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Review

To combat risk to a company from political threats to the business industry or injury to the economy, top decision-making managers and accountants must adequately identify potential risks on the horizon, review and understand the best options to deal with those risks, and be able to make the necessary decisions to put in place processes or mechanism that will ensure the company’s ability to maintain profit and continued growth amidst the political turmoil associated with those risks, all while ensuring they meet the legal and professional standards of their positions.

Identifying Risk

The first theory to examined for companies spanning politically different regions examined which combination of private debt and other instruments makes the best option for banks and financial houses to avoid unnecessary risk of changing political leanings and impacts on the economy (Singh, 2016, p. 365). Singh reviewed the financial and economic indicators for the banking sector of the European Economic and Monetary Union (EMU) over a 10-year period from 2004 through 2013, to determine the risk in the ability to loan and collect on debt (p. 365). Singh’s study further determined the risk behavior of the banking sector of the EMU to see if their practices were valid to ensure the stability of the economic climate, especially amidst economic upheaval (p. 366). Singh compared the banks’ techniques to generate revenue during varying stages of the 10-year period wrought with economic boon and distress, inclusive of the 2008 financial crisis, and delved into the impact of these economic downturns on the EMU (p. 365). Singh also researched private debt and its impact on the opportunity for EMU banks and financial houses to collect debt and provide additional loans (p. 366). Because the EMU sets the economic process for all of its member countries, its failure to respond to and avoid distress in times such as the 2008 financial crisis creates major risks for companies that do business within the jurisdiction of the EMU and rely on healthy banking programs to remain salient (p. 366). Singh reviewed discussions of the macroeconomic impact of the decisions of the banking centers of the EMU on the economies of the member countries and how the bank default may be predicted with regulatory variables, to develop a targeted regression and quantitative methodology to determine the impact of debt in the EMU banking centers (p. 365). Singh ran regressions on the factors determined to be most impactful on the economic processes for the EMU and analyzed the effect of the results considering the risk posed by the industry and how best the baking sector responded to the risk (p. 366). Singh’s study supported the hypothesis that the major factors that posed the greatest risk to the banking sectors included debt-to-GDP (Gross Domestic Product) ratio and that concentration on this or other factors could improve or place in danger the EMU’s ability to remain stable (, p. 367).
Kaousar Nassr et al. (2015) discussed the post-2008 financial crisis landscape and how companies took advantage of low interest rates and other incentives that were put in place to get the financial markets back to stability, after companies became financially and philosophically stuck in economic depression (p. 63). The authors discussed governmental and industry incentives offered to companies to stimulate their interest to continue to perform within the existing business industry, or to enter the industry as a new participant following the financial crisis, and how the companies made those decisions based on their needs and risks (p. 64). The authors further discussed benefits and risks of shadow banking, a practice in which the companies could reduce liability but may leave themselves open to greater risk (p. 67). Relying on theories and trends that would be beneficial to the research, and which could be used to gauge how impactful the decisions of the company managers were, the authors were able to synthesize a roadmap of the best decisions made by these company managers that worked best to cure the issues, by compiling a database of the historical decisions, the impact of financial distress on the companies, and were able to gauge how certain decisions impacted the companies (p. 71). Further, using qualitative methodology primarily to review literature and to make assumptions about the methods best suited for a company manager to make guided decisions, the authors hypothesized that if these cures can be retained, it is possible that in the wake of new or continued financial crises, implementation of these methods under these conditions may help companies and economies recover more expeditiously (p. 86).

Tactics to Mitigate Risk

Kanagaretnam et al. (2017) researched the link between bank stress, accounting for risk, and informal institutions seeking to provide assistance in these relationships (p. 38). The authors discussed the climate of information and process exchange between impacted companies and the informal institutions that sought to assist these companies both before and after the 2008 financial crisis, asking whether the practices of the informal institutions were a help to the companies and banks and whether the crisis was aided or mitigated by the involvement of the institutions (p. 38). Relying on empirical research and studies that examined the impact of decision theories on companies that endure financial distress, the authors focused on company’s ability to predict distress and methods used by the companies to control, mitigate, and avoid distress (p. 42). Using a qualitative methodology to review literature, the authors constructed a quantitative method for application of the concepts and theories to impacted companies to provide an understanding of the problem with the predictions (p. 43). The authors compared data from the companies impacted by the financial crisis and determined which approaches were used by those companies to forecast risk, how impactful the forecasts were, and how the company was able to weather the crisis as a result of reliance on the predictions (p. 38). The authors showed that the companies who strictly followed the predications of financial institutions were able to weather the crisis better, and were either able to continue doing business or were able to exit the industry with less of an inconvenience than companies that did not follow the predictions of financial institutions (p. 64). The authors noted that although the predictions of the informal institutions were sometimes in opposition to those of the companies, it was the decision-maker for the company who in the end had the responsibility to make the determination to go with the recommendation of the financial institution (p. 56).

