Welcome

In board rooms and back-offices around the world, risk management remains high on the corporate agenda.  Whilst this is positive, organisations need to achieve the right balance between adequate control and good management.

Talking to senior risk management executives this month, we have observed a trend towards a more pro-active approach to risk management in an attempt to find a better balance. 

What's the right balance? That depends on the risk and how risk averse your organisation is!

Enjoy this issue of InTouch

Tony Harb

Director, InConsult

Risk Management & Compliance Update

·                     According to a recent landmark ruling by the Australian Industrial Relations Commission, Employers cannot stop unions entering workplaces and interviewing employees on their premises to investigate a suspected breach of the Workplace Relations Act.

·                     Spyware is quickly replacing junk email as the most pressing security challenge facing internet users, Internet users are coming under continual attack from malicious software that infiltrates computers to steal passwords.  In one Australian company, a test of just 20 computers identified 1,200 spyware programs.

·         An Australian Financial Review survey of  25 leading chief executives and 5 of Australia's most senior chairmen and directors, found widespread concern over the excessive time and cost incurred in complying with new rules.  Whilst they were generally supportive, a better balance is required.

·         7 of the 37 Initial Public Offers (IPO) made last year have failed to meet projected returns in their prospectus, further highlighting the risk of poor IPO performance.  According to one adviser, one reason is that many good businesses suffer trauma in the listing process, management get caught up in paperwork and the essential of day-to-day management overlooked.

·         According to Harvard Business School professor Krishna Palepu, the recent wave of corporate regulation has done little to change the short-term focus of business and investors, which was the "fundamental force" behind recent collapses.  He believes that draconian regulation might lift compliance and produce "gold-plated" company accounts, but it would not fix the deeper issues which went to the heart of recent frauds and accounting games.

·         A trend is emerging to use project managers much earlier in the planning cycle for new engineering ventures. Increasingly, risk management engineers are involved in issues such as designing safety features for the entire lifetime of a new plant, building or installation.

·         ASIC will soon issue the guidelines to clarify Australia's "principles-based" approach to audit independence and hopes they will minimise conflict with the detailed "rules-based" US Sarbanes-Oxley Act.

Financial Services Brief

·         According to the Commonwealth Bank, under the proposed International Accounting Standards all derivative financial instruments must be recognised on the balance sheet, along with loan origination fees that were expensed and amortised.  The bank warned that retained profits in the banking industry might have to be substantially adjusted because of the transition to international accounting standards.

·         APRA has taken a tough approach on the major banks' preparations for Basel 2.  It warned that some of the banks are "cutting it fine" and advised that capital relief will be limited to a 10 per cent reduction from current regulatory requirements..

·         Recent surveillance by ASIC found that the majority of financial services companies have complied with tough new FSRA laws which became effective on March 11.  Only 9% of 353 financial service licence-holders reviewed had a poor report card and 45% had minor deficiencies  The most common flaws were inadequate cash-flow projections and not establishing a breach register as part of the risk management strategy requirements.

·         The National Australia Bank has changed its risk management structure following its $360 million foreign-exchange debacle and the appointment of a new chief financial officer.  New reporting arrangements will also be introduced as Mr Stewart admitted after the forex scandal that there were no clear reporting lines and accountabilities between risk management, operations and finance.

·         Although APRA has approved about 30 of the 34 remedial measures required before NAB can trade forex options again, APRA has made it clear to the NAB that it will not get back its licence to trade foreign currency options until its new risk policies and trading procedures have been thoroughly tested.

·         All of Australia's listed general insurers have reported strong profits. IAG $665M, QBE $320M, Promina $204M and Suncorp $618M..

·         The Combined Operating Ratio for Australia's major  insurers also improved.  Wesfarmers 86.5%, IAG 90.7%, QBE 90.8% and  Allianz 96.6%