Enterprise Risk Management and Financial Reporting

This assignment examines the relationship between enterprise risk management (ERM) and financial reporting processes. It delves into the experiences of various stakeholders, including audit committee members, CFOs, and external auditors, regarding ERM implementation and its impact on financial reporting. The analysis draws upon research articles and explores frameworks used for risk assessment in diverse contexts such as cloud service ecosystems, manufacturing processes, and business continuity management systems.

PROPERTY
DEVELOPMENT

Table of Contents
INTRODUCTION...........................................................................................................................1
Identifying potential risk.............................................................................................................1
Risk ordering based on category.................................................................................................2
Risk measurement and mapping.................................................................................................3
Allocating the risk between ASL / QM and contractor and risk mitigation strategy..................5
Management strategy for risks....................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Risk assessment helps in making estimation of uncertainty involved in a particular
project. It can directly or indirectly affect the functioning of the business (Cohen,
Krishnamoorthy and Wright, 2017). In the given case, QM group and ASL group have made a
joint venture in order to perform redevelopment of a building. The risk and responsibilities have
been divided between the two entities for smooth functioning of the project. The report discusses
about potential risks involved in the project. Further, a risk matrix will be prepared in order to
classify the risk as high, moderate and low. In the end various management strategies will be
suggested for the risks.
Identifying potential risk
Risk management is a process of identifying the risk, assessing it and prepare
development strategies to manage these risks. By understanding the riskier factors that are
involved in conducting a project one entity can prepare mitigation strategies beforehand
(Djemame and et.al., 2011).
According to the given case scenario, QM properties and ASL group have joined hands
to redevelop and manage 24000 square meters office complex. The proposal is to convert the site
from B grade standard to premium. The project timing is favourable with low interest rates. QM
will be providing half of the non debt capital required. A contractor have been appointed named
Bovis Lend Lease. There are various potential risk involved in conducting the project of
redevelopment:
 Increase in interest rates: The entity has to pay interest on the loan that has been taken
for redevelopment. The conditions are in favour of the company at the time of proposal,
however, change in the interest rates can increase the cost of redevelopment. It becomes
riskier to meet loan commitments.
 Increase in construction cost: Increase in material, labour and building material cost
can increase the redevelopment cost of the project.
 Increase in financial cost: Half of the non debt capital will be financed by QM.
However, the other half have to be arranged through bank loans and other financial
sources. It will be difficult if the other finances arranged will be achieved at high
repayment rates.
1

 Disputes with contractor: QM's recent projects were ended in litigation due to its
disputes with the contractor and the consultant. If any dispute arise in this contract it will
increase redevelopment term. Further, it can result to cost overrun.
 Unexpected structural defects: During the construction while redevelopment,
unexpected deficiencies may arise which can lead to increase in total cost of
redevelopment.
Risk ordering based on category
In order to analyse the level of risk involved, contractor needs to firstly assess that what
are the risks that can arise at the time of property development (Gassó, Basnou and Vila, 2010).
It can be then divided based on major and minor risk. The level of risk is divided based on its
likelihood.
The potential risk involved in redevelopment can be ordered in the following manner:
Table 1: Likelihood of Potential Risk
Potential Risk Likelihood Rank Reason
Increase in financial cost Very Likely 5
The other half of finance have
to be arranged from other
sources which can lead to high
cost involvement in the project.
It is on the riskier side of the
project.
Disputes with contractor Likely 4
QM have already been involved
in litigation in his recent
projects. There can be chances
to arise disputes which can lead
to increase in time duration as
well as cost. It is a likely
potential risk for the project.
Increase in interest rates Possible 3 The current interest rates are in
favourable condition. However,
increase in interest rates will
2

lead to increase in cost. It is a
possible risk of redevelopment.
Increase in construction cost Unlikely 2
Increase in cost of material and
labour will lead to variance in
the estimated budget. Since, the
expected duration is not more
than 2 years, hence, it is
unlikely that the risk will appear
in these two years period.
Unexpected structural defects Very Unlikely 1
The unexpected defects that
were not estimated by the
enterprise may affect the proper
functioning of the project.
However, the study of the
project have already been done.
It is the least expected risk in
this case.
Risk measurement and mapping
The potential risk involved affects the smooth function of the project. In case of
estimation meeting to the actual figures it leads to successful completion (Nigro and Abbate,
2011). The decided redevelopment duration is 24 months; any extra time required to complete
the project other than the estimated one can badly affect the finances. The total development cost
have been estimated as $37,500,000 where it is required for the contractors to take care of
expenses. The potential risk identified can be distributed as following:
Table 2: Classification of potential risk
Potential Risk Classification
Increase in financial cost Financial Risk
Disputes with contractor Operational Risk
3

