Chapter 4 Reputational risk - Practice Tests Academy

P3 - Risk Management

CH4 ? Reputational risk

Chapter 4 Reputational risk

Chapter learning objectives:

Lead A2. Evaluate risk

Component

(a) Evaluate the impact of risk (b) Assess the likelihood of risks (c) Analyse the interaction of different risks

Topics to be covered

? Quantification of risk exposure ? Risk maps

A3. Discuss ways of managing risks

B2. Evaluate the sources and impact of reputational risks

Discuss: (a) Roles and responsibilities (b) Risk tolerance, appetite and capacity (c) Risk management frameworks (d) Risk analytics

(a) Evaluate sources of reputational risk (b) Evaluate impact of reputational risk on strategy

? Role of board and others in the organisation in identifying and managing risks

? Risk mitigation including TARA ? transfer, avoid, reduce, accept

? Assurance mapping ? Risk register ? Risk reports and responses ? Ethical dilemmas associated with risk

management

? Risks of unethical behaviour ? Impact on brand and reputation of

organisation

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CH4 ? Reputational risk

1. What is reputational risk?

? Reputation refers to the opinions people have and communicate about something, so reputational risk is the risk that people will have a negative opinion of an organisation and share that opinion with other people.

? Reputational damage can be caused by many factors such as dishonesty, incompetence, activities that do unnecessary harm to the environment or unethical behaviour.

? It can be caused by an individual or by the behaviour of a company as a whole.

2. Sources of reputational risk

There are a wide variety of considerations: ? Employees - the actions and behaviour of staff reflect the principles of the organisation

they work for. ? Management ? their position implies they are more likely to reflect the core values of

the business, so any digression is more significant. ? Accounting - any company found to be operating dubious accounting practices will lose

the confidence of customers and investors. ? Fraud - if a company allows fraud to take place or doesn't take appropriate action, this

can lead to stakeholders having concerns. The prerequisites for fraud to occur are dishonesty, opportunity and motive. ? Bribery and corruption - if an organisation acts in an inappropriate manner by offering or accepting bribery or any form of corruption, this will damage its reputation. ? Transfer pricing - it is of reputational importance to strike the correct balance between using the rules and regulations of different countries to benefit shareholders and paying a reasonable amount of tax. ? Cyber security - as online sales increase, having a reputation for a secure website is increasingly important. ? Data protection - there is increasing legislation related to looking after personal information, and failure to comply could lead to reputational damage. ? Unethical behaviour ? this is explored in more detail in the next section.

3. Code of ethics

Ethics can be defined as `the moral principles that govern a person's behaviour or conduct of an activity'. ? Code of ethics - created in reference to the profession of chartered management

accountants ? Purpose: to conduct oneself professionally and morally

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CH4 ? Reputational risk

? One must not indulge in any activity or behaviour that disgraces the profession ? Good ethics may be more than what the law enforces ? CIMA encourages high ethical standards for its students/members ? CIMA has developed a code of ethics that follows the IFAC code:

a. Part A: fundamental principles of ethics b. Part B: application for professional accountants in business c. Part C: application for professional accountants in public practice

Business ethics

A management accountant should apply safeguards to eliminate the threats or reduce them to an acceptable level such that compliance with the fundamental principles is not compromised.

? CSR, sustainability - for differentiation, to attract and retain employees, for brand strengthening

? Miss-selling, misleading advertising

? Mistreatment of staff ? e.g. discrimination, unfair dismissal

? Bribery and corruption, especially of foreign government officials

Personal ethics

? Conceptual framework ? principles, threats, safeguards

Ethics as a source of risk

? Reputational damage ? Fines/discipline ? May affect chances of winning major contracts

Fundamental

principles

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Test Your Understanding 1 ? Ethics

Which of the following represents an example of CIMA's fundamental principle of professional competence and due care?

A. Raising concerns when asked to perform a specialised task outside your area of expertise B. Maintaining the confidentiality of sensitive information C. Refusing to take on work where there is a conflict of interest D. Accepting responsibility for errors made

Conceptual framework approach

? How to deal with threats to complying with the fundamental principles

? Ethical threats that may hinder compliance with the fundamental principles:

Self-interest:

conflicting with personal interest

Self-review:

not re-assessing a previous assignment

Advocacy:

promoting an interest or opinion

Familiarity:

compromising objectivity due to a personal relationship

Intimidation:

when someone is frightened off from acting objectively

Ethical safeguards

Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level. Safeguards created by the profession, legislation or regulation

? Educational, training and experience requirements for entry into the profession ? CPD requirements ? Corporate governance regulations ? Professional or regulatory monitoring and disciplinary procedures ? External review by a legally empowered third party of the reports, returns,

communications or information produced by a professional accountant Safeguards in the work environment

? Firm-wide safeguards, like internal policies ? Engagement-specific safeguards

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4. Ethical conflict resolution

An ethical dilemma exists when one or more principles of the code are threatened. Conflicts of interest and confidentiality issues are also ethical problems.

5. Impact of strategy on brand and reputation

? Brand is what an organisation says they will do, and how they approach their products, services and interactions.

? Reputation is how that promise is carried out. ? There is an important link to strategy. Managing the brand is difficult, and managing

reputation is even harder, and so it requires the whole organisation to work together.

6. Management of reputational risk

? Governance ? the direction comes from the top. A culture of doing the right thing will help set the appropriate tone.

? Employee relations - every single person within the organisation has a responsibility to manage risk, including reputation risk (e.g. bribery).

? Environmental awareness - transparency to stakeholders should be established without giving away information that provides a competitive advantage.

? External relations ? this includes internal monitoring of certain metrics or controls to ensure that policies and procedures are being undertaken as they should. It also includes monitoring of external resources (i.e. social media).

? Risk professionals ? hire specialists who can review known risks and mitigation strategies but also consider emerging risks relating to strategy and the changing environmental and social factors.

? A policy framework

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