Question

Elaborate 5 (FIVE) methods of managing risks for finance/accounting profession in different industries during this pandemic situation.(20marks) . Eplain it and with example in detail.

New Gaps in Internal Control

- Going digital

- Redesigning operating models

5 methods

1.risk identification

2. risk impact assessment

3.risk prioritization analysis

4. risk mitigation planning, implementation and progress monitoring

Answer 1

The coronavirus (COVID-19) pandemic has rightly become the focus of massive public attention in recent weeks. In addition to concerns about the health of their workers, businesses are increasingly concerned about how it will affect their financial results and the performance of their supply chain partners.

Though the full effects of the COVID-19 outbreak are yet unknown, the impact is already global. Every business is affected in some way. As the outbreak continues to grow worldwide, U.S. companies, large and small, are devising contingency plans and reworking their goals and budgets to address potential risks. Likewise, investors and other stakeholders want to know how companies are responding to this emerging risk factor.

Rules for Financial Reporting

The outbreak has coincided with the deadline for calendar-year entities to prepare and file their annual reports. So how (and when) should companies report the effects on their financial statements? Disclosure requirements largely depend on materiality — and whether failure to disclose this risk factor would make the financial statements misleading to investors.

Accounting Standards Codification (ASC) Topic 855, Subsequent Events, requires companies that follow U.S. Generally Accepted Accounting Principles (GAAP) to disclose events or transactions that occur after the balance sheet date but before financial statements are issued (or available to be issued).
Under GAAP, there are two types of subsequent events:

1. Recognized Subsequent Events
These events provide additional evidence about conditions that existed at the date of the balance sheet and affect the estimates inherent in the process of preparing financial statements.

2. Unrecognized Subsequent Events
These provide evidence about conditions that didn’t exist at the date of the balance sheet being reported on but arose after that date.

Moreover, ASC Topic 450, Contingencies, outlines the accounting and disclosure requirements for loss and gain contingencies. For example, this standard requires companies to accrue for potential lawsuits based on the probability that a claim will be made and loss will be incurred.

Factoring COVID-19-Related Risks into Financial Statements

Under GAAP, U.S. companies may be required to factor COVID-19-related risks into their financial statements. Examples of balance sheet accounts that may be materially affected by the outbreak include:

1. Financial Assets
Companies should consider the potential for impairment, as well as the need to adjust cash flow projections and other assumptions used to measure non-quoted financial instruments. Financial assets reported at fair value on the balance sheet may result in realized and unrealized losses.

2. Receivables
Customers adversely affected by the outbreak may be unable to pay outstanding invoices. This situation could result in additional credit and liquidity risks, higher than usual bad debt, and even impairments and write-offs. Cash flows from operations may also be affected.

3. Inventory
The outbreak may disrupt supply chains and productivity. Companies with reduced or idle production capacity may be unable to allocate overhead costs to inventory as they usually do. In addition, inventory that can’t be turned over because of travel restrictions may have to be evaluated for impairment. Finally, changes in prices and reduction in the level of demand will also have to be taken into consideration.

4. Pensions and Post-Retirement Plans
Financial market volatility has affected the measurement of these accounts. Companies may have to revisit both the expected return on plan assets and the funded status of the plans.

5. Deferred Tax Assets
If estimates of earnings of foreign subsidiaries change, companies may have to reconsider some of their tax strategies, or they may not be able to realize all deferred tax assets.

6. Goodwill and Other Indefinite-Lived Intangible Assets
Subsidiaries in areas heavily affected by COVID-19 may see their revenues or net income affected by the outbreak. This may trigger impairment testing for goodwill and other intangibles. The reassessment of key accounting estimates and projections may result in an immediate impairment. Additionally, impairment testing may have to be done more than once this year if management considers that evolving circumstances result in more than one triggering event.

SEC Urges Public Companies to Provide Robust Coronavirus Disclosures

In February, as coronavirus (COVID-19) was already rapidly spreading and starting to adversely impact businesses worldwide, SEC Chairman Jay Clayton issued a statement emphasizing the need for public companies to consider providing subsequent event disclosures to investors.

Currently, most calendar year-end public companies are starting to file their Form 10-Ks. Clayton advised companies that haven’t already filed their annual reports to look at their risk disclosures more closely. However, he admitted that estimating the financial effects of the outbreak is challenging because COVID-19 and its impact on the market continue to be uncertain.

“This remains a dynamic situation where the effects on any particular company may be difficult to assess or predict, because actual effects may depend on factors beyond the control and knowledge of issuers. However, how issuers plan and respond to the events as they unfold can be material to an investment decision, and we urge issuers to work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements,” said a recent SEC statement.

On March 4, the SEC announced that it is granting public companies extra time to file certain reports because of COVID-19. “The impacts of the coronavirus may present challenges for certain companies that are required to provide information to trading markets, shareholders, and the SEC. These companies may include U.S. companies located in the affected areas, as well as companies with operations in those regions,” said the SEC.