Increase in interest rates Financial Risk
Increase in construction cost Financial Risk
Unexpected structural defects Strategic Risk
The consequences of the risk is assessed based on the level of severity it involves
(Ramkumar, Schoenherr and Jenamani, 2016). The potential risks involved in case of
redevelopment project can be divided as follows:
Table 3: Consequences of potential risk
Potential Risk Impact Rank Potential Consequences
Increase in financial cost Severe 5 It will be difficult for the enterprises to
arrange finances for the project
Disputes with contractor Significant 4 It will bring the matter into litigation
which will increase the duration of the
project as well as affect the reputation
Increase in interest rates Moderate 3 Increase the repayment amount
involved through bank loans
Increase in construction cost Minor 2 It will increase overall cost of the
project.
Unexpected structural defects Negligible 1 It can increase duration as well as cost
involves in redevelopment
4

Risk Matrix
Table 4: Risk Matrix
IMPACT
Negligence Minor Moderate Significant Severe
1 2 3 4 5
LIKELIHOO
D
Very Likely 5 5 10 15 20 25
Likely 4 4 8 12 16 20
Possible 3 3 6 9 12 15
Unlikely 2 2 4 6 8 10
Very
Unlikely 1 1 2 3 4 5
Table 5: Interpretation of Risk Matrix
15-25 High Needs corrective action urgently
8-14 Moderate Needs corrective action after 2 months
1-7 Low Doesn't currently require corrective action
5

The high risk factors are increase in financial cost and disputes with the contractor.
Moderate level of risk is involved in increase in interest rates. Low risk is involved in increase in
construction cost, unexpected structural defects (Shah, and et.al., 2017).
Allocating the risk between ASL / QM and contractor and risk mitigation strategy
ASL and QM are in the joint venture for redeveloping an existing building. ASL group
has a vast experience in the field of commercial redevelopment undertakings. Hence, ASL has to
take care of finances of the project. It also has to appoint project manager who have effective
managerial skills to handle the property's functioning. QM have commercial development
experience which is liable to provide fee based marketing facilities of tenancies. It will take care
of all the risks involved in marketing. Further it also has to take measures to maintain the brand
image of the property and make all the terms and conditions clear to the contractors beforehand.
In case of contractor, he is responsible for timely completion of the project. It will help to
meet the estimated projections of the contract. Bovis Lend Lease have been appointed as a
contractor and other sub contractors who is responsible for managing material, labour and
overheads involved in completion of redevelopment (Thakor, 2016).
Administration and risk management are key component of real state companies.
Consumer complaints, commission penalties, revocations and license suspension are the major
problems faced by developer. Further, risk management is necessary because it is very
transaction intensive firm. An average to average developer do a dozen of sale transaction, so it
is very important for ASL Group and QM group to mange risk which can occur during the
project. These both groups specially look over financial, operational and strategic risk because
these are the most common risk which can be faced by real estate companies.
The company maintains the market and finance function in which income and
expenditure are recorded further it also includes the records of tax, advertising, invoices etc. ASL
and QM group records the maintenance of repairs schedules, warranty, and employee and
subcontractor personal records to avoid the future misrepresentation (Torabi, Giahi and
Sahebjamnia, 2016).
The real estate group follows the most relevant way of dealing with risk which is
purchase of insurance and transfers the risk to the insurance company.
Management strategy for risks
Financial risk
6

