Proper risk management equals success for businesses

MANILA, Philippines - For any business to succeed, it must be willing to take risks. But Juan Carlos “Juancho” Robles goes even further to argue that managing risks well — and not just taking them — is key to making a business thrive.

As risk management partner for audit, tax and consulting firm Punongbayan & Araullo (P&A), Robles has witnessed the effects of proper — and improper — risk management in corporations. “There are many kinds of risks to a company,” he explains. “The ones that companies commonly focus on are credit, market and operational risks, to name a few. But,” he stresses, “not all of these risks may be important or applicable to a particular company.”

According to Robles, there may be other specific or unique risks that a company should prioritize over the garden-variety kind. In some instances, it may not even be necessary to address the common risks, particularly if the cost of mitigating them exceeds the benefits or if the company is willing to take on these risks in exchange for higher returns. This is where risk management comes in.

Proper risk management

“Risk management is all about managing risks that are crucial to a company’s ability to achieve its goals,” says Robles. Naturally, identifying those risks depends partly on a business’s objectives.

Companies, even if they are in the same industry, may have differing targets: one business may be focused on achieving a certain level of profitability whereas another is more concerned with building an image as an expert in its field. The risks attached to either goal are vastly different.

A believer in the Pareto principle — that for many events, 80 percent of the effects result from only 20 percent of the causes — Robles notes that many companies invest their resources on actions that contribute to only a fraction of their productivity. “These businesses fail because they waste time and effort addressing insignificant risks when they should be focusing only on their top 20 risks.”

Identifying risk events in a timely manner and knowing which ones to prioritize are, again, areas that proper risk management can address.

Instrumental to the process is the implementation of an enterprise-wide risk management approach, where everyone in the company is involved and, as a result, becomes risk-aware. This way, all possible risk areas are reported and evaluated, which then helps management identify which risks to prioritize.

In the Philippines, Robles observes that not all companies recognize the role that risk management plays in organizations. But he is optimistic that more and more businesses are developing a culture of risk awareness and an appreciation of the role of risk professionals.

Fraud risk

The spate of bankruptcies and financial scandals — the fall of Enron, the global financial crisis, and more recently, the billion dollar Madoff investment scam — has likely contributed to this renewed interest in and focus on risk management processes. It has also made business leaders more aware of the risk of fraud and corruption.

“Based on a US survey, companies typically lose 7 to 8 percent of their gross revenues to fraud,” points out Robles. “In the Philippines, there are no specific data, but based on the companies I’ve looked at, I believe the figure is even higher than 10 percent.”

As a Certified Fraud Examiner (CFE) and a Certified Public Accountant (CPA) licensed in the Philippines and in the United States, Robles has handled several fraud cases involving white-collar crimes and public corruption both here and abroad. His work for the U.S. Government in Saipan earned him an award from the Federal Bureau of Investigation (FBI) and the U.S. Department of Justice.

The experience has taug ht Robles that there are many kinds of fraud risks. “Fraud can be as simple as a lowly employee using company resources such as office supplies or the company vehicle for personal use, and as complex as a bank executive devising fraudulent investment loan schemes to misappropriate deposits,” says Robles. All of these lead to revenue loss.

When addressing fraud, Robles advises management to train the spotlight on the company’s primary asset: its people. “For fraud to be committed by the perpetrator, who is usually an employee of the company, there are at least three factors involved,” shares Robles. First, the employee is normally motivated by a cause: It could be a pressing financial problem or even revenge, such as when an employee does not get an expected promotion. Second, the employee is in a position that gives him an opportunity to commit fraud. Last, the employee’s value system is in such a confused state that he is able to justify in his mind the fraud he is about to commit.

Recognizing these factors and addressing them early on may prevent fraud. “Companies, for example, may adopt control measures to create an atmosphere of honesty and integrity,” suggests Robles. “Management can adopt policies designed to reduce the opportunities to commit fraud. Or, going back to basics, management can also make sure that employee morale is high by treating and compensating staff members fairly,” he adds.

Robles is putting his own advice to good use as one of the partners of P&A’s Specialist Advisory Services Division. One engagement that is keeping him busy involves the fraud investigation of the highly controversial collapse and closure of a string of several banks in the Philippines.

(As published in the Philippine Star, 12 April 2010.)