Opportunity versus risk - the yin and yang of commerce.

 
Every business transaction contains an element of risk, yet at the same time how adequate are the mechanics and systems that are in place to manage these risks?

In recent years we have witnessed just how costly the laissez faire attitude to risk was in many institutions be they large corporations or smaller SME’s.

In the never ending quest for larger profits many of the saner measures of business were jettisoned.

An analysis of the most spectacular flame outs all have one common denominator – the architects of these calamities went hurtling over the cliff like lemmings.

There has never been a more pressing need to examine all areas of exposure.

A forensic analysis of the current Debtors Book might make for uncomfortable reading but like most unpleasant tasks it should not be ducked.

It is always preferable to take remedial action such as a write down whilst you are in control of your own destiny rather than have a 3^rd Party appointed to do it for you .

 

Auditing the Auditors

In recent times the flak following the recent failures in the global financial system has been largely directed at one sector i.e. the Banking industry. One group of participants have remained largely unscathed for their part in the train wreck, the Auditors.

There are now signs that the activities of this sector is coming under closer scrutiny.

Auditors are in a very privileged position and their integrity is paramount.

In the US authorities have filed criminal and civil charges against a former senior partner at accountancy giant KPMG over alleged insider trading.

It is claimed that Scott London passed information to a golfing friend, who then traded on the share tips.

KPMG resigned earlier this week as auditor to US companies Herbalife and Skechers after claims about its Los Angeles-based partner emerged.

However it is not just about illegal activity, there are many instances of conflict of interest such as taking on consultancy work for Clients and becoming too cosy with management teams.

John Griffith-Jones, the former boss of KPMG (and now head of the Financial Control Authoity) is under pressure after it emerged that he was involved in setting the terms of an investigation into the collapse of HBOS despite the fact that KPMG were auditors to HBOS from 2001 to 2009.

At the lower end of the scale it is all too easy for companies to bully the young staffers sent in to do the grunt work.

What chance has a newly appointed auditor walking around a factory warehouse to adequate value stock?

In reality they have to rely on the company for “valuations” and this can result in a totally inaccurate picture being presented. Very often the senior management of the company being audited and the auditors can end up signing off on a “nod and a wink”.

The validity of a company's accounts reflects both the integrity of the company which is being audited and that of it's auditors.

The cost of failing to grasp the nettle

There is a growing perception that bail outs organised by the EU are in effect kicking the can down the road. For example Portugal and Ireland are to be granted an extra seven years to pay back their emergency bailout loans.

In its latest report reviewing the Irish bail-out, the IMF criticised the "inadequate progress" of Irish banks.

There is particular concern that the Banks are failing to address non-performing loans and tackling home repossessions.

The IMF also expressed concern that Irish banks are still losing money even before putting cash aside to cover those bad loans.

As states such as Greece, Ireland and latterly Cyprus edged closer to the precipice there was a general sense of relief that defaults had been avoided and therefore the crisis was past.

As with all things in life there is also an element of wishful thinking, in the case of Cyprus the extent of the problem was not fully recognised.

Latest analysis prepared by the country’s creditor’s forecasts that the cost of the bailout has increased to 23 billion Euros compared with the original costs which was put at 17.5 billion. This begs the question how many other countries have under-estimated the scale of their economic problems.

It is an incontrovertible truth that unless the period of grace is used to good effect then the problem will have merely been parked and will come back to haunt.

 

Looking to the East

 

Latest statistics from the Asian Development Bank (ADB) for developing Asia, which covers 45 nations, predict GDP would grow by 6.6% this year and by 6.7% in 2014.

The group of developing Asian nations includes major emerging economies such as China, India and Indonesia,

Economic growth across the group slowed to 6.1% in 2012, the lowest rate since 2009 when it was 6%.

Various factors are buffeting the region; strong capital inflows could feed asset bubbles. Political discord surrounding fiscal debates in the United States, austerity fatigue in the euro area, and border disputes in Asia could jeopardise macroeconomic stability.

Ongoing sluggishness in the United States, Euro area, and Japan suggests that developing Asia must continue to shift toward more domestic demand and trade with emerging markets.

The ADB forecast China's economy would expand by 8.2% this year, up from 7.8% last year, on the back of strong domestic demand and better export performance.

China's President, Xi Jinping, has recently stated that the days of double-digit economic growth in the country were likely to be over.

European markets remain crucially important to China but with European economies in a fragile state the implication for export growth is obvious.

The potential for the Euro  debt crisis to spread would result in a further decline in economic activity in the months ahead.

Telling you what you want to hear

 

One recurring theme from the analysis of losses made in the financial sector is that the Management were totally unaware of the risks which their institutions were running.

To be effective, risk management and risk controls rely on the people operating them.

As has been well documented all too often the corporate culture is dominated by fear and greed and these together make for a toxic combination.

When strategies fail and trading positions spiral out of control these two elements come very much to the fore. Fear can often lead to individuals embarking on an even more reckless course of action in the misguided belief that it will all come right – the gambler’s doubling up mentality.

At the same time recklessness is often driven by greed; the larger the risk the greater the reward should it prove to be a successful course of action.

Against this background it is incumbent on the Management to ask the uncomfortable questions and not merely rely on the assurance that all is well and going to plan.

It is always worth remembering that if something looks too good to be true it invariably is.

Today’s mantra – keep hacking away at the costs

  

With operating margins being continually squeezed it is imperative that costs are rigorously monitored.

 

Every sector is seeing the impact e.g. FedEx the world's second largest package Delivery Company have seen their customers moving business from air to slower and less expensive routes.

 

Manufacturers of electronics and mobile phones are now shipping cargo by sea because competition was eating into their profit margins meaning they needed to cut delivery costs.

 

Traffic will continue to moving onto the water because moving goods by air is very energy-intensive and the high cost of jet fuel makes air freight too pricey.

 

Facing marked resistance from consumers to price increases and a greater level of competition those companies who are unable to control costs have an uncertain future.

 

Difficult times forge strong alliances

 

All too often the focus on the current economic background accentuates the negative. However one of the benefits emerging from the current business climate is the value that can be placed on a mutually beneficial Customer/ Supplier relationship.

 

As increasing numbers of business operate on a “just in time” inventory basis it is vital that a good understanding exists between supplier and Consumer.

 

In as much as a Supplier will be prepared to go the extra mile to ensure that his Buyer receives his goods on time and in good order so it behoves a Buyer to ensure that he pays as required and is not abusing the goodwill of his Supplier by “pinching” some extra period of credit.

 

If both parties work together in a professional and commercial manner then it will strengthen the relationship and both will emerge from the current difficult situation with a renewed confidence in each other and a better based business for the long term.