Compliance and risk management

There are the right ways to do things, and the wrong ways. When it comes to operating a business, compliance and risk management is key to ensure that you’re doing everything by the books and are able to avoid the negative consequences of breaking rules or regulations. Compliance and risk management are different in mission and operation, but are interrelated and can be complementary to one another. Whereas risk management involves identifying all areas of risk to the organization and taking steps to control, avoid, mitigate, or eliminate unacceptable risks, compliance focuses on identifying and mitigating regulatory risks. Compliance usually stops with verification that a rule has been followed to avoid risks, whereas risk management must be anticipatory, flexible, and proactive. It focuses on identifying risks as well as monitoring and managing changes.

Definition of Compliance and risk management

Risk management is the process of identifying, assessing, and controlling threats to an organization’s capital, earnings, and reputation. This refers to the practice of identifying potential risks in advance that could include financial uncertainty, legal liabilities, strategic management errors, accidents, clinical incidents, and natural disasters. By implementing a Risk Management Plan and considering the various potential risks or events before they occur, an organization can save money, improve operations, and protect their future. This is because a robust plan will help a company establish procedures to avoid potential threats, minimize their impact should they occur, and cope with the results. On the other hand, compliance is the process of ensuring that an organization adheres to the relevant rules, regulations, or laws applicable to their business. Compliance is a critical component of any successful business, as it helps to ensure that the company is operating legally and ethically. It is also important for businesses to protect themselves from potential liability in the form of fines and regulatory/political scrutiny. Depending on the industry and the size of the business, compliance can involve different levels of complexity and oversight. Some of the most common areas of compliance include data privacy, health, and safety, environmental regulations, and financial reporting.

Risk Management Process

The risk management process is a framework for the actions that need to be taken. There are five basic steps that are taken to manage risk, these steps are referred to as the risk management process. In manual systems, each step involves a lot of documentation and administration.

Here Are The Five Essential Steps of A Risk Management Process:

Step 1: Identify the Risk

The initial step in the risk management process is to identify the risks that the business is exposed to in its operating environment. There are many different types of risks: 1- Legal risks. 2- Environmental risks. 3- Market risks. 4- Regulatory risks, etc. It is important to identify as many of these risk factors as possible. In a manual environment, these risks are noted down manually. If the organization has a risk management solution employed, all this information is inserted directly into the system. The advantage of this approach is that these risks are now visible to every stakeholder in the organization with access to the system. Instead of this vital information being locked away in a report which has to be requested via email, anyone who wants to see which risks have been identified can access the information in the risk management system.

Step 1: Step 2: Analyze the Risk

Once a risk has been identified, it needs to be analyzed. The scope of the risk must be determined. It is also important to understand the link between the risk and different factors within the organization. To determine the severity and seriousness of the risk, it is necessary to see how many businesses functions the risk affects. There are risks that can bring the whole business to a standstill if actualized, while there are risks that will only be minor inconveniences in the analysis. In a manual risk management environment, this analysis must be done manually. When a risk management solution is implemented, one of the most important basic steps is to map risks to different documents, policies, procedures, and business processes. This means that the system will already have a mapped risk management framework that will evaluate risks and let you know the far-reaching effects of each risk. Risks need to be ranked and prioritized. Most risk management solutions have different categories of risks, depending on the severity of the risk.

Step 3: Evaluate the Risk or Risk Assessment

Risks need to be ranked and prioritized. Most risk management solutions have different categories of risks, depending on the severity of the risk. A risk that may cause some inconvenience is rated lowly. Risks that can result in catastrophic loss are rated the highest. It is important to rank risks because it allows the organization to gain a holistic view of the risk exposure of the whole organization. The business may be vulnerable to several low-level risks, but it may not require upper management intervention. On the other hand, just one of the highest-rated risks is enough to require immediate intervention.

There are two types of risk assessments: Qualitative Risk Assessment and Quantitative Risk Assessment.

Qualitative Risk Assessment

Risk assessments are inherently qualitative – while we can derive metrics from the risks, most risks are not quantifiable. For instance, the risk of climate change that many businesses are now focusing on cannot be quantified as a whole. Only different aspects of it can be quantified. There needs to be a way to perform qualitative risk assessments while still ensuring objectivity and standardization in the assessments throughout the enterprise.