Sound Decision-Making

Boateng and Cox (2016) researched the interpersonal trust relationships that form between political appointees and careers managers and decision-makers for corporations (p. 239). Specifically, the authors reviewed several studies and perform extensive data analysis to determine managerial variables connected to and influenced by this relationship between the decision-makers and political appointees (p. 242). The authors reviewed documentation from companies on organizational factors and how the relationships between the decision-makers of the company and political appointees impacted the company’s managerial decisions and bottom line to formulate three hypotheses based on the levels of trust factors for the decision-makers with the political appointees that influence their decisions based on differing levels of reforms and political landscape (p. 241). The authors conducted surveys of both politicians and company decision-makers and used the results to develop a database which was examined to determine results and trends (p. 241) In addition, the authors considered what, if any, correlation existed between the trust level a decision-maker had for a political appointee, the decisions made by the decision-maker in reliance on that trust, and the performance of the company as a result of the decision-maker’s actions (p. 242). The authors reviewed many prior research articles and studies which looked at the performance of companies with ties to politicians, at company performance as a result decision-maker reliance on political influence, and the political landscape and the prevailing standard company performance that could be expected in those times. The authors used quantitative data to review the performance of companies, the relationship between the company decision-makers and politicians, and the political environment (p. 244). The authors surveyed current and former politicians, company decision-makers and other relevant corporate individuals to gain data on the actions of decision-makers and the drivers behind those actions from a political point-of-view (p. 245). The authors found that data from surveys supported each hypothesis, though hypothesis two was by far the most heavily supported. In all, the trust placed in politicians by career managers or company decision-makers had a real-world impact on the decision made by the decision-maker and the company’s resulting performance (p. 260).
Stoel et al. (2017) discuss and research the impact of systems and information on the judgments of management in relation to risk management through a review of Enterprise Risk Management (ERM) and its impact on the decision chain for managers (p. 54). The authors explain why enterprise risk management is important for companies who seek to avoid or mitigate risk utilizes survey responses based on the practices of people in the RIMS organization who had much experience with managing and interpreting risk for other companies (p. 55). As a provider of risk management services, the authors found RIMS employees to be useful for the survey of the companies and were able to develop their findings based on the employees’ experience and expertise (p. 61). The authors hypothesized that cognitive factors for managers who make risk management decisions are impacted by processes and information systems for analyze like enterprise risk management in ways that create discord in the management chain; a belief that the judgment of the manager without the aid of risk management processes could be as effective (p. 55). The authors reviewed prior theories on risk management and studies conducted into the application of risk management design and models into companies that were headed by managers who had authority to make risk decisions, which included research and studies that examined the impact of risk management theories on companies (p. 57). The authors used both qualitative and quantitative methodology to review literature and apply concepts and theories to impacted companies to provide an understanding of the use of risk management tools and ideology to impact how the companies handled the risks (p. 59). The authors compared techniques used by the survey respondents to the impact that the ideas would have on the model businesses, and based on the performance of the business either with or without the risk as an impactor, the authors were able to create a process to determine metrics of the results (p. 66). The authors determined that companies who rely on enterprise risk management and other considerations needed for risk reporting may consider the context and type of risk when they are developing their risk reports; specifically, that the use of ERM is better than reliance on judgment of the executives alone, even though authors were able to show that the judgments were sometimes valid (p. 67).
Petrovsky et al. (2017) researched the tenure of heads of business in several companies and how they maintained their positions amongst significant threats to their power and in the thralls of political and economic unrest (p. 592). The authors examined executives in the British central government over 22 years and compiled their data and the performance of their agencies in comparison to other sectors finding that there was no difference in the tenure of civil service heads as compared to other agency heads based on the authors specific factors (p. 592). The authors built a database of companies and of their heads from 1989 to 2012, and used the information within the database to determine what, if any, correlation existed between companies in Britain, their profit performance, and the tenure of their heads executives of the companies (p. 594). The authors found that companies with heads that perform poorly relative to their companies would retire earlier, after reviewing documentation from companies on organizational factors and formulating a theory which considered how it impacted the company and how its use would aid the company to move forward to create profit and benefit for the shareholders (p. 596). The authors determine which factors were most important in the context of the company head’s impact on the bottom line, concentrating on companies in Britain, and within this selection, a subsection of the British central government (p. 592). The authors reviewed several studies which reported on the performance of businesses and how they tied to the performance of the executive, including compensation for top executives and dimensions that top executives focused on from an organizational perspective (p. 593). The authors found that education was the largest limiting factor and that was based on the results and how the Chinese and Indian companies did not showcase a sophistication that for accounting and regularity practices followed in their native countries (p. 599).

