Finance and Accounting; Merger and Acquisitions
Part 1: M &A Part
1.0 Introduction
Different factors motivate businesses to form mergers and acquisitions. For example, mergers and acquisitions are formed to pursue a strategy that a firm may find difficult to achieve independently because it is too risky, costly, or entails technology beyond its capability (Marks & Mirvis 2001). Mergers and acquisitions are increasingly considered an important strategic approach through which businesses can create value for their shareholders (Ray 2010). Lasserre (2012) is of the view that businesses employ mergers and acquisitions to achieve global reach and competitiveness. Mergers and acquisitions are increasingly being perceived as a viable competitive strategy in challenging a low-growth economy (Scheinkman, Snell & Wilmer 2013). However, effective evaluation criteria must be taken into account in deciding on mergers and acquisitions (M &A). Lee (2013) asserts that ‘ the evaluation criteria considered by businesses when making M&A decisions is a critical factor that affects businesses capability in determining a reasonable price to pursue M&A’ (p. 15).
The importance of effective decision-making in M&A is underlined by the fact that mergers and acquisitions face the risk of failure (Kuttstacher & Cooper 2005). Past studies show that less than 50% of businesses achieve the intended objectives through M&A (Scheinkman, Snell & Wilmer 2013). This finding is supported by Marks and Mirvis (2001) who affirm that less than 25% of mergers and acquisitions achieve the intended financial objectives such as the projected shared value, post-merger profitability, and return on investment.
This dismal performance of mergers and acquisitions arises from many causes such as paying the wrong price, purchasing or acquiring the wrong company, and untimely implementation of a merger. Valuation is central to the acquisition process. Bertoncel (2006) affirms that ‘acquisition valuation as a formal process is relatively young and new methods are constantly being developed in the world of business valuations’ (p.116). Subsequently, professional valuation practitioners employ different acquisition valuation models. Bertoncel (2006) further argues that acquisition valuations are complex and require optimal synergy and control. Acquisition valuation goes beyond valuing the asset or the target company (Bertoncel 2006).
Petitt and Ferris (2013) assert that one of the fundamental issues in acquisition valuation entails determining the acquisition premium which is ‘the difference between the offer price and the market price of the target before the announcement of the transaction’ (p. 9). Effective determination of acquisition premium is a critical determinant of an organization’s performance. A high premium increases the likelihood of the acquirer overpaying hence reducing the chances of acquisition success (Petitt & Ferris 2013; Dobbs, Nand & Rehm 2005). Considering the complexity inherent in valuing mergers, the likelihood of wrong acquisition valuation cannot be overstated. These aspects show that the process through which M&A decision is conceived and implemented further contributes to failure of merger and acquisition.
The application of mergers and acquisitions as a strategy to achieve competitiveness is not limited to a specific industry but is applied in different industries amongst them the financial sector. In 2015, the total value of mergers and acquisitions in the financial services industry was estimated to be £ 265.1 (Deloitte 2016). In addition to the requirement for financial institutions that have adopted M&A as one of their competitive strategies to adopt effective M&A management practices, such financial institutions must ensure that they implement effective financial risk management practices. Some of the financial risk management areas that financial institutions should take into account relate to technological advancement and an increase in supervision and regulation within the financial services industry. This paper entails an analysis of two main themes that include mergers and acquisitions and financial risk management. Concerning mergers and acquisitions, the paper evaluates the issues that contribute to the failure of mergers and acquisitions. The analysis entails an analysis and critique of the key ingredients that firms should take into account to minimize the chances of failure. Conversely, the paper entails a reflective piece on financial risk management. The reflective piece focuses on the risks that financial institutions face due to technological advancement and the increase in regulation and supervision of the global financial services industry. The reflective piece is based on a personal account as a chartered accountant working in a small accountancy practice.
