A Radio talk show on Rules for risk management: culture, behaviour and the role of accountants on ABC Radio hosted by ACCA Bangladesh

September 6, 2012

Summary of the talk show

Prior to the talk show, the Association of Chartered Certified Accountants (ACCA) compiled a study, ‘Rules for Risk Management: Culture, Behavior and the Role of Accountants’, which is revealing in the attitude of its members because it shows what actually happens within organizations where advice is given by risk assessment professionals, how ethics come into play – or flies out the window – and what risk management should and shouldn’t look like in practice. The study canvassed over 2,000 ACCA members from 109 countries. Respondents included CFOs, finance directors, financial controllers and financial accountants from all types and sizes of organization.

ACCA wished to know the relevance of the study findings to the business environment of Bangladesh.

The host had several question revolving around business risks management practice in Bangladesh, as they appreciated that the global attitude towards risk management had changed irrevocably in the past few years.

The program and conversation

The radio program consisted of two parts, 15 minutes each.  The interviewee ie myself-  Tofazzul Hussain FCA, of the radio program is a Partner of A. Qasem & Co.  The contents of the program was later published by the broadcaster on the leading daily newspaper (translated in Bengali language).

PART 1

Host:

The global attitude towards risk management has changed irrevocably in the past few years.

Yet, despite the increasingly stringent regulatory controls and development of sophisticated financial modeling, at the end of the day, risk management must address the human factor.

Accountants understand risk; they understand risk management.  They value the support they can provide to decision-makers by presenting risk management as part of every-day business decision-making.  They can do more and they want to do more.

Today we are going to speak with a local expert regarding this.  We have amongst us Mr. Tofazzul Hussain, Partner, A. Qasem & Co, a Co-operating firm of pwc.

Hello Tofazzul bhai – Assalamualaikum                   Walaikumassalm, and good morning.

Welcome to ABC Radio.                  Thank you

We are here today to talk about risk and in principally the role of accountants in managing risk.

Recently, the Association of Chartered Certified Accountants (ACCA) recently compiled a study, ‘Rules for Risk Management: Culture, Behavior and the Role of Accountants’, which is revealing in the attitude of its members because it shows what actually happens within organizations where advice is given by risk assessment professionals, how ethics come into play – or flies out the window – and what risk management should and shouldn’t look like in practice.

The study canvassed over 2,000 ACCA members from 109 countries.  Respondents included CFOs, finance directors, financial controllers and financial accountants from all types and sizes of organization.

Question:            But first of all, why risk, why this field of expertise for you?

Interviewee Answer:

Well, as we talk about ‘Risk’, we should see it from the perspectives of the business community including its stakeholders, and of us—the Accountants—part of the regulations.

It would require quite a bit of explanation why Risk and its management interest me. 

‘Risk’—— as I understand—- is the main reason why businesses devise strategies and develop plans to respond to them, because RISK threatens achievement of business objectives. 

They—I mean Risks— can emanate from many sources during business hours and are categorized as: Financial risks (risks off financing activities eg credit risk, interest rate risk, currency risk, overtrading, going concern, etc); Operating risks (risks off being in business eg loss of customers followed by allegations of poor brand management, loss of key personnel, inadequate business processes which vouch unplanned business activities, etc); and Compliance risks (risks arising from non-compliance with laws, regulations, policies, procedures and contracts  eg breach of company law, non-compliance with accounting standards, listing rules, income tax ordinance and rules, Vat act and rules, Bangladesh Labor Code 2006, and other laws pertinent to operation of the particular business).

We term these risks as Business Risks.  Business managers install a process which is called “risk management process” to identify Risks, then to summarize them in a risk matrix, where BIG risks are taken off for immediate actions; the remaining risks are profiled again to decide response strategies including designing and implementing controls into an operation or processes; transferring the risks to third party eg carriers’ onus on goods delivered; eliminate the risk by hedging; sharing the risk with another party eg joint venture, franchising etc; insurance against risk  to insure against adverse events; and accepting the risk  inherent to the business transaction which is tolerable and will result in higher level of return eg investment in share market.

Businesses who fail to establish a robust risk management process will find hard times surviving in this endless competitive market.  If we study the history of long-lasting companies, we come up with a wand—that magically helped the businesses create their heritage— and it is their acumen of constant risk management.  It is now a commonsense that flourishing Companies show respect to competitors, regulations of the regime, and their human resources.  This attitude helps them find magic bullet to solve difficult problems in an easy way to pioneer.

