Risk management for accounting is an approach a company will take when preparing financial information. Almost all business activities carry come level of risk; companies will need to institute principles to avoid taking excessive risk that may damage the company financially. Some of the best tips for this process include taking a conservative approach to recording financial information, avoiding the use of debt for purchasing assets and creating a secure environment for financial information. This approach helps companies complete a risk management for accounting analysis and reduce the potential for major business disruption.
A conservative accounting approach often relates to how a company recognizes income. Most national accounting principles — whether domestic or international — do not provide companies with strict guidelines for recording financial information. Companies can therefore create internal accounting policies that work best for their business practices. Unfortunately, improper risk management for accounting policies can expose the company to unnecessary scrutiny from accounting organizations or government agencies. Companies that record sales aggressively in an attempt to create higher earnings earlier rather than later will often incur more scrutiny. This risky approach can lead to accounting restatements, a major negative for companies in the business environment.
Accountants often help a company manage its debt associated with purchasing and using assets. Companies that over-leverage their assets often face more risk of financial failure. Risk management for accounting often involves the use of a total debt to total asset ratio to determine how much debt the company has compared to other businesses in the industry. This ratio presents the information in a percentage form as to how much of $1 US Dollar (USD) in assets the company finances with debt. For example, a company that finances $.80 USD of each dollar is often a risky business in terms of debt use. Accountants may help the company set a limit for the ratio, such as $.40 USD of every dollar in assets. This ensures the company will not create too much risk for internal and external stakeholders.
Risk management for accounting also includes creating a secure environment for all financial information. Allowing unauthorized individuals access to financial information can result in the company increasing its risk of embezzlement or fraud. Employees can use the information to their advantage and increase business risk to the firm. Companies must separate accounting duties, create user access limits for accounting software or prevent lower-level accounting employees from reviewing sensitive financial information. These actions can help reduce the overall risk in a company’s accounting office.