Part 1: Ingredients in the formulation of M&A proposal
Global mergers and acquisitions have increased remarkably since the 1990s. Nevertheless, research studies show that successful implementation of M&A is a challenging task as evidenced by the high rate of M&A failures (Lasserre 2012). The unsatisfactory performance of most M&A underscore the need for M&A decisions to be based on an adequate understanding of how the proposed merger and acquisition will lead to the attainment of the intended goal (Grant 2016). To succeed in implementing M&A, it is imperative for professionals charged with the responsibility of actualizing the merger and acquisition to take into consideration some issues in formulating the M&A proposal. Grant (2016) further asserts that mergers and acquisitions are actualized through two main phases which include pre-acquisition and post-acquisition phases. Lasserre (2012) asserts that ‘the pre-acquisition phase is concerned with the decision-making process about ‘how companies decide, give a value and negotiate deal’ (p. 149).
Mergers and acquisitions are actualized through two main phases which include the pre-merger and post-merger phases. One of the critical aspects that professionals should take into consideration during the pre-acquisition phase entails determining the strategic and financial value (Lasserrer 2012). Conversely, the post-acquisition phase is comprised of the managerial processes that firms should take into consideration to ensure that the merger and acquisition are adequately integrated (Brueller, Carmeli & Drori 2014). In formulating the merger and acquisition proposal, the professionals should ensure that a comprehensive merger and acquisition process is taken into consideration. Amongst the fundamental issues that businesses should take into consideration are examined herein.
Pre-merger review
In this phase, the firm intending to undertake the acquisition should ensure that the most appropriate firm for acquisition is targeted. The process of targeting the firm to acquire should be comprised of many aspects that include analyzing the identified target firm and evaluating the degree of fit between the target firm and the acquiring firm. Haberberg and Rieple (2008) assert that conducting an effective pre-acquisition process is essential in facilitating decision-making and the success with which the acquiring firm assesses the prevailing organizational and strategic fit. There are three main criteria that businesses should take into consideration during the pre-acquisition phase. These stages include value creation, target selection, and due diligence valuation (Faulkner, Teerikangas & Joseph 2012).
2.1.1 Assessment of Value Creation
In this stage, the firm intending to carry out the merger should undertake an extensive evaluation of the decision to determine its relevance to the acquisition to the firm’s long-term success (Watts 2015). One of the fundamental aspects that businesses should be concerned with during the pre-acquisition review stage entails determining the assessing value creation. According to Gaughan (2011), mergers and acquisitions play a fundamental role in improving the economic value of the firm undertaking the merger. Mergers and acquisitions can result in different types of values such as diversification, vertical integration, global reach, and consolidation.
Lasserrer (2012) argues that mergers and acquisitions can result in the creation of value through two main modalities that include short-term one-off value and long-term strategic value. The short-term value benefits entail the cash that a firm generates from asset disposal, debt leverage, cost saving, and tax shield during the merger (Hamza 2011). In assessing short-term value, the professionals should assess the likely value that the proposed merger will generate. For example, assessment of value creation concerning tax, the firm should assess the extent to which the merger and acquisition will result in the attainment of tax benefits. Gaughan (2011) asserts that some firms involved in the M&A ‘may use their tax benefits as assets in establishing the correct price that they might command in the market price’ (p. 607). Conversely, the long-term value originates from the competitive advantage that a firm achieves from the M&A. Examples of long-term value include improved differentiation capabilities, attainment of a large market share, achievement of economies of scope and scope, and improved core competencies (Lasserre 2012). Haleblian et al. (2009) argue that a merger and acquisition is justified if and only if the value of the new merged or combined entity is bigger than the sum of the value of the independent entities before the merger’ (p.155). Hubbard (2001) argues that the determination of value creation forms the foundation on which the acquiring firm undertakes post-acquisition integration.
