Concept of Inherent Risk
One should keep in mind that they have to face risk if any new business has been started. The occurrence of inherent risk is higher if it is a going concern business. Even auditors cannot find inherent risk. Auditor apply a lot of audit procedures, audit training and many internal functions are implemented still they are not able to find inherent risk. This type of risk can be minimized but it cannot be wholly removed.
A telecommunication business named One.Tel is a telecommunication business which was known by the people globally. Even it had almost captured the market of Australia. One.Tel gave a lot of non-segregated services and products to its customers. It mainly provides a business of innovation and technology. For competing in Australia market is not so much easy. In between 35 network providers in this type of industry that is telecommunication industry who are competing with each other than also One.Tel was one of the popular market players. It is an advantage for customers when smaller companies come in the telecommunication industry. Even the price of calling as well as communication services also come at a lower price. Even it gave a lower rate of calling that no one able to compete with it (Cook, 2001). Even the other type of services like international calls, long distance calls are given at a lower price. Thus, after smaller companies entered the market the leading company such as One.Tel which holds the majority of the stake in the market had a decline in its share due to these small companies. It was necessary for inherent risk assessment at the financial reporting level of the company because of some reasons:
- The fund movement can be tracked easily after seeing cash flow statement so the management should give an extra care when they are making cash flow statement. This type of cash flow statement is showing various short terms, medium term, and long term loans. If there are a control risk measures than fraud, misstatements and mistakes are not considered so much. There should be test procedures for inherent risk for the number of share issue (Fazal, 2013). The management keeps in mind that the valuation is correct when intangible assets valuation is done. In order to avoid inherent risk, some of the risk mitigation measurements should be considered. The license was purchased by the company in the year 2000 as per the cash flow statements (Brown et. at, 2006). When the license is being purchased than the most important thing to keep in mind is purchase, registration, maintenance, capitalization and amortization of the accounts. So it is a huge need for a proper inherent risk assessment. This enables the company to perform in an effective manner and keep the risk at bay.
- It was clearly seen that there was continuous buying of the plant and machinery by the company as there was an evident increase in the amount of plant and machinery as tracked from the financial reports of the company. It was evident that the uppermost level of management was totally and solely contributed in taking all the decisions about the purchase of the plant and the machinery, this is because these matters are related to finances and are only to be taken by the management of the company. Keeping in mind all the methods of the inherent risks assessment is necessary as it gives an idea that what amount of purchase should be made, from where it should be purchased according to the efficiency, what should be the methods of using the purchases and how to fulfill the requirements (Donius, 2010). This also helps in analyzing the finances of the company after and before making the purchases. It should be seen that the absurd situations such as the accumulated losses or any other vulnerable items should be treated strictly. The management should be careful in making the decisions as large scale inherent risk assessments are involved, decisions about the computation and writing off the losses should be taken care off.
- It is the most difficult situation for any company to control the circumstances when it is running on the funds of the investors i.e. money provided by the shareholders. In the case of Intel, it can be clearly viewed that the company was successful in raising funds by offering g its shares to the investors due to which the share position of the company rose from 355.6 million $ in 1999 to 1225.6 million $ in 2000. Dematerialization of the company share’s can be seen in the case of One.Tel but then also the company was required to follow the inherent risk assessments for determining the methods of offering the shares, there issuing and other related matters.
Strategic risk is as a whole associated with the going concern principle. These are caused due to the absurd decisions of the company. Circumstances in which the company is unable to make proper decisions give rise to risks. All matters related to strategic risks are recognized at assessment level (Lapsley, 2012).
Inherent risk is fully based on judgment. Appetite for risk gives the idea of judging an individual. There are certain steps by which a company can remove detection and control risks but finally what remains is the inherent risks which require an expertise in the management section and also requires a clever judgment. The reason of the presence of the inherent risk is that it does not depend on the risk management strategy (Gilbert et. al, 2005). But it can be seen that the causes of the inherent risks are many. The numerous factors are as follows:
- The inherent risk always remains so it does not depend on the type of the business. So the nature of the business can be regarded as an irrelevant factor. One of the risks among many such vulnerable risks is the inherent risk, as no business in cured of uncertainty. The possibilities of increased inherent risks are caused due to the vast company network and are one of the most vulnerable factors (Parker et. al, 2011). Connections between companies in the form of associates, holdings, partnerships, proprietorships, joint etc are some of the points due to which the inherent risk increases. It can be understood as like more number of connections with different companies and in turn more likely to encounter inherent risks (Fazal, 2013). Thus, it is clear that the increase in complexity in the connections of a single company with other companies decreases the ability of the management to sustain or prevent inherent risks.