Clayton reminded all companies to disclose information about their assessment of risks related to the outbreak “to the fullest extent practicable” to keep investors informed. He added, “Companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding coronavirus, can take steps to avail themselves of the safe harbor in Section 21E of the Exchange Act for forward-looking statements.” Safe harbor means that companies won’t be held liable for the statements.

Transparency about the nature of the event and management’s response to the outbreak is key. Public companies that fail to provide robust disclosures about this risk factor or recognize its impact on operations may receive comment letters from the SEC and potentially face additional actions from investors.

Whether you are a public or private company, there are many unknowns about the severity and duration of the COVID-19 pandemic. Disclosing and recognizing its financial effects may require management to exercise significant judgment and to work even more closely with its outside accountants.

As people begin to age, they usually encounter more health risks. Managing pure risk entails the process of identifying, evaluating, and subjugating these risks—a defensive strategy to prepare for the unexpected. The basic methods for risk management—avoidance, retention, sharing, transferring, and loss prevention and reduction—can apply to all facets of an individual's life and can pay off in the long run. Here's a look at these five methods and how they can apply to the management of health risks.  

KEY TAKEAWAYS

• Avoidance means not participating in activities that could harm you; in the case of health, smoking is a good example.
• Retention acknowledges the inevitability of certain risks, and in terms of health care, it could mean picking a less expensive health insurance plan that has a higher deductible rate.
• Sharing risk can be applied to how employer-based benefits are often more affordable than if an individual gets their own health insurance.
• Transferring risk relates to healthcare in that the cost of the care is transferred to the insurer from the individual, beyond the cost of premiums and a deductible.
• Loss prevention and reduction are used to minimize risk, not eliminate it—the same concept is used in healthcare with preventative care.

Avoidance

Avoidance is a method for mitigating risk by not participating in activities that may incur injury, sickness, or death. Smoking cigarettes is an example of one such activity because avoiding it may lessen both health and financial risks.

According to the American Lung Association, smoking is the leading cause of preventable death in the U.S. and claims more than 480,000 lives per year.1 Additionally, the U.S. Centers for Disease Control and Prevention notes that smoking is the No. 1 risk factor for getting lung cancer, and the risk only increases the longer that people smoke.2

Life insurance companies mitigate this risk on their end by raising premiums for smokers versus nonsmokers. Under the Affordable Health Care Act, also known as Obamacare, health insurers are able to increase premiums based on age, geography, family size, and smoking status. The law allows for up to a 50% surcharge on premiums for smokers.3

Risk management strategies used in the financial world can also be applied to managing one's own health.

Retention

Retention is the acknowledgment and acceptance of a risk as a given. Usually, this accepted risk is a cost to help offset larger risks down the road, such as opting to select a lower premium health insurance plan that carries a higher deductible rate. The initial risk is the cost of having to pay more out-of-pocket medical expenses if health issues arise. If the issue becomes more serious or life-threatening, then the health insurance benefits are available to cover most of the costs beyond the deductible. If the individual has no serious health issues warranting any additional medical expenses for the year, then they avoid the out-of-pocket payments, mitigating the larger risk altogether.

Sharing

Sharing risk is often implemented through employer-based benefits that allow the company to pay a portion of insurance premiums with the employee. In essence, this shares the risk with the company and all employees participating in the insurance benefits. The understanding is that with more participants sharing the risks, the costs of premiums should shrink proportionately. Individuals may find it in their best interest to participate in sharing the risk by choosing employer health care and life insurance plans when possible.

Transferring

The use of health insurance is an example of transferring risk because the financial risks associated with health care are transferred from the individual to the insurer. Insurance companies assume the financial risk in exchange for a fee known as a premium and a documented contract between the insurer and individual. The contract states all the stipulations and conditions that must be met and maintained for the insurer to take on the financial responsibility of covering the risk.

By accepting the terms and conditions and paying the premiums, an individual has managed to transfer most, if not all, the risk to the insurer. The insurer carefully applies many statistics and algorithms to accurately determine the proper premium payments commensurate to the requested coverage. When claims are made, the insurer confirms whether the conditions are met to provide the contractual payout for the risk outcome.

Loss Prevention and Reduction

This method of risk management attempts to minimize the loss, rather than completely eliminate it. While accepting the risk, it stays focused on keeping the loss contained and preventing it from spreading. An example of this in health insurance is preventative care.

Health insurers encourage preventative care visits, often free of co-pays, where members can receive annual checkups and physical examinations. Insurers understand that spotting potential health issues early on and administering preventative care can help minimize medical costs in the long run. Many health plans also provide discounts to gyms and health clubs as another means of prevention and reduction in order to keep members active and healthy.

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