For real estate company the best way to reduce the financial risk is to ensure the security
over development. Security is important because any loss can directly lead to loss of investment.
Fluctuation in tax rates and bank rates affect the business in long run as the company is bound
under the contracts and agreements. Signing the contract at fixed price helps the developer in
managing risk as the company signs agreement according to legislations of the state (Risk
Management, 2016).
It is very important for developer to do demographic research of its market like prices of market
and resources available in market. The contractor need to understand the luxury features trending
and demand of customers in fluctuating market in order to avoid the risk of losing contracts
because of lack in knowledge of market.
Structural Risk Management
Real estate business involves so many areas completely different from each other like so
many people working for same project, bankers, etc. different personalities working together
leads to disputes in the development project, so the developer should have ability of negotiation
and understanding everyone's desired results.
Operation Risk Management
People in project development industry do not like the negotiation process, everyone
wants contractor to finish their work as quickly possible but developer need to research for
project before rushing into the contractual process (Tsang, Lee and Tsui, 2016). Further, risk can
be managed properly by:
 Communicating and getting details of the contracts.
 Clearly identifying the parties involved in contracts.
 Transparency in decision making
 By ensuring the general conditions which clearly defines projects responsibilities.
 Developer should ensure properly execution and documentation of contracts.
 The company should ensure proper understanding of what insurance coverage is
providing (Zavadskas, Turskis and Tamošaitiene, 2010).
 Firm should follow the procedure of change in orders of contract and must record in
documents as per the changes.
7

CONCLUSION
Based on the above report, it can be concluded that, risk assessment helps in identifying
the risk involved in business. ASL and QM are involved in redevelopment of a building. A risk
assessment have been performed for the project. There are various uncertainties involved which
can affect the estimated projections, such as, increase in financial cost, construction cost, interest
rates, etc. The project is severely at risk of increase in financial cost as only half of the non debt
finance have been provided by QM group. In the end strategies such as efficient utilization of
resources, allotting time to every task, transparency in decision making, etc, have been suggested
to the enterprises for effective completion of the project.
8

REFERENCES
Books and journals
Cohen, J., Krishnamoorthy, G. and Wright, A., 2017. Enterprise risk management and the
financial reporting process: The experiences of audit committee members, CFOs, and
external auditors. Contemporary Accounting Research. 34(2). pp.1178-1209.
Djemame, K., and et.al., 2011. A risk assessment framework and software toolkit for cloud
service ecosystems. Cloud Computing. pp.119-126.
Gassó, N., Basnou, C. and Vila, M., 2010. Predicting plant invaders in the Mediterranean
through a weed risk assessment system. Biological Invasions. 12(3). pp.463-476.
Nigro, G. L. and Abbate, L., 2011. Risk assessment and profit sharing in business networks.
International Journal of Production Economics. 131(1). pp.234-241.
Ramkumar, M., Schoenherr, T. and Jenamani, M., 2016. Risk assessment of outsourcing e-
procurement services: integrating SWOT analysis with a modified ANP-based fuzzy
inference system. Production Planning & Control. 27(14). pp.1171-1190.
Shah, L. A., and et.al., 2017. Process-oriented risk assessment methodology for manufacturing
process evaluation. International Journal of Production Research. 55(15). pp.4516-
4529.
Thakor, A. V., 2016. The highs and the lows: a theory of credit risk assessment and pricing
through the business cycle. Journal of Financial Intermediation. 25. pp.1-29.
Torabi, S. A., Giahi, R. and Sahebjamnia, N., 2016. An enhanced risk assessment framework for
business continuity management systems. Safety science. 89(3). pp.201-218.
Tsang, H. W. C., Lee, W. B. and Tsui, E., 2016. AHP-Driven Knowledge Leakage Risk
Assessment Model: A Construct-Apply-Control Cycle Approach. International Journal
of Knowledge and Systems Science (IJKSS). 7(3). pp.1-18.
Zavadskas, E. K., Turskis, Z. and Tamošaitiene, J., 2010. Risk assessment of construction
projects. Journal of civil engineering and management. 16(1). pp.33-46.
Online
Risk Management. 2016. [Online]. Available through <https://www.business.qld.gov.au/running-
business/protecting-business/risk-management/preparing-plan/identify> [Accessed on 15th
July 2017].
9