The collapse of Northern Rock proves that profitability is no defence against liquidity risk: the company made profits in the quarter before it disappeared. Following a significant fall in market liquidity, Northern Rock was unable to meet its payment obligations.
Only a few voices raised liquidity risk issues until now and, even if the regulators did monitor banks’ liquidity management, they rarely raised serious challenges. During this financial crisis, risks tended to repeatedly transform from one type to another and companies face the challenge of placing greater emphasis on developing an integrated view of risk management across all types of risk.
The new economic perspectives bring significant challenges: while funding can still be found, it is only available for short periods and at high costs. Therefore, this is a good time for any company to perform a liquidity stress test such as the following 3 steps approach:
1) Identify liquidity risk drivers:
erosion in value of liquid assets,
additional collateral requirements,
evaporation of funding,
withdrawal of deposits (if the case);
2) Design stress scenarios (and probabilities):
emerging markets crisis,
systemic shock in main centres of business,
country / industry specific scenarios;
3) Model stress tests:
quantify liquidity outflows in all scenarios for each risk driver,
identify cash inflows to mitigate liquidity shortfalls identified,
determine net liquidity position under each scenario.
Times of crisis are perfect opportunities to refocus on fundamentals: you can show that you truly understand your businesses and its potential risks with an integrated risk management perspective.
CEOs around the world are retrenching, indeed many claim to be entering “survival mode.” PwC’s 12th Annual Global CEO survey shows how the financial crisis shattered short-term confidence.
The percentage of CEOs who were ‘very confident’ about their one-year revenue growth prospects dropped to 21%, the lowest level in six years. Uncertainty about the future is still running high and confidence no doubt continued to deteriorate after PwC completed the survey in early December.
You may compare yourself to the CEOs in this issue or download the most relevant nuggets of Survey data by industry, country or business issue from: http://www.pwc.com/ceosurvey/
“The impact of Sarbanes-Oxley Act on Romanian companies” is an article written for the “Financial Audit” Journal in July 2008. The article evaluates the benefits of the Sarbanes-Oxley Act for shareholders by studying the lobbying behaviour of investors and corporate insiders to affect the final implemented rules under the Act.
All over the world, regulatory pressures have overshadowed the risk management function for the past few years and we may see a high impact on Romanian companies as well. SOX compliance brings high regulation costs as well as competitive benefits such as improved ability to prevent, quickly detect, correct, and escalate critical risk issues, reduced cost of risk management by improved sharing of risk information and integration of existing risk management functions.
However, SOX compliance not only refers to financial side of corporations, but also to the IT departments considering the corporations’ electronic records and access rights. The lack of controls over spreadsheets has been a contributing factor in financial reporting errors at a number of companies. In this article, you may find examples to highlight the importance of understanding how spreadsheets are used in a company’s financial reporting process and evaluating the controls over spreadsheets as part of the company’s overall Section 404 process.