Protecting Financial Health Through Strategic Risk Analysis

Send us a text

Find the downloadable skills guides here: Finance Leader Academy

Episode 142: Financial risk assessment stands as the cornerstone of effective auditing—the crucial process that separates calculated risk-taking from reckless decision-making. This deep dive into organizational risk management provides finance leaders with a strategic framework for protecting company assets and ensuring financial integrity.

At its core, proper risk assessment requires a cross-functional approach. By bringing together expertise from legal, treasury, accounting, and financial planning departments, organizations can conduct robust SWOT analyses that reveal potential vulnerabilities. The process continues with identifying key metrics related to areas of concern, scoring and ranking these metrics, and evaluating the effectiveness of existing internal controls. This methodical approach ensures that audit resources focus first on the areas presenting the greatest risk to financial health and operational integrity.

The significance of this process cannot be overstated. By systematically identifying weaknesses in internal controls and operational policies, finance leaders can build audit plans that address real vulnerabilities rather than perceived threats. This validation process provides confidence to all stakeholders—from employees and suppliers to creditors and potential investors—that the organization maintains financial stability and follows a viable strategic course. Whether you're managing compliance risk, credit and liquidity challenges, market uncertainties, or operational vulnerabilities, a well-designed risk assessment protocol serves as your first line of defense against financial irregularities. Take time today to evaluate your risk management system and ensure it effectively engages internal experts to assess your organization's most pressing risks. Your company's long-term success may depend on it.

Episode outline:

1. Analyzing various risk metrics will help identify areas with the weakest internal controls, 
2. Why financial risk is the foundation of the audit plan, and
3. Properly integrating risk into what you audit.  

Please connect with me on:

1. Instagram: stephen.mclain
2. Twitter: smclainiii
3. Facebook: stephenmclainconsultant
4. LinkedIn: stephenjmclainiii

For more resources, please visit Finance Leader Academy:  financeleaderacademy.com.

Support the show

Episode Transcript

Stephen McLain (00:04):
Speaker, your annual internal audit plan
should be built on the analysisof organizational financial risk
that the leadership deemscritical.
As we continue this auditseries, we have to consider the
role of risk when it comes tovalidating the company's
financial health based on thatrisk analysis, the leadership

(00:26):
should be approving topics to beincluded in the audit plan for
that year. You must become anexpert at measuring, calculating
and assessing risk, so the mostcritical topics are evaluated
and included. We must ensurethat risk is considered in all
strategic decisions. Pleaseenjoy the episode. Welcome to

(00:48):
the finance leader podcast whereleadership is bigger than the
numbers. I am your host. StephenMcLain, this is the podcast for
developing leaders in financeand accounting. Please consider
following me on Twitter,Facebook, Instagram and
LinkedIn. My usernames and thelinks are in this episode's show
notes. You can also followfinance leader Academy on

(01:10):
LinkedIn. Thank you. This isepisode number 142, and I'll be
talking about measuring andassessing organizational
financial risk, and I'llhighlight the following topics.
Number one, analyzing variousrisk metrics will help identify
areas with the weakest internalcontrols. Number two, why
financial risk is the foundationof the audit plan. And three,

(01:34):
properly integrating risk intowhat you audit. Journalist
Charles de Haig said, betweencalculated risk and reckless
decision making lies thedividing line between profit and
loss. I am talking about riskthis week as I continue this
auditing series, measuring andassessing organizational

(01:55):
financial risk is the heart ofauditing. We need to determine
where our company is mostvulnerable. So we can assess and
allocate audit resources tovalidate issues and to make
recommendations on any confirmedfindings. Each organization may
be resourced differently forrisk and for the auditing
function. You have to look athow you are performing this

(02:17):
process. Some may have aseparate risk team, or several
risk teams, depending on theirindustry and clientele, I'll
explain this in a broad sense,on how to integrate risk
analysis into your annual auditplan. I hope you have been
enjoying this series. I openedthe series a few weeks ago with
a season preview. Now that wasin bonus episode number 93 I

(02:41):
explained how I would presentthe audit series over five
episodes. Now the first in theseries, episode 140 was the
audit blueprint, CFOs, Guide tofinancial integrity. And last
week was episode 141 the auditteam manager, how audit
leadership drives organizationalsuccess. Next week, I will talk

(03:03):
specifically about developingauditing plans, and then close
out this series with an episodeon forensic accounting. If you
have missed an episode, pleasego back to listen when you get a
chance. I believe it can helpyou tremendously. As a finance
leader, my most importantobjective in sharing an episode
on risk assessment is that Iwant to ensure you are, in fact,

(03:24):
performing this task. This maybe a short episode if I can
quickly convince you of theimportance of integrating risk
into your auditing plan, and forthe rest of you, it's a reminder
and a great review if youunderstand and then implement a
risk protocol when you were notdoing it before. I will count
this episode as a success. Thereare various forms of financial

