Internal Controls and Strategic Initiatives — July 2015

This topic involves internal controls.

CFOs have traditionally focused on loss prevention rather than risks that affect the firm’s strategic direction and success, where the CFO can add significant value. This can be accomplished by leveraging internal control principles to achieve strategic risk management.

Financial statements prepared under the CFO’s direction indicate what has happened and tend to force the CFO to react to risk rather than developing a plan to navigate the risks before they occur. Thus, even though compliance responsibilities are critical to produce reliable financial information, they do not foster thinking about strategic issues such as new technologies or tactical moves by competitors.

The CFO’s detailed understanding of the company’s financial position as well as its revenues and expense drivers allow him or her to add value to strategic risk management. Accordingly, the CFO can formulate plans to increase revenue or manage costs based on the relevant drivers. Such drivers include emerging technologies, demographic trends, economic conditions, acquisition opportunities, superior workforce, and loyal customers.

Understanding the relevant drivers provides the CFO with the perspective to anticipate risks that result from changes or disruptions affecting a particular driver and, therefore, affect strategic initiatives. Thus it is crucial that the CFO encourage other managers to think about matters such as demographic shifts, local government attitudes, and key personnel shifts at competitors.

These risks are much more difficult to envision than traditional internal control matters such as separation of duties. Accordingly, the risks shpould be specifically defined. At this point, the CFO formulates internal controls to help counteract the anticipated risks. To do so,, the CFO must ask and answer two questions.

First, what are the key processes, technologies, people, and other factors that must continue to function to effectively navigate the anticipated risks. Second, what assumptions underlie the current strategy and are they operative if the anticipated risks are realized.

By correctly answering these questions, the CFO can pinpoint issues that may trigger the risks and develop a plan to address the risks in their infancy. This leads to devising specific solutions to events that would cause customers to not need the company’s products; plans to address surprise costs; require a process to evaluate reconfiguring strategic initiatives; and evaluate the risk of not implementing the strategy.

Once this mindset is adopted, a framework should be devised. This framework will enable the CFO to utilized tools such as budgeting, forecasting, and financial modeling for forward looking analyses. In turn, the CFO can develop policies such as triggers and stop-loss rules that set boundaries for potential financial losses if the anticipated risk occurs.

CFOs have traditionally focused on loss prevention rather than risks that affect the firm’s strategic direction and success, where the CFO can add significant value. This can be accomplished by leveraging internal control principles to achieve strategic risk management. Financial statements prepared under the CFO’s direction indicate what has happened and tend to force the CFO to react to risk rather than developing a plan to navigate the risks before they occur. Thus, the CFO must think about strategic issues such as new technologies or tactical moves by competitors.

For additional information please see the following link:

http://journalofaccountancy.com/issues/2015/feb/cpa-strategy-risk-adviser.html

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