2.1.2 Target selection
Firms that intend to utilize merger and acquisition as their preferred value creation method should ensure that the firm identified for acquisition will positively increase the likelihood of achieving the intended outcome (Haleblian et al. 2009). During the target selection phase, the acquiring firm should engage in a comprehensive evaluation of the target firm’s strategic information and financial data. During the target selection stage, the acquiring firm needs to specify the areas that are likely to benefit the firm and those that might result in challenges after the acquisition. The fundamental aspect is this stage entails the determination of organizational and strategic fit (Gomes et al. 2013). Strategic fit entails the degree of strategic congruence or the extent to which the strategy between the acquiring and the firm being acquired complements each other. On the other hand, organizational fit entails the degree of congruency about leadership styles, organizational culture and structures, and administrative practices (Gomes et al. 2013).
2.1.3 Undertaking due diligence and valuation
a. Due diligence
The effectiveness with which the professionals charged with the responsibility of actualizing the merger and acquisition undertake due diligence greatly determines the success or failure of M&A (Halibozek & Kovacich 2005). Due diligence is a complex process that is comprised of different dimensions that include the financial, strategic, and legal review of the firm being acquired (Klein & Kahn 2003). Additionally, due diligence should focus on the contractual relationship that the firm being acquired has established in its organizational structure and operating history (Sherman 2011).
The rationale of undertaking due diligence in the merger and acquisition process is underlined by the fact that it provides the acquiring firm insight into whether the factors that make the M&A deal attractive to both parties are real or illusory (Sherman 2011; Carrol &Mui 2009). Gleich, Kierans, and Hasselbach (2010) argue that the strategic and marketing information provided by a firm through different mediums is usually less accurate and hence unreliable. Moreover, such information might not be readily accessible. The modern business environment is characterized by an increase in cases of accounting fraud (Gole & Hilger 2013). Thus, firms intending to be involved in merger and acquisition processes face the risk of relying on inaccurate and unreliable information. Madura and Ngo (2010) identify Enron as one of the most notable cases of organizations that failed due to the prevalence of accounting fraud.
Ray (2010) is of the opinion that an extensive due diligence investigation is fundamental in gaining insight into any existing material risk associated with a particular organization. Undertaking due diligence enables firms involved in mergers and acquisitions to avoid possible problems (Srivastava & Jhajharia 2011). Thus, due diligence limits the chance of the acquiring firm over-relying on the seller’s indemnification as outlined in the Acquisition Agreement.
Broad approach to due diligence; to ensure that the due diligence undertaken during a merger and acquisition process positively contributes to the success of M&As, the acquiring firm should adopt a broad approach in undertaking the evaluation. Lasserre (2012) asserts that ‘due diligence is more than just making sure a company’s numbers add up before a takeover, there are considerations that reach beyond financial statements and contractual agreements’ (p. 160). The case of Enron underlines the importance of a firm’s intending to enter into an M&A agreement looking beyond the financial information that a firm provides. A deeper evaluation of the company would have revealed the existence of internal problems within the firm that would make the acquisition considerably difficult. Therefore, in the process of undertaking due diligence, the acquiring firm should entrench a broad approach as opposed to a narrow approach. Examples of such an approach entail the 360-degree due diligence or the integrated due diligence approach (Gleich, Kierans & Hasselbach 2010). Herndon and Galpin (2013) emphasize that prioritization of financial dimensions of due diligence and ignoring intangible aspects of due diligence such as corporate governance, human capital, and company structure increases the risk of failure of M&As.
Under this method, the firm involved in merger and acquisition integrates a view that not only looks at the current situation but also the future potential of the M&A, for example, the evaluation of the likely synergies that might be developed from the M&A (Garzella & Fiorentino 2016; Clark & Mills 2013). Application of the 360 due diligence approach enables the acquiring from to evaluate all the aspects of an organization’s life as opposed to only assessing the financial stability (Bruner 2004). Traditionally, firms based their due diligence on two main dimensions which include the financial and legal dimensions. This approach entails a narrow approach to due diligence. The traditional approach has partly contributed to the increase in the case of failure of mergers and acquisitions (Whitaker 2016). Other areas that are entrenched under the 360 due diligence approach entail evaluation of the sales and marketing function, research and development, human resource management, and operational areas (Whitaker 2016).