Responsibilities of Managerial Accountants and Company Decision-Makers

Jones and Glover (2018) reviewed the Enterprise Risk Management (ERM) and other risk performance processes conducted by senior executives during the recession following the 2008 financial crisis, showing that the most likely outcomes from an audit and how these executives assisted the company to either grow within their industry or to make as entry into new industries (p. 323). The authors discussed the internal audit for a company and how those processes impact leadership going forward, after reviewing the processes of internal audit programs, what they attempt to and finally find, and how they influence decisions of management for business processes (p. 306). The authors further research the efficiency of organizations and how best to utilize functions of internal audit, noting the importance of internal audit to do more than just ensure compliance for regulatory requirements, but also to drive efficiency in the leadership processes, business revenue, and innovation (p. 310). According to the authors, the internal audit process should be a bridge for the management of the company and the individual business units so that they may understand the opportunities which exist in the environment of their industry (p. 312). The authors proved the importance of internal audit in creating and maintaining programs that can be used my management to improve the performance of the company, after reviewing theories involving the processes of internal audit and how they have been useful for several companies (p. 304). The authors compiled information from prior research and studies together into a database and ran regressions on the factors they determined most impactful on the economic processes for the internal audit team and how best the teams made use of their available resources (p. 305).
Malaescu and Sutton (2015) discussed the practice of external auditors who are tasked with reviewing the processes of a company to determine whether the company is functioning effectively within the parameters of regulatory terms, and whether it is using its organizational resources at their peak efficiency (p. 95). The authors discuss how external auditors rely on the processes of the company’s external auditors are either partial or total verifications for their own controls and discuss the appropriateness of this reliance (p. 96). In addition, the authors note the continuous monitoring and specific compliance functions that are equally necessary for the company and have a similar though difference impact for external auditors (p. 97). Based on their review, the authors provide background for their study from several sources which discuss the history and impact of internal audit, the need for external audit, the controls that are most important for large companies, and the potential controls that have to be utilized by auditors to determine risk; a difference of which could be crucial (p. 99). The authors used a qualitative method primarily to review the literature and to make assumptions about the methods best suited for a company manager to make guided decisions, and for judging stability and profitability within the financial markets (p. 97). Comparing the processes of the external and internal auditors, the authors noted they were similar, leading the data to answer the question of whether the external auditors were helpful for corporation if they relied on the processes of the company’s internal audit program and its impact (p. 102). The authors found external auditors required unbiased interpretation of company processes to produce their best results (p. 110).
Tripathi et al. (2017) researches the economic impact of the 2008 financial crisis on companies in the context of creating economic value added (EVA) for shareholders (p. 12). The authors focus on India and China, noting the latter was able to buck the trend in a decrease in EVA and return on capital earned (ROCE) because of its earnings management centered on its high rate of export activity (p. 11). The authors reviewed research and financial data for global companies in India and China especially who compared along lines of industrial growth despite the global economic climate (p. 13). Both India and China were examined based on their Standardized EVA to evaluate the corporate performances of the companies in the wake of the 2008 financial crisis (p. 12). The authors noted a decrease in profitability for a majority of global companies before, during, and following the 2008 financial crisis, however companies in India and China saw a less drastic shift in profit, proving the SEVA proved to be more accurate in measuring the profitability for these companies than ROCE and other measures (p. 20). The authors determined WACC, NOPAT, and CEBY to gauge the impact of the 2008 financial crisis on the global companies’ ability to produce a profit; thereby proving the EVA for the India and China companies were accurate in predicting the shareholder return based on the profitability of the companies (p. 19).
Chen et al. (2017) discuss and research how political pressure impacts firm decisions, including those related to how decision-makers in firms determine what information to disclose to the public for financial accounting reasons (p. 93). The authors show that the disclosures are not merely boilerplate but are artfully crafted to respond to specific situations and specific concerns, and that the impact of the disclosures is therefore the driver for many of these managerial decisions that ultimately result in disclosures on the backend (p. 118). The authors hypothesis is that the level of voluntary disclosure for companies backed by political patrons is low, but when the they lose that patronage, the rate of voluntary disclosure increases (p. 102). The authors attempt to test political costs hypothesis as applied to corporate disclosures that stem from real or perceived scandals, focusing on the behaviors and actions of firm decision-makers and how these decisions are made to impact the company (p. 95). The authors reviewed prior research and theoretical work concerning management decision-maker behavior, elements that add risk or reward to decision-maker actions, and the Chinese practice of guanxi (personal or connections) with politicians or officials, focused on the use of guanxi amongst decision-maker in large firms and their connections with political parties or individuals (p. 119). The authors used both qualitative and quantitative methodology of review of the literature and application of the concepts and theories to impacted companies to provide an understanding of the use of guanxi, and how that use, or the connection, formed impacted the company (p. 105).

