Proactive Risk Management During (and after) a Crisis

The COVID-19 pandemic has already caused panic in financial markets, with anyone’s guess as to how much more damage is yet to come. In the face of any crisis, corporate finance leaders, controllers and finance teams play an important role in keeping things calm and managing risk.

As CEOs and boards balance potential policy changes in the midst of trying to assess the ongoing waves of news and changing data, finance teams must continue to perform without missing a beat by excelling in two critical areas: risk management and transaction quality assurance.

A)   Risk Management

In the world of finance, risk management refers to the practice of identifying potential risks in advance, analyzing them and taking precautionary steps to reduce the risk, but when every single criteria around risk assumption changes in a matter of days due to the impacts of our current global pandemic, how can you do proper analysis and make confident decisions? 

You can build cash flow models based on various scenarios that include careful review of demand projections, supply chain disruptions, bad debt, layoffs and short-term liquidity requirements but the execution & monitoring of these plans require deep data insights to keep risks from knocking them off track. Let’s look at two key types of risk that are difficult to build into models but can be managed with the right tools.

i)                      Operational Risk

Human errors create operational risk. When uncertainty, volatility and anxiety are the main messages in the media, operational staff are more likely to make errors due to distraction and anxiety. It is common knowledge that stress and trauma contribute to decreased employee performance, higher error rates and poorer quality of work. This could lead to uncommon errors that should otherwise be second nature.

Using a risk monitoring tool that checks for errors and anomalies to identify transactions that don’t fit normal patterns of your business is a good idea at all times but especially during periods of high stress. This external accountability ensures errors and anomalies are caught before they become problematic. Having a tool that can validate and double check human work is critical to ensuring operational risk is minimized.

ii)                   Fraud Risk

Fraud is usually an inside job. What makes fraud so destructive is that it can take well over 12 months to detect, and many more months to unwind and correct. The cost of repairing the damage could escalate to as much as 2 to 10 times the value of the actual amount defrauded. It can include material expenses such as legal fees and tax implications as well as damage to reputation, insurance costs and other costs related to penalties or fines. With this in mind, it’s essential to have a continuous monitoring platform in place that evaluates every transaction to increase transparency and identify anomalies. 

These anomalies might just be the tip of the previously undetected fraud iceberg.  

Using Controls for Risk Management

Procedural controls, such as user access security, segregation of duties for important approval processes and audit trails of users’ data entry and approvals, are essential for standardizing the way data is managed and financial approvals are granted. 

That said, procedural controls can only act like doors and locks to a room. Having a system that monitors and watches everything that goes on is like adding a camera system. When everything is continuously monitored, data can be reviewed so that errors or anomalies are identified and quickly resolved. Artificial intelligence and machine learning are perfect for this type of continuous monitoring as the technology gives a way for finance leaders to identify potential overrides of controls and leverage these findings to improve the procedures.

B)   Transaction Quality Assurance

True quality assurance on financial transactions is difficult to practice because it involves much more than just coding entries to the right accounts. Debits and credits should be reviewed to identify transactions that don’t fit the patterns of the regular course of business. When you apply audit-based tests to your transactions, you can score and rank them based on the relationships between the accounts and time frames associated with the transactions. Being able to conduct these tests on every entry before you close the books each month gives confidence in the quality and insights into hidden risks. 

Having this enriched transaction data allows you to see correlations and patterns about the quality of the vendors, suppliers, customers, employees and departments that you would never otherwise get from just looking at the numbers. 

It has never been more important to be proactively monitoring financial transactions for errors and anomalies because emerging from a deep financial crisis requires insights and assurances that the models and forecasts that are being built are also closely monitored for errors and anomalies.

In Summary

Be proactive in finding risk and use this to your advantage. Rather than looking at risk management as a backward-looking, audit-oriented task, enrich your current financial transaction data to enable better, more confident forward-looking decisions to ensure your entire company is executing to plan.

About Graham: Graham Walker is a strong business development professional with education from MIT in Fintech Innovation with experience working at SAP, OpenText, American Express and Netsuite. The original article can be found here.

About MindBridge: MindBridge is unique in the market as it was birthed out of audit best practices utilizing AI to provide proactive risk monitoring for corporate finance departments that identifies errors and anomalies in financial transactions providing more efficient and effective management of risk.