Organizations’ failure to undertake due diligence concerning human resources has greatly contributed to the failure of mergers and acquisitions (Carrol &Mui 2009). Upon conducting due diligence concerning the evaluation of the target firm’s financial, tax, accounting regulatory, and legal issues, most firms undertaking the acquisition ‘plunge forward’ assuming that the other relevant strategic aspects will fall in line (Price 2007). Popp (2013) accentuates that human resource due diligence constitutes an essential element during the formation of mergers and acquisitions. This view is supported by Mathis, Jackson, and Valentine (2013) who emphasize that employees of the acquiring and the acquired firm should be extensively involved in a rigorous process before due diligence is undertaken. This approach is critical in enhancing the degree of inclusivity and participation of the employees. The overall outcome of such an outcome is that the possibility of the M&A process being marred by resistance is significantly reduced.
Economic valuation
In addition to the determination of value creation, firms involved in mergers and acquisitions need to undertake an economic valuation. Failure to undertake economic valuation might adversely affect the likelihood of an organization achieving the intended goal through the merger and acquisition. For example, the firm might not succeed in achieving value creation through improved competitiveness and global market reach if the valuation of the firm being acquired is too low (Rezaee 2001; Schumpeter 2013). The firm may subsequently lose the bid to a competing firm due to resistance from the firm being acquired. Lasserre (2012) thinks that economic valuation is important because it provides the potential buyer insight into the price that is most applicable in concluding the merger and acquisition deal.
There are different methods that firms involved in M&A can apply to succeed in undertaking the economic valuation of a merger and acquisition bid. Examples of economic valuation methods include asset-based valuation, market-based valuation, and cash-flow-based valuation (Carrol &Mui 2009). Lasserre (2012) opines that the cash-flow-based valuation method is based on the assumption that a firm’s equity is equal to the total net present value of its future cash flows discounted with the weighted cost of capital (p. 158). Under the market-based valuation method, the acquirer assesses the stock exchange market value of the firm being acquired. In making the acquisition bid, the bidding firm includes a premium on the market stock price of the firm being acquired (Haleblian et al. 2009). The rationale for including a premium is based on the anticipated value addition from the M&A. Available evidence shows that most premiums in M&A average between 20% and 30% above the target firm’s pre-acquisition share price (Petitt & Ferris 2013; Dobbs, Nand & Rehm 2005).
Despite its effectiveness in undertaking valuation during a merger and acquisition, the applicability of the market-based valuation method may be significantly reduced by the fact that some markets might not be effective in illustrating the economic reality within a firm (Carrol &Mui 2009). Lasserre (2012) asserts that stock market prices might be ineffective in communicating a firm’s economic reality, especially in countries that are characterized by low liquidity, insider trading, and optimal regulation. Conversely, the asset-based valuation method entails the determination of acquisition valuation by assessing the difference between a firm’s assets and liabilities (Garzella & Fiorentino 2016).
The analysis above indicates that effective and accurate economic valuation is a critical determinant of the success or failure of mergers and acquisitions. Thus, the acquiring firm should ensure that optimal valuation approaches and techniques are applied. The importance of valuation is that it provides the acquiring firm adequate understanding of the actual value of the firm being acquired (Mellen & Evans 2013). Effective economic valuation limits the likelihood of M&A failure.