Quantitative Risk Assessment

Finance-related risks are best assessed through quantitative risk assessments. Such risk assessments are so common in the financial sector because the sector primarily deals in numbers – whether that number is the money, the metrics, the interest rates, or any other data point that is critical for risk assessments in the financial sector. Quantitative risk assessments are easier to automate than qualitative risk assessments and are generally considered more objective.

Step 4: Treat the Risk

Every risk needs to be eliminated or contained as much as possible. This is done by connecting with ‌experts in the field to which the risk belongs. In a manual environment, this entails contacting each and every stakeholder and then setting up meetings so everyone can talk and discuss the issues. The problem is that the discussion is broken into many different email threads, across different documents and spreadsheets, and many different phone calls. In a risk management solution, all the relevant stakeholders can be sent notifications from within the system. The discussion regarding the risk and its possible solution can take place from within the system. Upper management can also keep a close eye on the solutions being suggested and the progress being made within the system. Instead of everyone contacting each other to get updates, everyone can get updates directly from within the risk management solution.

Step 5: Monitor and Review the Risk

Not all risks can be eliminated – some risks are always present. Market risks and environmental risks are just two examples of risks that always need to be monitored. Under-manual systems, monitoring happens through diligent employees. These professionals must make sure that they keep a close watch on all risk factors. Under a digital environment, the risk management system monitors the entire risk framework of the organization. If any factor or risk changes, it is immediately visible to everyone. Computers are also much better at continuously monitoring risks than people. Monitoring risks also allows your business to ensure continuity. At ADIG, we can tell you how you ‌create a risk management plan to monitor and review the risk.

Investment Risk Management

Investment Risk Management is the process of identifying possible risks in the investment and analyzing them well in advance and taking necessary steps to prevent them. In the case of businesses, when they make financial investments, they do risk management so efficiently, so that they can identify the potential economic risks, their impacts and ways to overcome them. Risk management takes place when an investor or fund manager quantifies the potential losses and takes the necessary actions to tackle the risk involved in the investment. Investment Risk Management teaches you how to make more by risking less. Investment risk management is the secret behind safe and consistent profit-making in any market condition. In financial terms, risk is defined as the potential for variability in returns. Risk means ‘Chance of Loss’. An investment is said to be risk – free if the actual return and the expected are the same. On the other hand, an investment is considered a risky one when its returns show wide variations. The expected returns vary according to the type of securities in which investments are made. The higher the variations between the expected and actual returns, the riskier the investment is. While making investment decisions, it is essential to measure the correct level of risk associated with the different types of securities available for investment. A better understanding of risk in its different forms will help investors to know the various opportunities, trade-offs, and costs involved with different investments. Risk Management is inevitable in everyone’s life. So one must have the ability to face the risk and overcome it. The main advantage of investment risk management is that it minimizes the risk of loss. In the case one investment performs poorly, other investments may perform better, thereby reducing the investment losses. The main disadvantage of risk management is the difficulty in its implementation, as it takes a long time to collect information relating to strategic plans. A risk management program will help to foresee the risk, ‌build a better defense, and thereby reduce liability.

Types of Investment Risk

Market Risk

It is the risk that affects the entire market because of economic developments and other events, resulting in a decline in the value of investments. The various types of market risks are equity risk, interest rate risk, and currency risk.

1- Equity Risk:

It applies to investments made in equity shares. The market price of shares always varies depending on demand and supply forces. Equity risk arises as a result of a drop in ‌market prices.

2-Interest Rate Risk:

It is the risk which applies to investments made in debt instruments such as bonds, debentures etc. Because of changes in the interest rate, there is a risk of losing money.

3- Currency Risk:

It is applicable in the case of foreign investments. Here, there is a risk of losing money due to variations in the exchange rate. When investments are made, they are exposed to various kinds of risks, and different risks can affect investment returns differently.

Liquidity Risk

It is the risk in which investors find it difficult to sell the investment at a fair price. When money is needed, he has to accept at a lower price for selling the investments.

Concentration Risk

It is the risk that arises due to the concentration of money in one investment or one type of investment. The concentration risk can be reduced by diversifying the investments, spreading the risk over different types of investments, industries, and geographical location.

Credit Risk

It is the risk faced by the government entity or company which faces a financial crisis and it is difficult to pay interest or repay the principal amount on the bonds issued by them.

Reinvestment Risk

Re-investment arises due to the risk of loss from re-investing the principal amount and regular interest payments at lower interest rates. Reinvestment risk affects when the interest rate drops. It can be avoided, if the investor intends to spend the interest payments or the principal amount at the time of maturity.

