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msafiri 36 Q David Leahy is a Partner in Advisory Services at KPMG in East Africa responsible for Internal Audit, Risk and Compliance. KPMG Kenya is a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. With 123,000 people worldwide, member firms provide audit, tax and advisory services from 717 cities in 145 countries. The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG IMPROVING RISKMANAGEMENT IN YOUR ORGANISATION promotion 123 W hile organisations already have processes and controls in place to manage risk, it is now time to reassess their risk framework and to make any modifications that are needed to stay current with changing industry trends and organisational needs. These improvements need to address the institution's risks in a more comprehensive manner while enhancing the ability to anticipate risk. KPMG believes organisations need: n An organisational response to assess their risk n An operational response to improve their risk-assessment and risk- management processes n A governance response to improve risk oversight Where do we start? KPMG's approach to enterprise risk management involves: n Creating content. Profiling risks and leveraging existing risk- assessment documents n Creating process. Building and maintaining a dynamic risk- management process. In terms of implementation, we see a five-step approach to managing risks and controls: n Conduct a more comprehensive risk assessment inventory and prioritise key risks. This needs to be led top- down by the MD / CEO to engage the entire organisation. Tone at the top is critical to successful risk management. n Identify and prioritise key financial reporting processes and controls. These include the revenue cycle, closing the books, regulatory compliance and budgeting and forecasting. This step should be led by the FD/ CFO and the controller. understanding of its risks based on insight into its potential consequences. By improving risk management processes, the organisation can better identify who is accountable for managing specific risks, and not only those risks that lie in the financial realm. Strategic, operational and compliance risks may become more visible to the entire organisation. Further, such a view helps educate the audit committee, as well as the full board and its committees, to help them better anticipate and mitigate financial risks. In addition, the collegial process of identifying and prioritising risks facilitates a more integrated, anticipatory and preventive approach to managing risks. As the management guru Peter Drucker observed: " Neither the quantity of output nor the ' bottom line' is by itself an adequate measure of the performance of management and enterprise. Market standing, innovation, productivity, development of people, quality, financial results – all are crucial to an organisation's performance and its survival. Performance has to be built into the enterprise and its management; it has to be measured – or at least judged – and it has to be continually improved." At the end of the day, it is important to have: n A more comprehensive risk assessment and risk management framework. n A risk- based, time- released approach to documenting, self- assessing and testing internal controls over financial reporting as well as key operational and compliance processes. n And a new reporting model for organisations that goes beyond traditional financial reporting models currently in place. n Develop a current- year plan for documenting, self- assessing and testing internal controls. This should be led by the controller and supported by internal audit, with the aim of linking the key risks with the controls that the organisation seeks to strengthen. If the organisation documents, assesses and tests the controls on the 20 per cent of its processes that are linked to the highest risk areas, this will probably cover about 80 per cent of the risks. And the organisation can deal with the other 80 per cent of their processes ( and related controls) by strong monitoring at the corporate level. This focus on the fewer areas that matter most – rather than taking a more comprehensive and less selective view – also creates an opportunity to improve these controls, including addressing gaps and deleting redundancies. n Create a risk committee to look beyond financial reporting risks to the strategic, operational compliance, and regulatory risks. Because the root causes of financial reporting " surprises", as well as other impairments to the institution's reputation, lie in all of those areas. n Link the oversight of risk to the audit committee and individual risks to the audit committee and other committees. So that their insights into enterprise risk and the process for managing risk can be shared at the highest levels. Directors must be able to provide oversight of the most significant and likely risks and the manner in which they are being handled. Key benefits of ERM Improved risk management provides a more explicit, comprehensive and enterprise- wide KPMG believes the risk management of organisations needs to become more integrated, preventative in practice, and anticipatory in approach

BUSINESS Oil- importing countries will benefit from the lower petroleum prices, but most of these will go to cover the shortfall caused by the earlier very high prices. The current low oil prices mean that a number of multinationals have suspended their exploration activities. Others are having a rethink about the viability of developing new fields in parts of the Gulf of Guinea or East Africa. There has been a steep decline in the value of African commodities, which is a serious issue for a continent that depends on the exports of its primary commodities; these form nearly 80% of its total exports. The price of copper for example, fell from US$ 8,454 per tonne in the second quarter of 2008 to the current US$ 4,000; nickel has plunged from a peak of US$ 37,136 per tonne in 2007 to US$ 15,494 mid- October 2008. Aluminum, tin, zinc, lead and iron have all seen dramatic falls in prices. China, one of Africa's most important trading partners, is also feeling the heat. As its primary export markets in the US and Europe shrink, so does its demand for both hard and soft commodities from Africa. The silver lining is that domestic growth is becoming as significant for the Chinese economy as exports, so it will continue to source products from Africa. However, Chinese companies are now demanding large discounts for commodities such as iron and coal. Remittances from Africans living abroad are a critical source of income for most African countries. In 2007, the UN estimated that over US$ 20 billion was sent to Africa as remittances. In some countries, remittances make up 20% of the gross national product. As the economies of the US, Canada and Europe either stagnate or decline, Africans living and working there do not have any cash left over to send back home. Kenyan authorities say that by August last year, remittances had fallen from around US$ 100 million to just about US$ 36 million. Remittances to Uganda, which comprise 7% of GDP, have declined by half. How can Africa ride out the storm? There is little that Africa can do to influence external realities. However, massive measures taken by some of the world's biggest economies to prevent a 1929- style depression will hopefully work over the next two years and growth will resume both in the West and Asia. This will impact favourably on Africa. The current downturn will mean that property prices are likely to drop. This will enable many first time buyers to take their first step on the property ladder if they can obtain the initial deposits. African lending institutions are in a fairly good position to continue providing mortgages in countries like Kenya, South Africa, Botswana and Namibia. The squeeze on exports could have the effect of making African countries more self- sufficient, producing for their own domestic markets and exporting and importing within Africa. Despite the fairly gloomy projection for 2009, Africa is in a much stronger position today than it was, say five years ago, and is likely to weather the storm. There is an increased volume of trade between African countries and if this continues or increases, the impact on the general population may not be so severe. 124 msafiri Exchange rates for African currencies have taken a sharp knock over recent months. By November last year, rates had fallen by 56%, 24%, 22% and 20% respectively in South Africa, Kenya, Ghana, Zambia and the CFA zone but they had remained steady in the major oil exporters Nigeria and Angola. The credit squeeze and stringent lending policies in the developed world are most likely to curtail the level and volume of foreign direct investment. In 2007, Africa attracted US$ 53 billion of FDI but inflows in 2009 will be lower. Portfolio investments in Africa which rose rapidly over the last three years, are likely to reverse as investors seek safety in US and European government bonds. An interesting offshoot of the squeeze on exports is that the cost of shipping bulk items such as iron ore and so on has plummeted 92% over a seven- month period ( May to November) in 2008. While this is welcome news to those African exporters who can still find markets for their products, the major problem over the next year will be in continuing to find those markets