Causes of high inherent risk at financial report level

Discuss about the Quantitative Risk for Concepts, Techniques and Tools.

The complexity of a system can lead to many unexpected errors in the financial reports. The chances of misstatements or errors in transactions in the system can arise due higher inherent risk. The chances of errors in the financial system for reasons other than lack of internal operational control can be mostly related to inherent risk. Guénin-Paracini et al. (2014) mentioned that degree of financial exposure of an organization is another factor that leads to inherent risk of an organization. The financial transactions of the organization that operates in the macro environment of stringent statutory compliances can lead to more occasions of errors and thereby, increased inherent risk. In the view of Ihendinihu and Robert (2014), the organization that is dependent on more types of forecasting of future requirements and deals with complex financial transactions creates chances for more inherent risk proportions.

The main contributing factors that enhance the inherent risks for the financial reporting of the telecom organization at Australia, One Tel can be detailed as below:

The availability of huge number of competitors in the Australian market creates the competitive pressure on the existing telecom organizations in the area. Moreover, the options of mobile number portability have provided option for the customers to switch over from one service provider to another. Even while switching over to another network, the pending bills for the present network are often not cleared. Kannan et al. (2014) mentioned that this situation creates bad debt which lacks chances of recovery. The overall bad debt need to be kept in a clear note as the total volume of bad debt may rise above the expected value. Efforts to recover the bad debts are to be taken and even correct reporting is important to get over the burden of excess income tax. Even the profit margin gets impacted by the bad debt amounts (Jang and Kim, 2016).

The competitive market impacts the level of revenue of One Tel in Australia. Sadgrove (2016) mentioned that the competition impacts the overall sale volume and the forecast on the future sale volume becomes far from expected due to the constant switching over among different telecom service providers. The number of telecom service providers in Australia has mounted up to 35 which create a huge option range of service providers for the customers. The customer behavior becomes more unpredictable with time and increasing options in market. Mironeasa and Codină (2013) emphasized that the chances of error in prediction become more evident leading to more inherent risks in the financial reports.

Impact of substitution in market

The autonomy of a board of directors is dependent on the fraction of non-executive members in the board. The present board composition of One Tel indicates that the half of the members on board are non-executives imbibing autonomy in the board. Now, autonomy actually indicates the independent operating capability of the board members. In the view of Lothe (2013), the autonomy imbibes a considerable proportion of inherent risk. Here, the case of One Tel also shows that the autonomous board attracts inherent risk in the system.

The board members are responsible for taking important financial decisions for the organization (Rust et al. 2011). The business policies and strategies are one of the main determinant factors for success of financial improvement of One Tel.  The qualifications of the board members are the driving force behind the decision perfection. More number of board members from finance back ground can help in meeting the financial risks in the organization. However, McNeil et al. (2015) mentioned that the telecom industries tend to hire persons from similar technical background in the same field of operation instead of finance qualified persons. This paves the way for major inherent risks in the systems.

According to Zadek et al. (2013), the inherent risk is directly proportional to the issues with revenue recognition. The revenue can be recognized in records once the revenue is completely assured. However, the telecom service providers face a severe issue in identifying the correct time for revenue recognition. William et al. (2016) stated that the telecom service providers with postpaid services are mostly in such problems. The customer using a postpaid connection has the opportunity to use the services for a month or a full bill cycle. The usage bill is generated and thereby the same is sent to the user. A due date is provided 7 to 10 days from bill generation. Now, the service providers face the issue as to when should the revenue be recognized. There are options for One Tel to record the revenue once the service is provided, or when the bill is generated and sent for collection of payment. The financial year closing period is even more confusing for One Tel. On the date of trial balance, One Tel get confused as to what amount should be reflected- the amount used up or the amount that is ensured of payment. The total complication leads to mount up in the volume of inherent risk in the financial system.

Competitive market

The most efficient tool to sharpen the work force is adequate training. In the words of Sanderson (2013), the more the number of training sessions, the clearer can be the concept of personnel at One Tel. The training needs to be essentially in the finance segment along with the operations team trainings. Even senior finance associates can train the junior staffs at the operations. The constant training programs can ensure that the financial reporting is done appropriately. Internal audit facility can also keep a monitor on the staff performances. The positive impact of training can be used only when such facilities are available at One Tel. If One Tel cannot arrange for the training facilities, then the process can lead to more inherent risks.

