The Accountant-Jan-Feb 2017

marttkip

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

More magazines by this user
Similar magazines