2.2 Post-acquisition phase
Despite the successful completion of a merger and acquisition deal, the future success of the newly formed firm cannot be guaranteed. Thus, the likelihood of the M&A failing cannot be ruled out. Abramowicz (2015) associates the failure of mergers with poor post-merger management. It is estimated that approximately 53% of mergers and acquisitions fail during the post-merger integration phase while only 17% of M&A deals fail during the deal negotiation phase (Abramowicz 2015). Therefore, to increase the likelihood of success under the post-merger phase, the acquiring firm must undertake effective post-merger integration (Papathanassis 2004). Past research studies show that post-merger integration is a critical determinant of the success or failure of M&A. The integration phase should commence once the M&A deal has been successfully negotiated and decided (Lasserre 2012). Sabrautzki (2010) emphasizes that ‘wasting time on trying to realize synergies is an unnecessary mistake that can cost an organization a lot of money’ (p.4).
Some of the aspects that might lead to failure during the post-acquisition process include the prevalence of leadership vacuum, cultural mishandling, loss of key management talent, and wrong identification of synergies (Clark & Mills 2013). Additionally, lack of strategic direction, communication, operational focus, and integration plan are major causes of failure during the post-merger integration phase.
2.2.1 Integration process
To succeed in undertaking post-merger integration, it is imperative for the acquiring firm to ensure that a comprehensive integration process is applied. The integration phase is comprised of three main phases that include formulation of an integration framework or plan, transition management, and undertaking strategic consolidation (Clark & Mills 2013).
According to Lasserre (2012), the adoption of an effective integration framework is a critical determinant of the success or failure of M&A. The significance of the integration framework in implementing the M&A is underlined by the fact that it contributes to improvement in the effectiveness with which the acquiring firm manages anxiety and uncertainty associated with employees during the post-merger process (Sabrautzki 2010). Some of the core frameworks that a firm can involved in acquisition to enhance successful integration during the merger and acquisition process entail the linear and contingent frameworks (Carrol &Mui 2009). Under the linear framework, the firm undertaking the merger and acquisition establishes a checklist detailing the issues that will be taken into account in the implementation of the M&A (He 2009). Conversely, the contingent framework involves differentiation of the integration processes on the basis of strategic and environmental factors. Lasserre (2012) opines that there is no unique approach assumed under the contingent framework. The contingent integration framework as stipulated by Haspeslagh and Jemison proposes three modes of integration that businesses can employ in ensuring successful post-merger integration (Finkelstein & Cooper 2010). These modes include preservation, absorption, and symbiotic (Profit 2014). The respective modes of integration vary depending on several aspects including the required level of operational interdependency between the two firms involved in the merger, and the intended level of organizational autonomy between the two firms (Faulkner, Teerikangas & Joseph 2012).
Preservation; this mode of integration is applicable in situations whereby the two firms involved in the M&A can only achieve a minimal level of operational synergy (Clark & Mills 2013). Under such situations, the firms involved in the merger are characterized by a significant degree of autonomy in the decision-making process. The preservation approach is mainly applied in situations where the cultures of the two organizations are different (Pablo & Javidan 2004). The rationale of the preservation mode is to preserve or maintain the autonomy and identity of the firm being acquired. This provides the acquiring firm an opportunity to progressively learn about the operational practices of the acquiring firm.
Absorption; under this mode of integration, the firms involved in the M&A are characterized by a significant degree of interdependency. Thus, the likelihood of value creation is high. For example, the firms involved in the M&A can achieve value creation through full integration. Additionally, the level of organizational autonomy required by the two firms is minimal (Profit 2014).
Symbiosis; this mode of acquisition focuses on the establishment of a balance between the required level of autonomy and interdependency between two firms.
Transition phase
To minimize the chances of integration failure, the acquiring firm should ensure that the integration is optimally undertaken. Firms can achieve this outcome by focusing on effective transition. The importance of optimal transition is to nurture partnership and focus within the new entity. Several issues should be taken into consideration to enhance the efficacy with which transition occurs. These aspects include;
Establishment of an executive team; the selected executive team should have the capability to successfully lead the integration process. One of the issues that the executive team should take into account entails optimal management of the interface between the two firms. For example, the executive team should have the capability to foster the establishment of a new culture that is acceptable to the two firms. Examples of changes that might occur during this phase include the development of a new logo and company name. The executive team should have the capability to succeed in preserving the knowledge and key contact and controlling of the previous management team. Therefore, firms involved in M&A must apply effective corporate governance mechanisms. Haleblian et al.(2009) argue that ‘corporate governance characteristics such as board ownership, board size, and board composition, have an economically and statistically significant impact on operating performance changes after merger’ (p. 128). Therefore, the acquiring firm must ensure that it applies an effective corporate governance model.
