Why is the importance of risk management in accounting firms?
The role of the accountant has changed dramatically in recent years as they have taken on more responsibilities in the organisation. Accounting is no longer just about performing transactional duties but also entails thinking about the larger goals of the organisation and creating a strategy to work towards them. This involves taking an active role in the internal processes of an organisation and drafting reports to help with the strategy. The rise for greater internal control has led to the need for risk management practices and ethical standards in companies.
Role of accountants in risk management
Accountants are no longer responsible for the preparation of financial statements and documents in the company but act as business partners who help the organisation thrive and grow. One of the most important parts of the accounting profession is the implementation of greater internal controls in the organisation to help manage and mitigate any potential risks that may arise. While some accountants focus on the day-to-day transactional tasks, other accountants in managerial positions play an active role in managing, implementing and monitoring risk management programs.
Although risk management strategies are designed by employees at the managerial level in the organisation, there are training sessions provided to all employees to ensure that the risk management practices and standards are followed in all financial operations. This enables accountants to be more proactive during the decision-making process and ensures that all the potential risks are considered before any important decisions are made.
Risk management in accounting
Risk is present in all areas of a business and there is a myriad of risks that every company faces on a daily basis. This includes the risk associated with tax liabilities, government regulations and client data. As effective accountants, it is important to implement risk management techniques in each area of the business to ensure that the company’s resources and reputation are protected.
Breach of data
All businesses store large amounts of their clients’ and employees’ personal data but the accounting department, in particular, handles more sensitive and highly confidential information. This makes the protection of the department’s data more important than ever. Here are a few risks that the accounting department may be exposed to:
1. Damage costs
The client or third party may make direct claims to cover the costs caused by the data breach. This may be in the form of a class-action lawsuit against the firm for the damages caused the exposure of the data.
2. Failure to abide by standards
When companies fail to comply with the rules and regulations listed in the associated accounting board, they face the risk of undergoing a criminal investigation and other possible penalties.
3. Damage to the reputation
In the accounting world, your relationships with your clients is incredibly important. Clients need to be able to trust that their accountants guide them in making the best decisions while protecting their personal data. Therefore any breach of the client’s data and misconduct on the accountant’s part can result in the client’s immediate exit from the firm. This can have a severe impact on the firm’s reputation which can take many years to rebuild.
How can accounting firms mitigate risks?
Proper risk management techniques and practices need to be implemented in all areas of an accounting practice. Here are a few measures that can be taken in order to mitigate potential risks:
1. Password protection
Most data is stored electronically so it is essential that these files are protected. One way to increase security is to use strong passwords and for all electronic files with the help of a password management program. Research shows that the main cause of data breaches is stolen credentials.
Encryption of data reduces the risk of potential data theft and also increases the client’s trust in the organisation. This is crucial for data that is stored on handheld devices such as a mobile phone or in the cloud.3.
3. Antivirus program
In order to safeguard all the data stored on computers and laptops, anti-virus programs can be installed to ensure that the data stored on the system is not privy to malware attacks.
It would be prudent and wise for a company to buy a basic business insurance policy to protect themselves from any potential costs that may arise as a result of a data breach. For further protection, the company can also purchase more specific insurance policies that protect the holder from data breach and data loss protection.
Risk management best practices
As companies become larger, it becomes a challenge to implement proper risk management techniques in all areas of the organisation. However, there are a few best practices and standards that can be standardised across all departments to create a better framework for risk management in the organisation:
1. Understand the risk profile
The business environment has become more complex in recent years with the introduction of new standards and regulations. Due to this, many managers are placing greater importance on the risk culture of the firm. To make risk culture a part of everyday decision making, firms need to understand the risk profile of the company. This involves recognising the corporate risk tolerance policy, how much you are willing to spend on risk management and the overall goals of the company. The answers to these questions will help you create an effective risk management framework.
2. Create a solid foundation for risk management
The best way to create a risk management strategy that makes the best possible use of your time and resources is to create a solid foundation for risk management. One way to do this is to establish a broad range of controls within the organisation. As the business grows, it often becomes a challenge to mitigate specific risks so you need to cast your risk net wide and create a strong culture of risk mitigation across all operational, compliance and reporting categories.
3. Leverage technology
As the organisation grows, the need to create a culture of risk mitigation increases as well. While creating a standardised process can reduce the risk in the firm, the use of technology can further enhance risk mitigation in the organisation. Automation of key controls in the organisation can enable employees in the firm to make decisions more confidently. Taking the manual aspect out of transactional tasks can increase efficiency and productivity and also reduces the risk of human error.
There are many ways to improve your risk mitigation skills in the organisation. This can either be achieved through professional experience or you can even earn a certification to show your commitment towards the implementation of risk management procedures.
The accounting profession is constantly changing. Accountants are no longer number crunchers, they are also partners to the organisation that help with the risk management procedures to protect the data and resources of the company.