Though it’s a free world economy allowing us to venture, businesses have a social impact in terms of, inter-alia, wealth accumulation and social equilibrium; the regulators as the guardians of the society promulgate regulations to ensure equitable and indiscriminate business environment to benefit all concerned—the entrepreneurs, the stakeholders, the employees, and the consumers.  Therefore, we have to abide by a set of rules and regulations—national and international—in our pursuit to balance the society’s progress as a whole.  These regulations including mercantile law as set by the regime, professional bodies, business associations etc are sources of the risks as classified above as ‘Compliance Risk’, which sometimes can be central to business operation; thus, non-compliance with these can result in huge penalty, and, at times, cessation of the business.

Risk is omnipresent; without it business is meaningless and won’t require setting and achievement of objectives.  That’s why risk management and understanding its impact and peripheral would be a continuous pursuit of economically active people.  I can sense it and foresee its demand in future.

The above narration placidly explains the reasons why I am interested in ‘Risk and Risk Management’.  As a part of my ongoing role as an accountant in public practice licensed by the Institute of Chartered Accountants of Bangladesh (ICAB), I passionately exert—in fact I have to as required by our professional standards— ‘risk management’ skills to assess risks of my clients and translate those risks into engagement risks to deign responses and work procedures.  Besides, sometimes assurance clients seek help to design control system, which is an instrumental part of a good Corporate Governance; and we all know that good governance is required and demanded by our local regulator and development partners.

Host:

There is great focus on risk globally, particularly after the economic crisis.  Businesses are more than ever aware of the risks and are trying to manage them effectively.

Question:            Do you think there has been a perception change in the way Risk is being addressed?

Interviewee Answer:

If I understand your question correctly, you mean if there is a change in the attitude of business community towards ‘Risk’. 

Well, going back to my earlier discussion, risk had always been out there causing disturbance and insomnia, but the types of risks and their ability to impact have been transformed.  Previously, as content analysis says, operational and financial risks topped the list, where compliance risk did not deserve to be deemed as lethal as it is today, thanks to our litigious propensity.  Regulators are strengthened; oversight is enhanced; and prosecutions increase in number.  Litigations—in-house and external— are prevalent among companies.  Technology and wireless business option ie the option of virtually borderless business has given another dimension to litigation pattern, eg Samsung vs Apple case.  Though we are not catching up with the developed countries that fast, but, certainly, in time, we will reach a stage where they had been once during their journey of economic development. 

In fact, Bangladesh is moving forward, albeit the ongoing global economic turmoil, to join the league of the “Middle Income Countries” in tandem with the target to achieve Millennium Development Goal within the shortest possible time.  These targets have been manifested in global forum; investors from both the developed and the developing countries find interest in Bangladesh for its growth potential.  Naturally, they will call for globalised standards under the auspices of the development partners—bilateral and multilateral— and international organizations.  Hopefully, very soon there will be an unprecedented emphasis on standardized compliance requirements including corporate governance to foster our economic growth and to gradually move us towards a standard way of operation.

Sorry for the digression, though it was linked.  To answer your question whether there is a change in perception towards risk management in Bangladesh; first of all we need to precisely define “perception”.  In this context PERCEPTION means the way we regard Risk in doing business and our sincere understanding of the risks to respond to them.  Generally, I can say, yes, there has been some awareness among business community about risk; it is now fathomed that ‘Risk’ costs fortune if materializes and it can’t be undone; so, better to control them, mitigate them, since we can’t kill them—risk would be there as long as the business continues.  In this risk mitigation exercise, accountants play a vital role.  It’s an intricate and enjoyable task requiring involvement of all on the board.  Entrepreneurs—young, professional and literate—relish risk to play with since they know a good game-plan within legal framework can yield a sustainable, if not bewildering, return.  Without return growth is thwarted, and without growth business eventually dies out.

Host:

The Association of Chartered Certified Accountants (ACCA) recently compiled a study, ‘Rules for Risk Management: Culture, Behaviour and the Role of Accountants’. One of the study’s key findings is that, while a lot is being done already, accountants feel they can do a lot more to improve ethical behavior.

Question:            What do you think that can be done to improve ethical behavior?

Interviewee Answer:

Your question is very straight forward as if you have already factored in the consequences of unethical behavior.  On this assumption I will humbly say a few words to share my perception in this regard.

Terminologically ‘Ethics’ is a set of moral principles and standards of correct behavior.  ‘Moral’ in it has got standard behavior—so, ethics and moral go hand in hand; we can’t expect one without other.  So is discipline, which is embedded in Ethics.  In the realm of Ethics, Wrong does not have a space.

