Question

Examples of preventable losses

Give three other examples from your own experience, or of something you have heard of, of losses that could easily have been prevented.

Explain:

• Why these losses occurred;
• Why no action had been taken to prevent them;
• The action that would have cost-effectively prevented them

Answer 1

The 3 looses which i have heard of are

1) Fire in Warehouse- I did a valuation of a company which record a loss in revenue numbers because of fire in its warehouse resulting in huge damage. That year the company reported a loss. Company did not take an insurance.

Proper insurance of the goods in the warehouse and proper manintenance of the wareshouse should be taken. There are isurance policies which can guard against it.

2) slippages and higher provision by banks resulted in loss for some of the banks.- As we all know about subprime crisis happened in 2008 that resulted in huge looses for the banks. These loss occured because proper checking of the borrower profile was not done and in order to increase its loan book as compared to its competitor loans were given to those borrower also who were not eligible for such property. When the house value collapsed the borrower defaulted resulted in huge looses. No actions were taken by the bank management because for their selfish reasons of increasing the loan book, increasing the stock price etc.

Basel III implemented guidelines for every bank to follow post the crisis. These could have done a bit earlier when some initial signs started shooting up like decline in house property, default by one of the top investment banking firm etc. Infact they waited for the entire crisis to happen till the time another investment banking firm got bankrupt and AIG also got bankrupt.

3) Retuns in items sold led to decline in net sales. although this is less but this loss could be prevented.It occured because of improper testing of the items being sold. Proper Research was missing. So company should have done proper testing and Research of the items being sold. This is most found in Pharma companies where in they recall their medicines when USFDA founds that those medicines are not properly functioning. So R&D should be proper.