The Accountant-Jan-Feb 2017

MANAGEMENT
INCUMBENCY AND
DEEP END DIVING
Emerging Business Risks
By CPA Charles Mwitari, charles.mwitari@gmail.com
There has always existed the
ever-present possibility of an
adverse event affecting the
business performance. The
business managers have for a
long time focused on physical risks which
could destroy the business assets such as
fire or accidents.
Development of insurance industry
and products responded well to these
risks and can now cover most of the risks
associated with business disruptions. The
other traditional risk is the loss of revenue
through theft and frauds, mainly caused by
weaknesses in internal controls. This risk
was quickly addressed internally through
creation of internal audit departments.
The external auditors further gave their
assurance by confirming the Financial
Statements presented the true and fair
view or otherwise.
So why business failures while the
most obvious risks have already been
taken care of? The recent revelation of
billions of Kenya shilling losses at the
Premier Africa Airline, Kenya Airways
and Uchumi Supermarkets Ltd revealed
an emergence of new kinds of risks that
need to be proactively addressed. The
two, have significant shareholding by
the ‘taxpayers’ through the government
which has invested public funds in
them, they are significant to the country
as flagship brands hence attract a lot
of public sympathy when they are in
financial trouble and the government is
often obliged to dip into public coffers
to rescue them. An analysis of the main
causes of these business failures will help
bring out the new risks that need to be
managed. The two companies expanded
their business operations at a very fast rate
resulting into a case of putting the “Cat
before the Horse”. Today’s shareholder
is interested in returns in both dividends
and capital gains and not mere public
stunts in the name of business expansion.
Kenya Airways “Project Mawingu”
focused on acquiring bigger airplanes
worth billions of shillings with a view
of operating new routes in Africa, Asia
and Europe. Unfortunately the expected
business did not come through due to
various factors which though unforeseen
are not unlikely and should have been
factored in the business formulation stage.
A ‘what if ’ approach would have advised
a more cautious expansion. The Ebola
outbreak in parts of West Africa, security
threats due to increased terrorist attacks
and downturn in tourism resulted into
idle-capacity while the assets acquired
through debt arrangements continued
draining the limited resources. In
2014/2015 the Pride of Africa reported
Kshs.25.7 billion loss and went further to
report a half year loss of ksh.11.9 billion
in 2015/16. Uchumi Supermarkets
followed very much the same path by
12 JANUARY - FEBRUARY 2017