Did you know accounting firms have the following risk management priorities?
- Enhancing the quality, availability, and timeliness of risk data – (79%)
- Improving risk information systems and technology infrastructure- (68%)
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When it comes to businesses, accounting risk management is of extreme importance. This is because it helps minimize and eliminate risks and damages to a company’s resources. Without further ado, let’s understand how accounting and risk management go hand in hand.
How To Identify Acceptable Accounting Risks?
While some risk is acceptable, trade-offs and opportunity costs must be weighed when deciding what types of risks should be eliminated. So, to identify acceptable risks, accounting practices demand that they should be broken into categories. These include:
- Financial: This includes business practices that may result in financial instability. Financial risk is linked to poor management practices. Bad investments and misallocations of resources can adversely affect a company.
- Human Risk: Such risks involve a company’s human elements. Errors due to human judgment can lead to errors in accounting and eventually lead to a loss in a company’s finances.
- Environmental Risk: This category includes external factors such as natural disasters or power outages. While you cannot control these, you can put emergency disaster plans in place to minimize damage.
- Physical Risk: In accounting, this refers to the loss of any physical resource. For example, loss of land, buildings, or equipment.
- Loss on Investments: This includes losses from rental properties and financial investments. When your expenditure exceeds the income you receive from investments, your company may be on the verge of bankruptcy.
Role of Accountants in Risk Management
With advancements in technology, accountants are longer responsible for preparing financial statements and documents. So, how has their role changed over the years? Well, now accountants act as business partners who help the organization thrive and grow.
One of the major roles of accountants is implementing greater internal controls and mitigating any potential risks that may arise. Accountants in managerial positions play an important role in analyzing, managing, implementing, and monitoring risk management programs.
While risk management strategies are designed by the management, training sessions are provided to all employees. This is to ensure that the risk management practices and standards are followed in all financial operations.
Thus, helping accountants to be more proactive during the decision-making process and ensure all potential risks are considered before making important decisions.
Risks Associated With Accounting Firms
As a business owner, you know that there are a myriad of risks every company faces daily. Tax liabilities, government regulations, and preserving client data are some of them.
All businesses store a large amount of data and also handle more sensitive and highly confidential information. This makes the protection of the department’s data more important than ever.
Here are a few risks your accounting department may be exposed to:
- Data Breach: Client data needs to be preserved, and not doing so may lead to instances of a data breach. This can lead to a lawsuit against your firm, and you might need to shell out a lot of money to defend yourself.
- Failure To Abide by Standards: If your company fails to comply with the rules listed in the associated accounting board, you might be at the risk of undergoing a criminal investigation. You might also be liable to pay fines and penalties.
- Damage To The Reputation: In the accounting world, your relationships with clients are incredibly important. Your clients need to be able to trust your decisions and the fact that you can protect your data.
Thus, any data breach or misconduct on the accountant’s part can result in your client’s immediate exit from the firm. This can severely impact the firm’s reputation, which can take many years to rebuild.
How can Accounting Firms Mitigate Risks?
Proper risk management techniques need to be implemented in all accounting firms. Here are a few steps you can take to mitigate potential risks.
Since most data is stored electronically, it is very important to protect your files. One way to increase security is to use strong passwords. All you need to do is invest in a password management program and ensure data security.
Encryption of data reduces the risk of potential data theft and also helps you bring brand loyalty. It is all the more important for data stored on handheld devices such as a mobile phone or in the cloud.
To safeguard data stored on computers and laptops, you can install antivirus programs. This will ensure that data stored on your systems is not vulnerable to malware attacks.
You must buy a basic business insurance policy to protect yourself from any potential costs resulting from a data breach. For further protection, you can also purchase more specific insurance policies. They will protect holders from data breaches and data loss protection.
Accounting risk management is gaining importance, and more organizations are adopting it to build brand loyalty. Not only will it help you mitigate risks, but it will also help you improve your workflows and provide better services.
Have you implemented risk management policies as yet? Share us your experience in the comments below!
Amaey Anand is a certified accountant with over 10 years of experience in the finance industry. He has worked with various organizations to streamline their petty cash management processes and reduce inefficiencies. He has also written several articles on financial management for leading publications such as Zensuggest and The Wall Street Journal.