unraveling-the-secrets-of-financial-control

Unraveling the Secrets of Financial Controls and Risk Management

In the wise words of Dale E. Jones, one of the world’s top business and leadership consultants,

Thoughtfully assessing and addressing enterprise risk and placing a high value on corporate transparency can protect the one thing we cannot afford to lose: trust.

Emphasis on Trust. Trust is something that no business can afford to compromise on. Trust is the foundation of the business world. A business that cannot be trusted is not worth doing business with.

Hence, it is one of the chief duties of the leadership in a business to safeguard the trust that the business has built up. Whether it is the trust between business and customer, business and the competition, or business and the government; trust is what makes these relationships function, and legality is what holds each side accountable when it is broken.

The financial function of the business, the hub of all the financial data of the business and its relations, then becomes one of the most vulnerable places that must be defended. The finance function is one that cannot —under any circumstances— afford to take risks, whether they be internal or external, because the trust with which that sensitive information was given to the business is something that must remain unblemished.

For this reason, for decades finance professionals have made it their duty to protect the sanctity of the finance function, and in turn, guard the trust that the public and the business world have put into a business.

In this article, we unravel the secrets to successful risk management in the business’ accounting and finance function through the use of financial controls and business finance management strategies.

As an accounting outsourced services provider, we at Expertise Accelerated are especially passionate about this subject, and so this article is partially borne out of our desire to educate up-and-coming entrepreneurs on the ins and outs of financial controls and business finance management. All so that the business world becomes a safer and happier place for businesses and customers.

With that said, let’s try to turn what would otherwise be a boring finance lecture into a short, fun, and educational journey in the world of finance. Let’s jump right into it!

What Really is Financial Risk?

What-really-is-financial-risk-scaled

Anything that has the potential to adversely affect the business financially, whether it be affecting profitability, sustainability, or financial stability, can be labeled a financial risk to the business.

The kinds of financial risk that we will be talking about today are problems that can crop up in the business’ accounting and finance function, and how financial controls can be put in place to mitigate if not negate the possibility of these potential dangers becoming reality. These risks can be aptly named operational financial risks.

Typically, operational financial risks are internal to the business and are usually either a product of ignorance, negligence, or malicious interference. There are, of course, external factors that can induce financial risks in a business. For example, volatile market conditions can adversely affect the value of assets, but this is not really something that lies in the wheelhouse of this discussion.

With that cleared up, let’s list out some of the financial risks that could threaten your or anyone else’s business, before we jump into the subject of financial controls.

Common Operational Financial Risks Observed in Businesses

Human Error and Fraud

Perhaps the most vulnerable part of a business’ financial function, the human element has been observed to be the mastermind —whether intentionally or unintentionally— behind a vast number of problems relating to the financial function.

As reported by Resourceful Finance Pro, 41% of all financial mistakes in a business can be attributed to human error. This is no laughing matter because it shows us that no matter how well-intentioned and trustworthy your financial team is, there is always potential for things to go terribly wrong. What this stat also tells us, or rather implies, is that a great percentage of the surveyed businesses did not have measures in place to avoid this risk, and ended up paying the price for what may just have been an unfortunate typo in the book of accounts or a miscalculation during financial statement analysis.

And this is just talking about the unintentional damage that the human element can inadvertently cause to a business. Now think about what could happen if there was intent to do harm to the business. One wrong move by a malicious actor in the financial department can in a matter of hours destroy a business’ reputation. Let’s look at history to emphasize the point, shall we?

As reported by Reuters, in 2016 Hernan Arbizu, former vice president of the banking division at JPMorgan, pleaded guilty to maliciously acting against JPMorgan, and embezzling millions of dollars from its clientele. Arbizu was eventually apprehended, of course, and sentenced to prison.

The problems for JPMorgan did not stop at the legal fees and state penalization that they had to deal with already, because the behemoth corporation then had to deal with the fallout of such a massive breach of trust between the corporation and its clientele. What rational customer would go to JPMorgan again, when they had proved that they did not do their due diligence in vetting their professionals and monitoring their activities and handling of such high-profile clients?

JPMorgan is, of course, still functioning and has managed to recover the rapport it so easily lost. But that is only because JPMorgan is a big enough corporation to where it could afford to be reactive rather than proactive. For small and medium-sized businesses, having such a breach of trust would close the business overnight. Had JPMorgan simply had the risk management and financial controls in place to prevent Arbizu from ever making it to the first wire transfer, JPMorgan would be a far bigger business than it is today.

Cyber Risk

You can’t talk about risk management and financial controls without addressing the elephant in the rooms: cybersecurity.

Cybersecurity has become a leading problem in the business world today, especially for the finance function. Cyber threats such as Malware and Ransomware threaten to shut down and take hostage the business’ entire finance process. All the sensitive data of your clients like credit card numbers, names, addresses and the like are weaponized against you through cyber-attacks.