Inflation Risk

It is the risk that occurs because of inflation. It reduces the purchasing power of money over time. The risk of purchasing power arises because the value of investments does not align with inflation. Shares and Real Estates are the investment alternatives, as their prices also rise in line with inflation.

Horizon Risk

Horizon risk is the one which may shorten the investment horizon because of an unforeseen event. For example, that event may be loss of a job, which may compel the investor to sell the investments, which were expecting to be held for a long time.

Longevity Risk

The risk of outliving savings is known as Longevity Risk. This risk affects those people who are retired or are nearing retirement.

Foreign Investment Risk

It is applicable in the case of buying foreign investments. The risk of loss arises when making investments in foreign countries. Different kinds of risk should be considered at different stages of investment for achieving different investment goals.

Importance of Investment Risk Management

• It saves time, cost, and effort.
• It helps to discover new investment opportunities.
• It helps in making better decisions by forecasting possible threats and opportunities.
It is clear that a good risk management plan is the basis for the success of any investment.

The Principles of Investment Risk Management

Basically, there are three principles for Investment Risk Management, which are applicable almost everywhere.

Principle 1: Prediction about the Future

Making correct predictions is a task, mainly when it’s about the future. Asset Management Firms make these predictions, and they are paid for this, and every prediction is subject to a level of errors. Investment risk management tries to understand these levels and to use these understandings in the decision- making process, keeping in mind the uncertainty.

Principle 2: Investing not a Game

Investing in financial markets is not a game. Financial markets always face a massive break from normal behavior, here the rules are well-defined and known in advance. Investment risk management must consider the chances of big regime changes.

Principle 3: Clarity is Imperative

The third principle gives more importance to the clarity of duties between investment managers and their clients. The client must have a clear idea about the decisions which he has to make and the decisions which he can leave to the investment managers. All parties dealing with the client’s capital must have knowledge about their responsibilities so that they can move quickly and precisely A company establishes internal controls as a measure against wrongdoing and as a tool to protect the company’s interests. Internal controls ensure a company complies with Emirate laws and regulations in the management of financial data. Strong internal controls can improve operational efficiency and ensure accurate financial reporting during internal or external audits. Here are the benefits of internal controls and why they are important to your business.

What are internal controls?

Internal controls are procedures and processes put in place by a company to prevent fraud, promote accountability, and ensure the integrity of financial data. Internal controls are unique to every company and designed according to the company’s size and structure. Effective and efficient internal controls aim to meet company objectives and protect the company’s interests. Internal controls not only address risks to the company but also reduce incurrences of unnecessary cost or effort.

The core purposes of internal controls are to:

1-Explain the process in which internal controls are carried out.
2-Identify risks.
3-Mitigate risks.
4-Control the sharing of information.
5-Evaluate the effectiveness of internal controls.

What are the benefits of internal control?

Internal controls provide cohesion and consistency to establish order and protocol within a business. Business owners establish protocols and set boundaries around how the procedure is followed and regularly review controls for efficacy and accuracy. An established internal control process outlines how the company handles financial transactions as well as the assignment of administrative and management tasks. When protocol and procedures are clear, employees understand what is expected of them and how to complete day-to-day tasks.

Here are 11 reasons internal controls are important to protect your business, clients, and assets.

1. It establishes the processes.
2. It improves process performance.
3. It improves operational efficiency.
4. It keeps duties separate.
5. It mitigates business risk.
6. It organizes information.
7. It produces timely financial statements.
8. It reduces errors.
9. It improves accountability.
10. It stabilizes operations.
11. It reduces audit fees.

Conclusion

With all that happens in your organization, you’re aware of the importance of compliance and risk management. No business wants to face the consequences of failing to comply, whether it’s financial, reputational, or operational effects. In an effort to alleviate the stress surrounding compliance, you can leverage the aid of technology and automation software to streamline, standardize, and automate processes so that you can ensure accuracy, efficiency, and compliance, even when regulations are constantly changing. Additionally, you’ll be able to forecast with accuracy and analyze risk in advance to properly address concerns before they grow too big to manage. Risk management is important because it tells businesses about the threats in their operating environment and allows them to preemptively mitigate risks. In the absence of risk management, businesses would face heavy losses because they would be blindsided by risks. If you want to see how risk management can do for your organization, simply get in touch with our team and we will take the task.