Ethics is supposed to be universal; but we get baffled, sometime shocked, when we observe differing behaviors tantamount to ethics in various places!  Why is that?  Well, like most of us, I believe, discipline gives way to progression (Max Weber, a German sociologist, depicted a relationship in this regard in one of his studies); and discipline comes from ethical codes.  Ethic perse is an abstract idea.  It’s not a formula; it’s a perception which is prone to alteration to fit in a changed environment.  It shows the ways of our lives which could be diverse given the collection of people in a particular setting.  The differing life styles to a great extent distinguish ethical boundaries among people.  What’s good to me may not be good to you—it’s that kind of thing.  Thus, it is transformed to a conscience that Ethics can always be anything, but nothing unacceptable.

Due to its nature and the subtlety involved in it, we have to simplify the definition of Ethical Behavior within the boundary of Business and Commerce.  If we do it, we can likely to have a set of Global Ethical Behavior emphasizing on truthfulness, fairness, accountability, and social responsibility to let us land on a set of principles of doing business.  Breach of any of this Ethical Behavior can fetch disciplinary actions, penalty of sizeable amount, stigmatization to create a fear of breach, etc.  Regulations can do it to improve ethical behavior in combination with a program to create awareness of ethics.          

ETHICS HELP US BUILD CONFIDENCE AND FEEL HAPPY ABOUT LIFE.

Picking a line from your statement—- accountants feel they can do a lot more to improve ethical behavior—– it’s not a feeling but empirical truth that accountants can do a lot more to improve ethical behavior in business world, because, if you recall, we are a principle based profession which demands application of moral standards and fundamental principles such as: Integrity; Objectivity; Professional Competence and Due Care; Confidentiality; and Professional Behavior.  We get such ethical codes from International Federation of Accountants (I FAC) of which ICAB is a member; ICAB’s by laws; and national regulations (Companies Act, SEC notification etc).  Thanks to ICAB’s training and Continuous Profession Development (CPD) requirements like those of the most of the accounting bodies in the world, accountants are inherently prudent; they have the knack to pin down illogicality in a dossier or document.   We are called the ‘sanitizer’, though frowned upon by hasty people who jump onto things overlooking germs.

So much of a useful and timely study on the subject carried out by ACCA!  I appreciate the report which I have already read.  Thank you.  I would also like to reiterate the phrase——risk management must address the human factor—-—which you uttered at the outset of the program.  I am overwhelmed by your good judgment to consider People ie Human Being at the core of everything.  This is a fact; human beings create empire, they slip down by fostering a bad culture.  History says Rome was not built in day.  It took thousand of years to build it dating back from BCE to CE; nonetheless, Rome fell one day.  Dozens of theories can be posited in this regard to show the causes of the fall of Rome, but what I see is the ensuing ‘Cultural Risks’ that emanated from unethical behavior which the Roman failed to perceive and recognize much earlier before they were afflicted.  To the same extent, a business will be doomed to failure if it indulges in unethical behavior of its residents and it fails to perceive the resulting risks upfront and fails to take necessary measures in time.

Host:

ACCA’s study also shows how important an organisation’s “culture” is in creating a positive impact. There is a statistical link between instances of good risk management and a reduction in people’s experiences of ‘dysfunctional’ behaviour.

What is your opinion on “Importance of Culture”?

Interviewee Answer:

Culture is the active place of Ethics.  People create it; there had been thousands of cultures in human civilization. 

‘Culture’ is a set of ideas, beliefs, and customs that are shared and accepted by people in a society.  Again, we a have dilemma similar to the one we have just discovered during our analysis of Ethics.  Likewise, it varies country to country; so, for the sake of precision we have to define Culture in business world to come up with a harmonized set for benchmarking.

In this sense, ‘culture’ is inseparable from ‘ethics’.  Since, People on top layer decide universal Ethical Standards to share among society which turn into a ‘culture’.  This is a vast area to delve into— for example, available studies have revealed different sub-cultures in a culture.  Studies also suggest that ‘culture’ can be one of the biggest impediments to a country’s development. 

So, for our purpose, I can say- culture is as important as ethics in business. 

Well. Listeners, as much as we would like to carry on this conversation but we have ran out of time. However, Mr.Tofazzul Hussain will be with us again tomorrow, same time. So, please tune in ……

PART 2

The global attitude towards risk management has changed irrevocably in the past few years.

Yesterday we had a fruitful discussion on Rules for Risk Management: Culture, Behaviour and the Role of Accountants.

Today we are going to continue that by speaking with none other than Mr.Tofazzul Hussain, Partner, A.Qasem & Co, an co-operating firm of PricewaterhouseCoopers.

Hello Tofazzul bhai – Assalamualaikum

Welcome again to ABC Radio.

