can help business owners identify inefficiencies and waste, ensure sound decision-making and deter fraud. Each of these activities effectively reduces the cost of business, improving profitability and returns to shareholders.
Risk assessments help businesses preserve value within the firm and safeguard assets by identifying potential risks, quantifying the impact and likelihood of risks, and developing a plan for remediation. They help reduce the volatility of a firm’s earnings to a level commensurate with the organization’s risk appetite. And in some cases, they may help organizational managers insulate the firm from risks, including fraud, that might disrupt the accomplishment of organizational objectives.
Is the primary goal of risk assessments to reduce the risks an organization faces?
Not necessarily. The goal of a risk assessment is for organizational managers to better understand the impact and likelihood of risks they face, and to evaluate whether these risks are in line with the organization’s appetite for risk.
If they are outside the organization’s risk appetite, a firm’s operations and/or control structure must be changed to reduce the impact and likelihood of risks, or the organization should outsource the risks to a third party. If either of these activities does not take place, the firm may overexpose itself to risks and face potential degradation in its value.
For example, many private and publicly traded company managers and board members did not fully understand the risks their organizations bore prior to the global economic crisis. As a result, numerous financial institutions went out of businesses, but many types of businesses also found themselves succumbing to the economic aftershocks that proceeded financial institution failures.
What impact has fraud had upon organizations?
It’s hard to quantify the exact impact of fraud because much of it goes unreported. Some companies are afraid to risk their reputation should word of the fraud spread to their customers and suppliers.
However, the Association of Certified Fraud Examiners (ACFE) has estimated that the typical organization loses 5 percent of its annual revenue to fraud. Moreover, the ACFE found small businesses are particularly vulnerable to fraud because they generally lack controls to protect their assets from fraud.
This is one reason why small businesses, in particular, should focus on comprehensive operational and risk assessments. Significant amounts of value can be lost due to fraud. In the worst cases, the end result is bankruptcy.
HARRY CENDROWSKI, CPA, ABV, CFF, CFE, CVA, CFD, CFFA, is managing director of Cendrowski Corporate Advisors LLC. Reach him at [email protected] or (866) 717-1607, or visit the firm’s Web site at www.cca-advisors.com.
