Yasmin Yusof
This book was written from the perspective of international accounting to show how risk mitigation applies to the multinational firms with complex global transactions and assets. It analyses the interplay of currencies, exchange rates, interest rates, and accounting systems. Financial risk management is a specialized area of international accounting that requires specific training, tools and techniques, if one is to be successful in mitigating risk for an international business.
Financial risk management refers to the practices used by corporate finance managers and accountants to limit and control uncertainty in the firm’s total portfolio. Financial risk management aims to minimize the risk of loss from unexpected changes in the prices of currencies, interest rates, commodities, and equities. In the context of international accounting, financial risk management also contains an element of political, legal and “culture” risk—exposure to uncertainty in the outcomes of business transactions and asset transfers that comes with most international business operations.
Risk management has become an integral part of international business strategy, and accountants use quantitative tools to measure and analyze risk. The job of the Chief Financial Officer is to identify and address all types of risk, establish support and control mechanisms for dealing with it, and set the course for the risk management team in terms of its policies and objectives.
The financial practices commonly employed include diversification; asset allocation ; and hedging. These practices are examined in light of their applications for international business, where accountants must cope with many more types and degrees of risk. A firm’s long-term strategy, such as investment risk, credit risk, and insurance risk are the basis focus for a financial analysis.
Yasmin Yusof is a fellow Chartered Certified Accountant (ACCA) from the United Kingdom. She is a member of the Malaysian Institute of Accountants and a fellow member with the Cambridge Association of Managers. She has a PhD. in International Finance and a Masters in Business Administration in International Business. She is currently a Financial Controller and also a Director for a few companies in Malaysia, besides being a PhD Supervisor for a university in the UK.
WHAT IS RISK MANAGEMENT?
Risk management structure should be well thought-out, as well as a cultural fit and sustainable. (Smiechewicz, 2001)
Uncertainty is not measurable. Risk is.
- Frank Knight,
Risk, Uncertainty and Profit (1921)
Introduction
Success in business, to a certain degree, requires owners and managers to take calculated risks. The most successful business is usually managed by people who know when to push forward and when to pull back, when to buy and when to sell, when to stand firm and when to compromise. The successful company is managed by people who understand what risk in business is, and how this risk should be managed and mitigated.
Risk is an undeniable reality of doing business today, whether domestically or globally. A successful entrepreneur does not fear risk, but strives to understand it, to manage it, even to take advantage of it. As risk management tools and techniques become more and more complex, however, companies require the services of a Risk Management specialist.
A growing specialty in this field, globally, is that of international accounting risk management. International accounting professionals can contribute to the success of their companies must have a strong grasp of financial risk management techniques for multinational and multilateral business transactions of great complexity.
Unfortunately, as the world of business becomes increasingly borderless, risk management becomes, likewise, borderless, and thus more complicated. Risk management strategies that make sense in a domestic environment do not necessarily apply in the international arena, where business is exposed to the additional risks associated with currency prices, exchange rates, and interest rates, as well as more intangible issues of political and cultural risk. While not necessarily absent in the domestic arena, each of these issues becomes both more complex and more crucial once a company is active internationally.
In this context, it is imperative that the chief financial officers (CFOs) of these companies be familiar with a variety of accounting tools and techniques with which they can work to minimise their companies’ risk exposure. Financial risk management in international accounting aims to minimise risk of loss from unexpected changes in the prices of commodities and equities, or changes in interest and inflation rates.
Intelligent risk management can help a company stabilise cash flows, reduce its risk of insolvency, manage taxes better, and focus more effectively and efficiently on its primary business risks. According to Adler J. in his 2002 ‘Lenders betting on the future’ article, effective risk management allows corporations and their lenders to weather difficult situations and be able to survive the fall-out of loan losses or corporate accounting scandals. Intelligent risk management at the level of international and multinational business operations must take into account a myriad of factors, from the technical and the theoretical to the political and practical.
