risk management accounting

The Accountant’s Role in Risk Management

Here’s the fact. Businesses are every day exposed to risk. Financial, strategic, reputational, and operational. It’s a given; you can’t eliminate risk. However, you can manage it. 

And while risk management is everyone’s responsibility, accountants have a unique role in an organization’s risk management practices because of their professional training. This article will help you understand the accountant’s role in risk management. 

What is risk management in accounting?

In accounting, risk management includes identifying, understanding, and managing your financial risks, often in the context of an integrated enterprise risk management policy.

Remember, your business will contend with other types of risks, such as operational, legal, human capital, and even external factors like political risk, especially at a macro level. Accountants are primarily focused on managing financial risk

The enterprise risk management should ensure that risk management is not a siloed function completed only by the risk team. But instead, risk management is the responsibility of everyone in the organization.

Key responsibilities of accountants in risk management

To help the company manage risk, accountants need to undertake specific key duties.  

The most natural responsibility is that of stewardship. 

Traditionally, finance and accounting teams are stewards. Their work primarily involves safeguarding an organization’s resources, including cash. To better perform their stewardship responsibilities and manage risk, accountants need to produce financial statements that are accurate, timely, and relevant.

Other key risk management responsibilities accountants can get involved with include 

  • performing benchmarking studies for use in risk identification, 
  • refining internal controls
  • developing both financial and non-financial metrics to evaluate the effectiveness of risk mitigation actions, and 
  • advising on risk disclosures in the end-of-year financial reports

How accountants identify financial and operational risks

There are several ways accountants identify financial and operational risk, including using systems that capture financial controls while performing routine day-to-day tasks such as monthly closes or account reconciliations.

Also, accountants can identify financial and operational risks through data analysis.

Looking at trends, the role of accountants in risk management is shifting from traditional stewardship roles to risk managers and data analysts.

When it comes to using data analysis to identify risks, accountants can design and generate reports that compare budget to actual, for instance, report on comparable accounting periods and facilitate year-to-date reporting.

Accountants should also compare the organization’s performance to industry averages in data analysis. If these comparisons reveal significant variances, reasons for the variances should be justifiable. In some instances, these variances may point to financial and operational risk.

Also, accountants can evaluate projects’ or investment proposals’ financial and non-financial implications. 

Accountants can make predictions and financial forecasts integrating critical value and cost drivers. This will involve testing assumptions using such techniques as sensitivity analysis. While some may not be 100% correct, they are crucial risk indicators.

Other ways accountants can identify financial risk include organization-wide brainstorming sessions that tap into participants’ insights, conducting SWOT analysis with a special focus on the “W” and the “T,” and administering risk questionnaires and surveys.

When all is said and done, it is crucial to remember that accountants should always strive to operate within the enterprise risk management framework.

Which strategies and tools do accountants use to mitigate risks?

There are certain inevitable risks in business you can’t eliminate. The best approach in these situations is to mitigate the risks or reduce the likely impact on the company should they occur. 

Yet you must do more than just mitigate risk haphazardly. You’ve got to have risk mitigation strategies in place.

The following are some risk mitigation strategies you may want to implement.

Risk acceptance

Adopting a risk acceptance strategy means you have come to terms with the probability of certain risk events taking place, and you are keenly aware of the possible consequences. 

While a risk acceptance strategy may not sound inspired, it makes sense, especially if the cost of eliminating the risk is high. 

And risk acceptance also makes sense when the likelihood of a risk occurring is minimal.

Risk avoidance

Risk avoidance involves avoiding a particular activity that has the potential to cause risk. This strategy should be on the cards if a specific risk can cause significant damage to the organization, whether that damage is financial or not. 

Also, risk avoidance will make sense if the cost of managing or mitigating the risk is so high that it is not worth it. 

An example is when a company has an excellent product with the risk of polluting the environment. Considering the cost of lawsuits and the environmental impact, it is better to avoid the activity altogether.

Risk mitigation

Because the benefits of a particular investment decision may outweigh potential drawbacks, risk mitigation is where you choose to go ahead with the project and allocate resources to manage the risk. 

Risk reduction

Risk reduction is where you take steps to reduce the effect of a particular risk event taking place. 

For example, if the risk is security-related, you can enhance security measures, such as locks and safes. 

You can also reduce risk by transferring it. An insurance policy is one such example.

Best practices for accountants in effective risk management

Accountants should consider the following best practices to ensure their risk management game is top-notch.

  • Communicate clearly: For effective risk management, accountants should always ensure they communicate in clear and straightforward language and a consistent manner about risk management goals and everyone’s role in risk management. 
  • Get everyone on board: In risk management, the worst thing you can do is to adopt a siloed approach. It always pays to get everyone on board. This ensures you can tap into the insights and experiences of different business units.
  • Keep abreast of changes in the operating environment: This can come in handy when managing compliance risk. For instance, keeping a tab on the legislative landscape and pronouncements by professional bodies can save your hide. This is where a good Compliance Management System can come in.
  • Promote a risk-aware culture: Accountants should entrench a culture where everyone is mindful of the organization’s risks, reports risk events, and complies with the enterprise risk management policy.

Final thoughts

Accountants should be at the forefront of designing and implementing organizational risk management strategies. Yet, because of the continuously-evolving business environment, risk management is a work in process that can come with significant investments in time, cash, and expertise. 

Fortunately, with well-designed Controls and Risk Management Software, you can efficiently streamline financial controls, making your risk management program less costly. 

If you’re tempted to consider this for your business, hit us up today and schedule a demo.

Stefan van Duyvendijk

Stefan van Duyvendijk is FloQast's first Accounting Operations Evangelist. Stefan is a tenured controller who has consistently nurtured finance professionals and improved accounting processes throughout his career. Previously he was Corporate Controller for Kodiak Cakes where he led a 10-member finance team through a pre-IPO initiative. Before that, he was U.S. Controller for Skullcandy and senior associate at KPMG.