The auditing process is overall managed, monitored and controlled by the audit committee of an organization. One Tel needs to maintain such a team of experts who monitors the overall process of financial reporting and also oversees the auditing to ensure no unjust non-conformity can be bestowed on One Tel. The Audit committee assists the external auditors in the external audit process. The external auditors can be provided with apt information pertaining to all financial transactions one asking. Zeff (2016) mentioned that the absence of an audit committee however leaves loopholes in the financial recording due to absence of monitoring of the complex transactional processes. The inherent risk can be avoided by appointed an efficient team of finance experts as audit committee.

The Australian economy is at the verge of growth. Here, Beck and Mauldin (2014) mentioned that most interestingly, the growth opportunities create many options for business development and expansion which leads to increased inherent risk. Now, this can be attributed to the various scopes that open up for business growth and more enhancing the revenue volume. The lending and investment options increase by leaps in growing economy scenario with increased complication. So, with growth in economy, the inherent risk gets enhanced.

The some of the factors contributing to the inherent risks arising in financial report can be specifically overcome by proper strategic progress. Such issues can be identified as strategic issues like qualification of board member, independence of board; audit committee at office, training culture implementation can be such issues (Waldron, 2016). Now, proper strategic planning at the management level of One Tel can evolve out specific strategic approach towards handling the issues. Bowling (2014) stared that the top management needs to implement the culture to ensure proper training and development of the grass root level employees to the middle management level to reduce the inherent risk from the complexity of daily operation.  Also, setting an audit team is a essential responsibility of the higher management.  

Autonomy of Board of Directors

However, the most important part is determining the board composition and selection of proper qualified financially knowledgeable person who can define the strategic policies for the organization. The top management of One Tel can be very particular on eliminating the identified issues to reduce the overall inherent risk of One Tel.

The factors that cause the inherent risk at account balance level need to be identified. The identification can help in management of the inherent risk associated at the account balance level. The factors can be studied as:

The operation of ant telecom service provider is offered in dual mode. The first mode can be seen as pre-paid services and the other one is post-paid services. The expense for prepaid services are paid by customer before using while in postpaid, the services are first used and then bills are sent for payment. The time on which the revenue is to be recognized gives trouble. The amount of bill gets assigned as account receivable or doubtful dept remains a question for One Tel. The same accounts system gets no resolution as to when the actual revenue can be recorded.

The sales calculation for the services at One Tel and similar other telecom service providers becomes very complicated due to the different types of tariffs available for the huge band of pre-paid customers along with different bill plans applicable for different post paid customers. The rate cutters with different denomination and different functions are being recharged by the customers the same way as the postpaid customers take power packs sometimes to reduce call rate and sometimes to boost internet speed and others. The confusion heaps up when the question arises whether payment for postpaid services used is to be shown as accounts receivable or as sale. The confusion clearing is highly necessary for ensuring low inherent risk at One Tel.

Going concern concept is one of major accounting concepts which consider an organization to continue its business for a considerably longer period of time in the industry. The concept of accounting clearly assumes that a particular business organization would continue its business over a longer period of time and would not think of liquidating its assets or resources within a short time. On the other hand, the principle of going concern is applied in all accounting transactions and thus impacts the financial performance of a company. It is the going concern principle based on which prepaid and outstanding portions of incomes & expenses are recognized in the balance sheet. Similarly, an asset is depreciated over its entire useful life.

Qualification of the Board Members

One Tel is one of the growing companies in the telecom sector of Australia. There are certain financial and non-financial factors that influence going concern aspect of the business. The good thing about the external business environment is that the Australian telecom sector is evidencing sharp growth which has a positive impact on the sustainability of One Tel. On the contrary, a market with rapid growth opportunities attracts investors which might reduce the market share of One Tel and can also have a negative impact on the going concern aspect of the company. On the other hand, analyzing the financial statements of One Tel it was discovered that the liquidity position of One Tel has improved considerably in 2000 compared to the same in 1999. Increase in the amount of current assets is yet another good factor for the company. However, One Tel has been seen to indulge in high level of debt financing which raises the financial risk of the company and thus sustainability could be at stake if not managed quickly. Negative cash flows from investment and operational activities remains a concern for One Tel.

Hence, on the whole One Tel seems to have a medium level of going concern state.

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