1. Please outline your proposed alternative(s) and address the following issues:
a. What issue should Ariana discuss first with the CFO.
i. How future risks that are not typically identified are likely to affect future performance of the firm.
Most line managers and management would always rely on internally biased reviews on risk assessment and strategies which might be outdated in logic and facts. There is tendency to focus much on initial risks and less on residual risks. Whilst much focus on initial risks within the firm mitigates the firm against such risks, this however does not mitigate the firm against residual risks since the firm is always a going concern with active activities and programs. Instead, a focus on a combination of initial risk mitigation measures already in place and residual risks would mitigate the firm future performance against these risks. The management should also consider using external third-party consultants for reviews of its risk assessment and mitigation strategies for independent valuations and independent due diligence.
ii. There is usually incomplete risk identification process
Although there is a strong established risk identification process, there should always be known that there is no single known and complete risk identification process that is always complete since risks are always evolving and changing in nature. And to this the line managers and management should time to time assess its risk profile across portfolios, functional lines and geographical boundaries.
iii. Undetectable developments in risk profile
Sometimes it is difficult to detect specific portfolio risk profile since specifics portfolio risks evolve undetectably different from the whole firm’s portfolios.
iv. Mitigation measures has much focus placed on high risk elements.
Whilst this is appreciated, this leads to tendency where the firm ‘s focus and that of its employees and management has been solely on high risk areas leaving the firm exposed to the overlooked low risk areas which evolved from time to time to become high risk undetectably.
b. What are the risk management issues that you must address in order to evaluate staying with its current programs in place or adopting your proposed structure?
i. Third party risk management. Due to the frequency of dealings with third party intermediaries like brokers in interactions with different jurisdictional authorities, third party risks assessments are very important. They have to be vetted, monitored and evaluated from time to time to assess their risk impacts to the firm’s operations (Aon Risk Portal- Risk Map 2019, 2020)
ii. Technology risk management. By establishing strong technology risk management functions to assess, monitor and evaluate risks. Thus, reducing or eliminating technology risks, hence stabilizing the firm and its subsidiaries against business disruptions emanating from such risks.
iii. Fraud and misconduct. By having enforceable implied, written or consented external engagements either by contracts, memorandum of association or understanding to external players like suppliers, purchasers/debtors, partners, financial players and consultants’ strong internal controls like policies, procedures and standards. This will help to monitor risks associated with external engagements, suppliers and employees conduct thus aiding in fraud detection, fraud prevention and preservation of the firm’s image and reputation.
iv. Effective Compliance. Due to the ever-changing regulations, the firm should have an automated compliance methodology so at to have an effective and compliant firm to varying regulations across jurisdictional authorities. This will guard the firm against unnecessary fines, penalties and threat of closure and likelihood of loss from compliance risks.
v. Data security. Since the advent of technology in data storage and sharing, companies share data with companies and as well with trusted third parties. These relationships are to be vetted and reviewed to ensure the shared data or information between companies are not breached and are held in confidentiality. The same are to extend to trusted third parties in protecting the firm’s confidential data. (Homepage | RiskMap 2020, 2020)
vi. Crisis management. The firm should have a well-documented crisis management plan with a prompt actionable response. This should include pre-vetted professionals, partners and government agencies. This will reduce the possibility of loss arising from such risks.
c. What are your risk financing program recommendations? Explain.
i. External risk transfer. Strigidae Manufacturing Inc should take insurance cover against known risks and third-party risks due to the nature of the firm’s operations. But even with insurance cover, it should minimize insurance costs as much as possible since insurance costs are sometimes expense costs, example, it should ensure its strong employee safety program is effective to reduce workers’ compensation injuries so as to reduce the cost of work-related injuries to be below 1.8% of payroll. Workers’ Compensation
ii. Collateral costs. This include examples of trust accounts and pledged securities like covenant bonds to cover for such likelihood of losses arising from such secured assets/goods or services.
iii. Risk mitigation programs. This involves ensuring and maintaining compliance on environmental health and safety, regulatory compliance and emergency and crisis management planning.
iv. External consultancy fees. For example, legal fees for contracts and legal constraints expenses to cover for likelihood of losses arising from litigations due to executions/non executions of such contracts and legal issues and professional fees for such areas of consultancy. Like the firm’s exclusive contract with United Parcel Services for product delivery from its plants to constructions sits and distributors across the United States, Canada, Mexico, Chile, Brazil, Japan, China, and Australia. And the firm should subcontract its auto fleet of 400 vehicles to other users at a fee. Strigidae Inc should continue with subcontracting Lowes, Home Depot, Costco to smaller builders as it reduces the likelihood of losses to be incurred from such operations.
v. Internal program administration. This should be by providing competitive salaries with enhanced benefits whilst reducing unnecessary overhead costs
vi. Retained and self-insured losses. The firm should incur indirect costs like employee reduced productivity.
d. Draw a graphic of your proposed program and then outline the advantages and disadvantages of your ALTERNATIVE program structures.
i. Transfer of risk arising from the insured risks, hence stability to the firm’s cash flows.
ii. Reduction in penalties and fines and threat of business closure over compliance on environmental health and safety, regulatory compliance and emergency.
iii. It provides prompt response to crisis management related incidences.
i. A huge amount cash and budgetary allocations to insurance of risks. This leads to increment in insurance expenses.
ii. It is expensive to comply to environmental health and safety and regulatory compliance.
iii. Not all risks can be insured and some risks are hard to quantify for insurance hence uninsurable. And some risks attract higher premiums.
2. After completing your analysis explain why Strigidae should adopt your proposed Risk Financing program structure.
The Proposed Risk Financing Structure:
i. Is a hybrid of both non-monetary costs and monetary budgetary costs. Monetary budgetary costs collateral costs, external consultancy fees including external transfers of risks which cover the insured in the event of loss. Thus, minimizing the amount of loss or eliminating the amount of that would have been incurred by the firm thus increasing the firm’s shareholders value.
ii. The non-monetary budgetary costs like retained and self-insured losses promotes creation of employment even when employee productivity is lowered.
iii. Has a risk mitigation programs ensures compliance on environmental health and safety, regulatory compliance and emergency and crisis management planning.
iv. Has internal program administrations help improve employee morale and low staff turnover whilst reducing insurance costs on such risks due to low staff morale and high staff turnover.
Controlrisks.com. 2020. Homepage | Riskmap 2020. [online] Available at: [Accessed 29 April 2020].
Riskmaps.aon.co.uk. 2020. Aon Risk Portal- Risk Map 2019. [online] Available at: [Accessed 29 April 2020].