This article will deal with risk management of small and medium-sized public accounting firms. It will provide a guide to dealing with and managing risks in an accountants office.
In general, large public accounting firms have the structure, resources, and methodology necessary to assess risks that affect them. Universities and specialists are hired, studies are carried out, and solid conclusions are drawn. At least that is expected from the investment of such resources in risk management issues.
However, to a large extent, the accountant profession is composed of medium and small companies, along with independent professionals. Their financial, market, operational, and legal risks are different from those of large firms. In many cases, their situation has not been studied or analysed correctly.
This article will provide some valid recommendations. We will first give an explanation of and a brief analysis of each of the traditional risks involved in this type of firm.
Traditional Risks Involved In The Business World
Liquidity risk
This refers to the possibility of obtaining a negative effect when selling a service that is difficult to place in the market.
Operational risk
This comes as a consequence of deficiencies or operational limitations of the business itself, such as the absence of sufficient trained personnel, lack of preparation, etc.
Counter-party risks
These are the possible costs of being associated with a client who could not pay for services provided to clients. Or who cause harm by associating the name of the accounting firm with them, such as criminals or persons of dubious reputation, etc.
Market risk
The general definition of market risk is: exposure to a negative variation in costs or profits due to a change in market prices.
Traditional Risks Applied to an Accountants Office
25The above risks are common and typical in many fields of business risk management. How can they be applied to an accounting firm?
Perhaps we could manage them as quantitative, qualitative, business management risks and use them to examine recent audit results.
Quantitative risk should be evaluated by aspects such as the efficiency of the business’ cash flows. The amount of capital of the firm itself. Also, the adequacy of the fees to be charged and the financial situation of the business.
The business’ qualitative risk should be determined by specific aspects such as its main clients, the industry in which the firm is immersed. The number of clients and suppliers, and the experience of the management are also relevant. The number of products in the market, key personnel, should also be taken into consideration.
Operational risk mainly results from issues such as pressure from partners for management to generate profits or positive cash flows. Financing needs, additional capital, reserves for not recognising or (inadequately recognising) income, very high management compensation based on results are also very important to consider. Unsound accounting practices may also result in risk, comparable to a management’s concealment of information from the firm’s partners.
The results of recent accounts audits can point out risks that other accounting professionals have identified in the recent past. Pressure to impose ideas, unreasonable reporting dates, detected fraud, unexplained departures of firm personnel, may all cause problems. It is smart to take these into consideration.
Litigation is also a source of risk for the firm, as are unnecessarily complex transactions or contracts with parties to the firm. This should not be under-evaluated.
One suggestion to assess the firm’s total risks is to develop one or more risk matrices that evaluate the different types of risk to which the firm is subject by assigning values to each of the different risks noted above.
The analysis of these matrices will surely lead to smart business decisions. It also will allow for defining the levels of capitalisation, or levels of insurance, or what is sought to manage, or mitigate. All of which may incur different types of risks to which the firm is subject in particular.
Conclusion
In the current era, a more effective, efficient, and professional management of public accounting firms is required. Demands on external public accountants are beginning to become commonplace.
It is, therefore, crucial to adopt risk management concepts both inside and outside the firms in order to prevent serious problems for the firms and their partners. Managing risks is an essential part of running an accountants’ office of any size.