And the kicker in all of this is that most successful cyber-attacks credit their success to human error! As we just discussed, human error can cripple a business if it strikes at the wrong time, and cyber attackers try their best to exploit the human element of the finance function to breach the walls of the fortress.

Cybersecurity and risk management is frankly a subject that deserves its own separate article to talk about it. Luckily, an EA publication titled “A Guide to Cyber Risk Management in Business Accounting” is already available for our readers to check out, providing a holistic view of cyber risk and risk management. Give it a read!

Unoptimized Systems and Processes Risk

Another big risk in the financial department is having outdated and unoptimized systems and processes in place. For example, using an older version of accounting software that has major vulnerabilities that have been patched in later versions, leaving the business wide open for attack.

Similarly, Unoptimized financial processes such as manual bookkeeping and paper invoicing, which are far more susceptible to error and abuse, and far more difficult to trace error and fraud, are just some examples to illustrate this type of error.

Not much to say about this one as it is quite self-explanatory, other than that these risks are often ignored by entrepreneurs because hey do not invoke an urgency to fix them until things start to go wrong.

Financial Risk Management and Financial Controls

Access Control

Access control is by far one of the strongest and most prevalent risk management and financial control measures leveraged by financial controllers. Access control is basically all about controlling what professional has access to what data, and how much influence over altering that data.

Say for example that you hire a bookkeeper. Well, your financial controller will set up the bookkeeper’s account in the business’ ERP system in such a way that they have access to the business’ books of accounts and other relevant information, and are only allowed to enter and edit data relating to transactions.

This makes it so that your bookkeeper has no idea of the other parts of the business accounting function. They won’t know details like what are the business’ future financial plans, future projections, and forecasts, the business and its clientele’s sensitive data, and so on.

Not only does access control mitigate fraud risk, but it also makes it far easier to identify the source of any errors. If only one person has access to the business’ bookkeeping, then any problems in the books of accounts can be traced back to the bookkeeper.

Authorization and Approval Procedures

Another way that risk management and financial control experts curb any chances of fraud and unintentional harm is by putting in place authorization and approval requirements. Any transaction that happens must be approved by a trusted management member before it can go through, any large transaction needs approval from the executives before it is processed, so on and so forth.

Authorization requirements are immensely effective in preventing fraud. No money goes anywhere without your express approval of it. You can even ask your bank to give you a notice if any particularly notable activity happens so that you can prevent an employee from subverting the business.

On top of risk management and financial control, authorization makes it so that potentially malicious actors are scared into never attempting any harm to the business. If Hernan Arbizu knew that the transactions that he was making to embezzle money would have to go through the CEO, he would have abandoned the plan altogether instead of risking being caught.

Daily Reconciliation and Review Procedures

Similar to authorization control, review procedures make it so that any financial document is subject to scrutiny before it can progress to upper management. The filing of any documentation such as taxes and financial reports must first be reviewed by the financial controller. Nothing makes it out of the finance department without first going through the office of the controller. Whether it be financial statement analysis reports, audit reports, or even the day’s bookkeeping, all of it must first be assessed by the controller before the team goes home for the day.

Business Process and Systems Optimization

Yet another way that a financial controller engages in risk management and financial control is through business process optimization and systems optimization.

What this means is that the controller looks at the finance department’s internal processes, i.e., how an order gets fulfilled and the cash flow associated with the business’ daily activities, how the accounts receivable department interacts with accounts payable, how the bookkeeper’s recorded information goes into the hands of the CPA who uses it for financial projections and financial statement analysis.

By assessing all of these processes, as well as the systems being used by the business, a controller can work in tandem with business process optimization support to enact positive change in the business that makes everything much safer and maintains transparency.

Internal Auditing

The last topic of the day when it comes to risk management and financial controls is internal auditing. Auditing is pretty much all about following the paper trails of the business’ financial activities to make sure that everything is kosher, and that there is no underhanded activity going on. Audits also help identify potential vulnerabilities in the business’ financial processes, which can then be corrected.

Expertise Accelerated’s Financial Control and Risk Management Services

As mentioned before, our team at Expertise Accelerated is very passionate about the subject of financial safety and risk management in the business landscape.

As an accounting outsourced services provider and staff augmentation specialist, EA is dedicated to helping US businesses hedge against financial risks by leveraging our world-class financial control services. Financial controls are absolutely a requirement for any business today because technology and information have made it so that we are at an all-time high when it comes to potential threats to businesses and especially to the finance function.

We also recognize that financial controls come with an exorbitant price tag and that many businesses would rather do without one than spend half their budget on risks that may never manifest. This is precisely why EA CEO Haroon Jafree founded EA; so that even the smallest of US businesses could have access to world-class financial services. From general accounting to financial controls, EA offers US businesses access to the global talent pool of professionals for the job, all at a fraction of the usual cost.