References

Boateng, J., & Cox, R. W. (2016). Exploring the trust question in the midst of public management reforms. Public Personnel Management, 45(3), 239–263. https://doi.org/10.1177/0091026016658030.
Chen, J. J., Cheng, X., Gong, S. X., & Tan, Y. (2017). Implications of political patronage and political costs for corporate disclosure: Evidence from the Shanghai pension corruption scandal. Journal of Accounting, Auditing & , 32(1), 92–122. https://doi.org/10.1177/0148558X15579491.
Jones, K. K., & Glover, H. (2018). From bean counter to business partner – internal audit: The new source of executive leadership. Journal of Managerial Issues, 30(3), 303–324. Retrieved from https://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=buh&AN=132393491&site=ehost-live.
Kanagaretnam, K., Lee, J., Chee Yeow Lim, & Lobo, G. J. (2017). Effects of informal institutions on the relationship between accounting measures of risk and bank distress. Journal of International Accounting Research, 16(2), 37–66. https://doi.org/10.2308/jiar-51827.
Kaousar Nassr, I., Wehinger, G., & Yokoi-Arai, M. (2015). Financial risks in the low-growth, low-interest rate environment. OECD Journal: Financial Market Trends, 2015(2), 63–87. Retrieved from https://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=buh&AN=116282441&site=ehost-live.
Malaescu, I., & Sutton, S. G. (2015). The reliance of external auditors on internal audit’s use of continuous audit. Journal of Information Systems, 29(1), 95–114. https://doi.org/10.2308/isys-50899.
Petrovsky, N., James, O., Moseley, A., & Boyne, G. A. (2017). What explains agency heads’ length of tenure? Testing managerial background, performance, and political environment effects. Public Administration Review, 77(4), 591–602. https://doi.org/10.1111/puar.12735.
Singh, M. K. (2016). Determinants of bank risk behaviour in EMU countries. Applied Economics Letters, 23(5), 365–368. https://doi.org/10.1080/13504851.2015.1076138.
Stoel, M. D., Ballou, B., & Heitger, D. L. (2017). The impact of quantitative versus qualitative risk reporting on risk professionals’ strategic and operational risk judgments. Accounting Horizons, 31(4), 53–69. https://doi.org/10.2308/acch-51777.
Tripathi, M., Kashiramka, S., & Jain, P.K. (2017). Significance and relevance of salient management accounting parameters in the context of global financial crisis: Focus on economies of India and China. Journal of Financial Management & Analysis, 30(2), 11-21. Retrieved from https://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=buh&AN=129763994&site=ehost-live.