Development of a new sense of purpose; employee resistance ranks amongst the leading causes of failure of M&As. To successfully manage resistance, the new management team should focus on managing and developing a new sense of purpose. The new executive management team should reassure the employees of different issues such as their job security. One of the strategies through which the executive management team should take into account entails developing a comprehensive structured communication campaign. The communication campaign should be aimed at disseminating information on different aspects such as the new objectives that the company intends to pursue. Brooks and Dawes (1999) assert that communication is essential in developing readiness within the firm being acquired.
Operational focus; the new management team should ensure that a concrete understanding of the performance targets and operational details is created. This aspect is critical in eliminating uncertainty associated with mergers and acquisitions. Operational focus can be achieved by developing an integration team. A task force comprised of personnel drawn from the acquired and the acquiring firm should be established. The development of a task force will significantly reduce anxiety arising from the organizational change. The task force should further focus on nurturing a high degree of inclusivity amongst the employees in implementing the change. This strategy aids in establishing mutual understanding amongst employees from the acquiring and acquired firm (Lasserre 2012). Through this aspect, the likelihood of achieving synergy is increased. For example, the integration team aids in overcoming the intrinsic weaknesses that might hinder the performance of the new firm.
Promoting mutual understanding and respect; culture shock is one of the leading causes of M&A failures. Despite the wide recognition of the fact that the culture element is a major source of M&A failure, Saunders, Altinay, and Riordan (2009) assert that ‘it is unclear how this element’s management is perceived by both acquired and acquiring organization employees and how it related to M&A’ (p. 1360). Therefore, firms involved in M&As must consider nurturing a mutual understanding of the culture of the two firms amongst the employees as opposed to trying to change or imposing a different culture on the firm being acquired. If the acquiring firm intends to change the culture of the firm being acquired, the change should be progressively and continuously adjusted. However, in changing the culture, the acquiring firm should ensure that the opinions and ideas of all employees are sought. This approach is critical in minimizing the possibilities of resistance.
Consolidation phase
This phase is concerned with developing an organizational structure that ensures that the structure of the acquiring and acquired firm is optimally dissolved into the merged company (Gaughan 2002). Under the consolidation phase, the merged company should focus on developing a new strategic identity. Effective consolidation ensures that the acquired firm’s employees feel like part owners of the new firm. This aspect is critical in ensuring that the employees of the acquired firm positively contribute to the achievement of the intended strategic vision (Clark & Mills 2013). One of the strategies that can be employed in the consolidation entails ensuring that the employees actively participate in the new entity’s operation, for example, by assigning new employees strategic responsibilities.
3.0 Conclusion
Despite the growing significance of M&A as one of the strategic approaches in organizations' quest to achieve competitiveness and long-term sustainability through value creation, the analysis shows that the risk of failure amongst mergers and acquisitions is inherent. The analysis reveals that the failure largely arises from organizations’ failure to entrench effective M&A practices. The analysis further underlines the fact that mergers fail to arise from ineffective application of the ingredients requisite for successful implementation of M&A. One of the notable gaps that contribute to the failure of M&A entails ineffective valuation during the formulation of the merger proposal. To increase the likelihood of success of mergers and acquisitions, it is imperative for firms involved in actualizing the M&A to entrench optimal pre-merger acquisition and post-merger acquisition practices as discussed above.
