One of the several fallouts and learnings from Covid-19 is how businesses look at risks and adopt mitigation strategies to deal with them. Answers to this question will not be forthcoming overnight, but organisations will be now obsessed with issues such as: we could have done this or that better to deal with the pandemic in a better manner.

Everybody is wiser after the event but what separates the good from the ordinary is the one who anticipates potential danger ahead of time and is prepared to counter it when it comes. The normal tendency of crossing the bridge when you reach it will no longer hold water. In all fairness, the subject of ‘risk’ is being discussed in detail in boardrooms today than ever before.

Risk architecture

All evolved companies now have a detailed risk matrix and architecture in place. Chief Risk Officer (CRO) is now an integral part of large organisations and his job is to eat, sleep and breathe risk on a 24/7 and 365 basis. Risks are essentially placed in two buckets. One that is external and the other that is internal.

External risks are related to the overall global trends, interest rates and shocks such as what we are witnessing now. Some external risks can be potentially identified whilst others arrive unannounced. It is imperative that corporate boards keep reviewing the external risks on a regular basis just to be ahead of the curve and better prepared.

At the same time, obsession with risks can also lead to crystal-gazing the future and being oblivious of the present. It is appropriate to strike the right balance between the present and the future.

Internal risks are now well defined and documented via standard operating procedures, audit procedures, IT controls, etc. The audit and the risk management committees in tandem have to ensure all levers of internal risks are functioning appropriately. The biggest challenge of internal risks is the people part, which requires constant attention.

Business continuity and going concern

Several factories and offices have been shut for close to two months and there is now a phased opening up on the cards. Discussions are now focussed on business continuity plans and risks associated with opening up. With all the precautions taken to ensure safety and hygiene standards there is still a lurking fear of what could be the implications if some worker or staff member is affected by the virus.

Business risks are manageable but health risks of this nature create liabilities that are not quantifiable. Moreover, independent directors on companies are also vulnerable if liability is fastened on to the entire board. Obviously, nobody can guarantee protection in such matters and each company has to adopt and evolve its own business continuity policy and approach keeping in mind various rules and regulations in force.

In the context of shut down of business, another controversial issue is how would one assess “going concern” and “impairment of assets” with the havoc caused by the pandemic? Future cash flows, liquidity position and some rough projections of business for the next 12 months is the yardstick to be followed, but in today’s situation nobody is able to predict tomorrow, leave alone the next one month or 12 months.

In the ultimate analysis it will boil down to the gut-feel of the management on what lies ahead and the judgment of the auditor on how to deal with the issue of going concern.

The accounting cushion

Conservative companies provide the required cushion in accounting policies to ensure profits and reserves are not overstated. In the good old days, creation of secret reserves was the order of the day, but today it is represented by extra provision for liabilities and under-recognition of income if the guidelines so provide.

One way to counter calamities as the current one is to have the necessary liquidity to deal with it. Companies should be mandated to invest at least 10 per cent of profits to reserves in bonds issued by the RBI/Central Government with the condition that this can be redeemed only to use in a crisis such as this. NBFCs are already required transfer 20 per cent of their profits to a special reserve. This should be invested in the manner mentioned above.

Covid-19 has opened the eyes of all businesses — big and small — to sudden shocks and unanticipated risks. The only escape route is to stay liquid till the crisis and the virus dies on its own. It is in this context that war chests come to the rescue. Rock solid companies are those that have sufficient liquidity to manage fixed costs over a short term horizon.

Over-leveraged companies will find these turbulent waters difficult to swim against but at this stage patience is the name of the game. Redefining and mitigating risks for the future will be — manageable growth, prudent accounting policies, robust risk matrix systems and last but not the least a sufficient cash war chest.

The writer is a chartered accountant