Risk-related earnings uncertainty sparks market expansion, efficiencies

Forecasting risk has become increasingly difficult, and it won’t get easier over the next three years, but organisations are responding to the challenge with expansion and new efficiencies, according to a new survey of finance professionals in North America.

Some of the risks that are the most difficult to forecast are having the greatest impact on earnings and will continue to affect future financial results, according to an Association for Financial Professionals (AFP) survey released Wednesday.

At a time when unforeseen events can ruin a company’s reputation as quickly as a damaging video goes viral on YouTube, customer satisfaction can never be taken for granted. Meanwhile, proposed rules – from the European mandatory audit firm rotation discussion to the developing, federally mandated “Volcker rule” affecting financial firms in the United States – have the potential to significantly affect companies’ finances.

“From subtle changes in consumer tastes to sweeping changes made by regulators, future risks can be difficult to manage proactively,” AFP President and CEO Jim Kaitz said in a news release. “That’s why a risk mind-set must permeate the entire organisation.”

Fifty-nine per cent of the 547 finance professionals surveyed said their organisations are exposed to more uncertainty in earnings compared with five years ago. And 53% said it is more difficult to forecast risk today than it was five years ago; just 18% said risk forecasting is easier.

The prospect for the future is just as grim. Fifty-two per cent of respondents predicted that it will be more difficult to forecast risk three years from now, while 12% said it will be easier.

Respondents said the following risks will have the largest impact on their organisations’ earnings over the next three years:

• Customer satisfaction and retention.
• Regulatory risk.
• GDP growth.
• Political risk.
• Interest rate risk.

Two of those items – regulatory risk and political risk – also were identified among the five most difficult risk factors to forecast. Natural catastrophes were rated most difficult to forecast, and product liability and commodity (non-energy) price volatility also were in the top five.

Responding to challenges

Organisations are doing their best to overcome these risks, in part by improving efficiencies and expanding into new markets.

In response to current and emerging risks, they are investing in IT systems (57%), increasing revenue growth targets (53%), focusing on risk culture and awareness within the organisation (52%) and expanding the geographic markets they serve (51%), according to the survey.

“Developing a sustainable, competitive advantage in an increasingly uncertain environment is the most important issue facing business today,” Alex Wittenberg, head of the Global Risk Center at survey co-sponsor Oliver Wyman, said in a news release.

Organisations are altering their risk-management activities, too, in response to current and emerging risks, according to the report. These changes include:

• Greater executive review of strategy assumptions (63%).
• Increasing specific risk analysis (46%).
• Increasing risk reporting to management (44%).

Related CGMA Magazine resources:

Risk and Innovation Spotlight: Browse the latest tools, reports and articles offering tips and best practices for the successful management of risk and innovation.

“Five Emerging Strategies for Coping With Unknown Risks”: Unknown, complex risks that often are outside the executive team’s control increasingly threaten companies. Here are five strategies for battling those unknown risks.

“Five Likely Threats That Should Keep Global Leaders Up at Night”: Threats that keep top experts and high-level leaders up at night are the risks that are beyond any one company or even one nation to handle. A report from the 2013 World Economic Forum lists the most likely ones with the biggest damage potential.

“Companies Plan to Pump Up Enterprise Risk Management”: New regulation and severe weather events in the past few years are driving companies around the globe to pay more attention to enterprise risk management. Find out what threats worry executives the most and how existing ERM programmes could be improved.

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.