Yesterday, we spoke about ethical behavior and the importance of culture.

But, how can accountants lead us in effectively manage risk?

Interviewee Answer:

Well, building on yesterday’s comments, including the one that accountants can do a lot more to improve ethical behavior in business, let me remind you that professional accountants—like us, members of the Institute of Chartered Accountants of Bangladesh (ICAB)—go through a rigorous training program before becoming a registered member of ICAB, which later on requires constant CPD to hone up skills on expected areas including Risk Management.

If I revert to your first question—why risk and RM interest me—you will find your answer to this question: how can accountants lead us in effectively manage risk?

Accountants naturally look for risk (we are calculated risk-takers, not kind of risk-averse).  We learnt well and understand quite right “Risk vs Return” formulas under scenario analysis.  What we do a bit more.  We don’t jump onto things irrationally; we need to spend some time to fathom and perceive imminent and future troubles to base our decision to maximize a risk free and/or risk tolerated desired return.  That’s why top management asks finance bosses to have a glimpse over a proposal before making final call.

So, you understand Accountants understand risks.  They embrace the norms of risk management and they show overwhelming support for several effective risk management tools.  They value the support they provide to decision makers as a means to help them manage risk.  They have a clear view that the contribution of accountants to the culture of decision making should encourage honesty and objectivity, but not baseless conviction, consensus, and advocacy over evidence.

Accountants prefer explaining a range of possible outcomes from courses of action to detailing merely the most likely outcomes. This is the essence of risk management.

Host:

You might be already aware that the ACCA recently compiled a study on ‘Rules for Risk Management: Culture, Behaviour and the Role of Accountants’. The study canvassed over 2,000 ACCA members from 109 countries. Respondents included CFOs, finance directors, financial controllers and financial accountants from all types and sizes of organisation.

The study revealed what actually happens within organisations, where advice is given by risk assessment professionals, how ethics come into play – or flies out the window – and what risk management should and shouldn’t look like in practice.

How well do you think risk is being managed in our country?

Interviewee Answer:

Pretty the same way risk is being managed in other countries against the current or earlier standards they have been using.

Yet, stress on different class of risks (Financial; operation; compliance) is different; nowadays, risk perception is changed, as we discussed yesterday in full length.  Fortunately, we have a fantastic juxtaposition of generations of entrepreneurs.  Our country is only 40 years old.  Since the independence, it has bred at least two generations of business people; first generation’s shrewdness and acumen are rubbed off on the more literate second generation of professional businesses.  The synthesis of innate and acquired knowledge and skills places this generation in a better position to gauge risk from a vantage point.  However, among newly emerged or self-selected business houses, risk perception could be different, where regulations can even out.

So, all together, I thing risk is being managed in our country reasonably, though it could have done better.  Well, we survived the onslaught of global economic turmoil; we held up remarkably well, and the feat talks about our ability to manage risk.  Hopefully the sky is clear now off 2008 debacle!

Host:

Participants in the ACCA study said that good practices will always be significantly superior to that based simply on consensus, on short term self-interest, on unsubstantiated opinion, or simply following orders without question – behaviours which many believe were at the root cause of the financial crisis.

The results revealed overwhelming support for a series of six decision-making practices and behaviours which should form the basis for achieving best practice in risk management; these are: questioning proposals regardless of the seniority of those that originated them; recognising uncertainties, and measuring and managing them; making unbiased decisions irrespective of personal interests; acting ethically and encouraging an ethical culture; acting legally and challenging a failure to do so; and thinking carefully while using applicable quantitative techniques.

Would you please share your views regarding the above?

Interviewee Answer:

That’s the most interesting lesson ACCA survey teaches us.  I am totally with the unanimous decision making process.  If you get eligible people on board to consult with, risk has to be better managed.

Business proposal should be built upon the intention of objective decision making ie free of personal interest within ethical parameters.  Because, in addition to financial ambition business has social responsibility too.  Hence, participatory decision making is of paramount importance to ensure fair and socially compatible business ventures.

Of the six decision-making practices, most are applicable to us for achieving the best practice, but, unfortunately, in business, all proposals are not visible to all concerned.  Moreover, we have still a courtesy to respect seniors irrespective of social settings.  This is our cultural trait; as long as global cultural is not aligned for business, it will tend to loom here. 

However, the most important is thinking carefully while using an applicable quantitative technique which is tantamount to the Latin principle “Caveat emptor ie ‘Let the buyer beware’”.  

Thank you Mr. Tofazzul for your time ………. You are welcome

Well.  Listeners, as much as we would like to carry on this conversation but we have ran out of time. We have come at the end of a really fruitful discussion.