(03:49):
risk that should be evaluated,like compliance risk, credit and
liquidity risk, market risk andoperational and strategic risk.
I am not going to get toodetailed here, but I'll show you
a quick summary for riskanalysis, which is one way to do
it. You can determine a processthat fits your organization,

(04:10):
based on your industry, yourcustomers, and then your service
and product mix. Now, firstconduct a cross functional
workshop with the help ofseveral internal teams like
legal, Treasury, accounting,fpna and then others, to review
incidents, audit findings, yourrisk heat map, if you have one,

(04:30):
and then conduct a robust SWOTanalysis. This should give you
several areas to review for highrisk Next, determine key metrics
that support those areas ofconcern. For example, if you are
reviewing cash flow, then ametric to be evaluated could be
your account receivables and howlong it takes to collect money

(04:51):
that is owed. Next score andrank those metrics and model
those metrics for sensitivityNext determine the effectiveness
of an. Internal Controls andreview the relevant policies.
Are they being followedproperly? Finally, present risk
findings to the audit committeeor team, and then add those

(05:11):
areas with residual risk to youraudit plan for further
evaluation. Risk Analysis issomething that doesn't sound
very fun to do, but it iscritical to the company's long
term success. If you don'tidentify areas with the weakest
controls or policies that arenot working, it may very well
affect the company's ability tocompete in the business

(05:32):
environment and your marketoverall risk analysis helps to
focus the audit team and theleadership to areas of greatest
concern first. Now let's talkabout assessing financial risks
for your organization. Numberone, scoring various risk matrix
will help identify areas withthe weakest internal controls.

(05:54):
Risk begins with identifying keyareas that may have the weakest
controls. This gives us areas ofconcern, where our financials,
our policies and company assets,may be vulnerable. Now work with
other finance and accountingteams plus legal to identify
areas of concern, then score keymetrics to identify controls

(06:17):
that may not be working. Numbertwo, why financial risk is the
foundation of the audit plan.
Now remember, our goal for anaudit is to ensure our
financials are accurate.
Internal Controls are working,and the company assets are
protected. The audit also helpsus to identify areas that can be
improved, for example, cashflow. To dig deeper, we identify

(06:39):
key metrics to study are cashflow, which would include
policies and procedures to findareas of concern or where
company assets are notprotected, or where the use of
cash may put us at risk for notpaying our own bills. A cash
flow metric would would be toanalyze our own receivables for
on time collection of money owedto the company, there's too much

(07:03):
at stake to overlook keyfinancial risk areas, and this
is why we need to be diligent inour duties, so that we continue
to analyze, measure and scorethese risks to be included. A
solid audit plan helps seniorleaders to verify that the
strategy does not have any areasthat can affect the company's
financial health going forward,number three, properly

(07:26):
integrating risk into what youaudit, the risk areas of concern
with the weakest controls thatstill do have a residual risk
score should be presented to theaudit committee for inclusion
into The audit plan, thecommittee can then make a
decision to include those areasin the final audit plan. If you

(07:47):
are a senior leader, ensure thisprocess is scheduled and planned
so that it happens. Our goal isto validate financial health,
which then translates tostakeholders, both internal and
external, that our company isviable on the course it's on.
This gives them confidence,which can include our own
employees, our suppliers, ourcreditors, government regulators

(08:11):
and even future investors. Nowfor action today. How well is
your risk management systemworking? Do you have an active
system that invites variousinternal experts to evaluate the
organization's most pressingrisks. Please review your system
and refine as necessary thatbest supports the organization.

(08:34):
At finance leader academy.comyou'll find a collection of
practical, downloadable PDFguides designed to help you
excel as a finance leader,whether you want to coach your
team to higher performance,master the art of financial
storytelling or sharpen yourExcel skills, we've got you
covered. Each guide is availablefor instant download after

(08:55):
purchase, no waiting and nohassle. Visit finance leader
academy.com click store in themenu and then start upgrading
your skills. Today, you can finda link in the episodes show
notes. Today, I talked aboutmeasuring and assessing
organizational risk, and Ihighlighted the following
points. Number one, scoringvarious risk metrics will help

(09:19):
identify areas with the weakestcontrols. Number two, why
financial risk is the foundationto the audit plan. And three,
properly integrating risk intowhat you audit. Again, my
objective for this episode is tohighlight the need to conduct a
risk review so that isconsidered for the development

(09:39):
of the annual audit plan risk isused to highlight the
significance of strategicobjectives, overall performance
and governance, morespecifically, the level of
compliance the organization hascontinue to refine and improve
your risk management system soyou continue to identify the

(09:59):
most. Most important gaps inyour internal controls and
operational policies are yourstandard operating procedures
working effectively. Nextepisode, I will be talking about
developing an annual internalaudit plan that makes sense. I
hope you enjoyed the financeleader podcast. You can find
this episode wherever you listento podcasts. If this episode

(10:21):
helped you today, please sharewith a colleague until next
time, you can check out moreresources at finance leader
academy.com and sign up for myweekly updates so you don't miss
an episode of the podcast, andnow go lead your team and I'll
see you next time. Thank you.
You.