Weak spots in risk management
Moore Stephens survey says Europe behind Asia in shipping geographical sentiment
survey) as the factor likely to pose the highest level of risk to their organisation. The cost and availability of finance (up from 13% to 16%) featured in second place, followed by competition, down from 14% to 13%. Operating costs were ranked in fourth place at 9% compared to 10% last year. There were also significant increases for bunker and fuel costs (up from 4% to 7%) and geopolitics (up from 4% to 6%). Meanwhile, supply of crew declined from 6% to 3%.
Geographically, demand trends remained the number one concern in Europe, Asia and the Middle East.
Respondents to the survey felt that the level of risk posed by most of the factors which impacted their business would remain steady over the next 12 months, with the exception of demand trends, fuel emissions, bunker and fuel costs and geopolitics, which were all perceived to have the potential for increased risk. 7% used internally developed software, as opposed to 10% at the time of the previous survey.
On a scale of 1.0 (low) to 10.0 (high), changes to legislation were deemed the factor most likely to result in a material misstatement in companies’ period-end financial statements. Next came estimates of claims and provisions, vessel impairment, disclosure of commitments and contingencies, and loan covenant noncompliance.
“Shipping is a high-risk industry, and one where inattention to the proper identification and management of risk can have catastrophic consequences. It is not possible to take the risk out of shipping. But it is possible to reduce the levels of risk by identifying potential hazards and then putting in place measures to eliminate or reduce them,” said Michael Simms, Moore Stephens partner, Shipping Industry Group.
“Traditionally, this has not been something at which shipping has excelled. Too often in the industry, the risk has outweighed the reward. But there has never been a more pressing need for shipping to address the way in which it analyses and manages risk.
“The nature of risk itself is changing, not least with the insidious increase in levels of cyber-crime. And the need to manage risk effectively is the subject of increasing legislation, notably in the form of the UK Corporate Governance Code and more stringent requirements in other jurisdictions.” as significantly less satisfied than they were 12 months ago that sound enterprise and business risk management was contributing to commercial success.
“On the plus side, almost three-quarters of respondents reported that their senior managers had a high level of involvement in risk management. There was a small increase in the number of respondents who noted that risk was managed by the use of proper written documentation, accompanied by an increase in the level of undocumented risk management discussions. But there was a 10% drop in the use of third-party software, and a smaller decline in the use of software developed internally.
“The findings of the survey suggest that shipping still has some way to go in order to significantly improve its risk management profile. This is particularly relevant if, as seems likely, we are beginning to see the start of a recovery in the industry’s fortunes after a ten-year slump. New opportunities will bring more – and some new – risks, and these will need careful management.”
Simms added that respondents to the Moore Stephens survey deemed demand trends to be the biggest risk they face. They also identified fuel emissions, bunker and fuel costs, and geopolitics as posing an increased risk to their businesses over the next 12 months.
“There are sound reasons to explain why respondents should identify the potential risks to business posed by these classic elements of shipping practice. But it is open to question whether it is entirely prudent to classify certain other risks as merely ‘steady’, including the risk posed by the likes of cyber security, which is an increasing threat in shipping, as are changes to corporation tax and transfer pricing legislation around the world.
“This is not the time for shipping to be taking its eye off the risk ball. The tone at the top is everything, the starting point for good practice and transparent management which can improve the confidence of investors and other stakeholders. Shipping businesses which fail to recognise and address their genuine level of exposure to threat are at great risk of both financial and reputational damage,” Simms concluded.