Part 2 : Reflective piece
The changes currently being experienced in the contemporary business environment require firms to employ effective operational practices to achieve sustainability. One of the issues currently being experienced relates to the emergence of new types of risks. Thus, the adoption of effective risk management practices is critical. Firms operating in the financial services sector are facing the emergence of different types of risks. Therefore, to enhance the success of financial services institutions, employees in the financial services sector should have knowledge that goes beyond knowledge of financial markets by including skills such as risk management. The rationale for taking into account risk management emanates from the fact that financial services institutions have become very volatile.
As a chartered accountant working in a small accountancy practice, I am committed to enhancing the performance and sustainability of the accountancy firm. This goal will be achieved by providing the firm’s top management team with valuable and reliable financial advice about financial risk management. Some of the two themes that I will focus on entails providing the firm’s management team insight on how to deal with risk that arise from increasing regulation and supervision in the financial services sector and the risk arising from technological advancement.
As a chartered accountant, developing knowledge on how to deal with the risk arising from technological advancement is critical in my current and future work practice. This arises from the fact that I will be able to provide the firm’s top management team insight on how to take advantage of emergent financial accounting technologies. One of the areas that will be of key focus to succeed in managing technological risk relates to the integration of fintech in the provision of accounting services. Fintech entails the incorporation of different financial technologies in the process of undertaking and providing financial services.
Knowledge of the trends in financial technology will significantly contribute to the enhancement of the financial services firm's capacity to achieve a high competitive edge. This will arise from the fact that I will positively contribute to improvement in the effectiveness with which the firm aligns with prevailing technological innovation. Aligning with the prevailing technological changes will enable the firm to improve its efficiency in offering financial services to its clients. Thus, the risk of obsolescence of the firm’s operational practices will be significantly reduced. In addition to this aspect, developing knowledge of financial risk management about financial technology will significantly reduce the risk of disruption associated with the increased adoption of new technologies in the financial services sector.
Despite the benefits associated with financial technology, emergent technologies present a significant degree of security risk. For example, an increase in the incidence of cyber security presents a significant threat to the application of financial technology. Thus, developing adequate expertise and knowledge on how to manage security risk is critical in enhancing the organization’s long-term success through optimal utilization of financial technologies.
In addition to the technology dimension of financial risk management, I will also be concerned with enhancing the firm’s performance by ensuring that it complies with the stipulated financial rules and regulations. Currently, firms in the financial services sector are experiencing an increase in the development of new regulations and supervisory measures. The rationale of new regulations is to promote accountability and efficiency within the sector. For example, financial services firms are facing new requirements about capital requirements such as capital adequacy requirements. By ensuring that the organization complies with Basel III, I will be able to enhance the firm’s future operation. The Basel III stipulates that firms in financial institutions must have adequate capital to adequately cover the risks that might arise, for example, internal risks. This trend has been motivated by the increase in the risk of failure faced by firms in the financial services sector due to the ineffective application of financial risk management practices.
In addition to the above aspect, the increase in supervisory and regulatory requirements has arisen from the volatility inherent in the financial services sector. The contemporary financial services sector is characterized by a high degree of interconnectivity, which increases the risk emanating from the external financial services sector. Failure to comply with stipulated regulations might significantly reduce operational efficiency. For example, failure to ensure accurate reporting of the firm’s financial performance might lead to the incurrence of hefty regulatory costs such as fines. As an accountant, I will ensure that the firm reports true and accurate information regarding its financial performance. Through this aspect, I will be able to ensure that the financial information that the firm reports to the public is credible and reliable. For example, potential investors will be able to rely on the financial information provided in deciding whether to invest in the firm. As a chartered accountant, I will therefore be in a position to ensure that the accountancy firm complies with the stipulated supervisory and regulatory requirements. In summary, focusing on the two areas of financial risk management, I will be in a position to positively contribute to the improvement of the accountancy firm’s future success. This is because the firm will optimally and proactively deal with the operational risks.
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