WARNING SIGNALS OF RISK PROCESS PROBLEMS
WARNING SIGNALS OF RISK PROCESS PROBLEMS 1
Failure of Risk Management process in organizations don’t just happen overnight. Rather it is the culmination of some ‘telltale’ warning signs that have been ignored over time, either deliberately or just ignorantly. Some of these flaws have been found to have contributed significantly to the risk management failures in very large and highly celebrated institutions like Enron (a large U.S energy company), Allfirst (U.S bank subsidiary of Allied Irish Bank (AIB), Sumitomo Corporation (one of Japan’s largest industrial conglomerates), Barings (a British Merchant Bank) and Metallgesellschaft (a large German commodity and financial services firm). These organizations are so large, yet they suffered massive losses due to the following factors (amongst others) characterized as common flaws in risk management:
Some of these flaws relate to the ways in which risk is governed in the institutions as follows:
- Executive / senior management does not understand the nature and/or magnitude of the risks it is taking. Its either they are simply uncomfortable with risk, fails to understand the impact of risk on the operations/ business of the organization, or view risk as unimportant or irrelevant.
- For instance, some decisions are taken at the MCC (Management Credit Committee) without really weighing the risk implication. Credits are approved in excess of single obligor limit and concentration risk limits are breached with impunity in some banks, especially those whose board and the top management have very huge and uncontrollable risk appetite.
- Some top management actually view the cost of risk and control functions as ‘parasitic’ on the earnings of the bank and some actually set deposit targets for staff of these departments so as to make them compensate for the amounts spent on their salaries/overheads.
The results are obvious.......t o be continued tomorrow.
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Association of Enterprise Risk Management Professionals
Tel 07062206653, 08033468451, 07088905252
Amafa Etupu Olufunmilayo (on 2017-07-04 12:26:44 said)
More risk alerts especially as it relates to a development finance institution.