- Deviant transactions, peculiar circumstances, and non-routine operations play a key role in increasing the inherent risks. Transactions done with a lack of idea and guarantee from the management are dangerous to the company. Peculiar activities that require adjustments and repeated corrections from the managements are also sources of inherent risks. There are some transactions which are not in the range of the company, not following the ideologies and requirements of the management and these may often prove to be dangerous for the company (Roach, 2010). This can be due to some personal opinions or due to the effect of feelings rather than considering the present conditions of the market.
- The dominance of the related party transactions also plays a key role in the presence of the inherent risks. Attention should also be paid that going against the significant debts covenants increases inherent risks. It is transparent in the case of One.Tel Ltd that it borrowed heavy loans which were all followed by covenants. It must be kept in mind that overriding of this corporate debt can lead the company to serious and vulnerable problems. It is a duty to pay off all the loans with the interests charged on those loans and is not an abnormal activity (Hoi et. al, 2009). The management did not pay any attention to the risks which led the company to huge losses. If the managements keep following these activities then it is almost impossible in tracking the risks. It is also seen that the inherent risks occur due to the overlooking of mistakes caused on the part of the audit personnel. A strict audit team can be an easy solution to it. It is the duty of the auditor to track the risk and eliminate it, but the failure of the auditors causes losses to the company. It is important and necessary for the company to have able auditors for the elimination of the risks and prevention of losses. Thus, an inefficient audit team invites inherent risks on a large scale (Bertilsson, 2017). Thus, it is important for a company to have auditors having experience, qualifications, and expertise so as to encounter the inherent risks easily. It helps the company to ensure standard practice and every matter is backed up with sufficient evidence. Hence, a major chunk of the company activities resides on the performance of the auditors.
Case Study: One.Tel
The going concern principle is the major reason why the organization will continue its operation in the long run and there is no reason why the organization will shut down the operations. By stressing light on the balance sheet, it can be said that the current, as well as liabilities, witnessed a good enhancement. On the contrary, some unexpected movement was witnessed because the share capital increased while the profits dropped that is a negative indicator. When the profit declines, it raises a strong concern among the stakeholders and remains a cause of worry. Due to decline in the profit, many activities of the company gets affected. When it comes to the balance sheet of One.Tel the losses of the last year exceed more than 200%. From the income statement, it is seen that the EBIT stands negative. As per the analysis, it can be commented that the loss ranked in huge numbers while the expenses were easily posted to the debit of the profit and loss account. From this position, the company can have a selection over two options that are an increment in the revenues or the reduction of debt so that the losses can be curtailed (Hoffelder, 2012). Going by the vast losses it is difficult for the company to wipe out such losses in a span of one or two years. Therefore, it is imperative that the management must come to the forefront and bring the company out of such stake. However, it is a daunting task by the company because the many limitations of the company were exposed. It came to the limelight that the Finance Director was unable to authenticate ledgers, trial balance, journals, etc. further, the executives failed to perform their duty and hence, was a major flaw (Manoharan, 2011). The loophole was present in many areas ranging from the aging cycle of the debtors to the listing of cheques. Being ignored, a major crisis was observed in the management.
There was a collective failure of the management and hence, the operations of the company declined in a constant manner. It leads to the weakening of various departments. The continuous operation of the company in such a manner spoils the solidity and creates a negative influence that disturbs the company’s goodwill. Going by the happening in the company’s management it can be said that the principle of going concern is in immense danger and it can be attributed to the mismanagement process, a weak form of internal control and weakness in the financial scope of the company (Guan et.al, 2008). Such factors need to be taken into consideration at the earliest. The going concern states that the existence of a company will be present for an infinite period but the company cannot perform if the funds are mismanaged and funds are blocked. A company can undertake mechanism to stop the problem in the system if it concerns the management. However, in the case of One.Tel there are many issues with the management, funds, and operation that put the company at immense risk. However, the company needs to perform with effectiveness so that any frailties or drawback can be eliminated at the earliest.
References
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Cook, T 2001, Collapse of Australia’s fourth largest Telco adds to growing list of corporate failures viewed 31 May 2017, https://www.wsws.org/en/articles/2001/06/onte-j08.html
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Guan, L, Kaminski, K. A & Wetzel, T. S 2008, ‘Can Investors Detect Fraud Using Financial Statements: An Exploratory Study’, Advances in Public Interest Accounting vol. 13, pp. 17-34.
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Manoharan, T.N. 2011, Financial Statement Fraud and Corporate Governance, The George Washington University.
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Roach, L 2010, Auditor Liability: Liability Limitation Agreements, Pearson.
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