Question

Larry and Hank are employees of one of the leading accounting firms, CPAs. The two have recently obtained their licenses as certified public accountants, CPA, however they are considering starting their own accounting practice.
Using Brown's risk taxonomy, identify and describe at least five risks that Larry and Hank must take into account if they plan to open their own business. For each risk you identify, suggest one or more internal controls that may lessen it.

Answer 1

As per Brown's Risk Taxonomy, there are various types of risk which are as follows:

1) Financial Risk:

Financial Risk are related to monetary activities. In case of financial risk there is a Market Risk which refers to changes in company's Stock prices, Investment values, and Interest Rates. Further, Credit Risk is associated with Customers' unwillingness or inability to pay amounts owed to organizations. Liquidity Risk involves the possibility that company will not have sufficient cash and near-cash assets to meet its short term obligations.

Internal Control :

The Company may place a Proper Internal Control system to avoid this risk. In case of Credit Risk the Company may place a system of Regular Follow-ups to recover the payment with the credit period. The Company can give frequent reminder calls to its Customers in case the dues have exceeded the credit period. For Liquidity Risk, the Company may always keep certain percentage of cash as Liquid Funds for any emergency situation.

2) Operational Risk :

Operational Risk concern the people, assets and technologies used to create value for the Organization's Customers. Under this, System Risk refers directly to Information Technology. As a business becomes more reliant on IT Procedures, there is a chance that IT will fail at a crucial moment. Also, Human Error Risk recognizes the possibility that people in the organization may make mistakes.

Internal Control :

The Company should always be aware of the latest technological developments so that the technology it is using does not get Obsolete. It should regularly update its system in a period intervals. Also, the inspection of Physical Assets should be made and necessary actions must be made in case of any defects are identified.

3) Strategic Risk :

It relates to entity's decision making process at the senior management and board of directors level. Business Strategy Risk comprises poor decision making related to company's basis for competing in its markets.

Internal Controls :

The Company can appoint Independent Directors or Expert Commitee to review the functioning the business activities of the company. The Experts can provide an un-baised views which can be beneficial to avoid Strategic Risks.

4) Legal Risk :

Legal Risk and Regulatory Risk is concerned with the chance that those parties might break laws that result in financial, legal or operations sanctions, This can also result in Unexpected Infringment of Copyrights, Trademarks etc which can hamper the reputation or knowhow of the organization.

Internal Control :

The Company should have a Legal Team to look after any Regulatory Risk that may arise to a company. The Legal Team should ensure that all the laws applicable to the company are complied in a timely manner. Any new product development must be patented on a timely basis to avoid any legal disputes.

5) Hazard Risk :

Hazard Risk is Director's and Officer's Liability. These Individuals have a risk of litigation if leading company is wrong. The Company would have property damage risks to its plant and equipment resulting from fire, storms, or other events. It would also have risk of injury to its employees and liability risks associated with its products.

Internal Control :

Hazard Risk is no one of dangerous risk that a Company might experience. Proper waste management policy must be in place to avoid hazardous diseases among employees. Proper hygiene must be maintained. Good and clean working environment must be in place.