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Association of Financial Professionals, Research Paper Example

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Research Paper

Business organizations are concerned with the concept of adding value. The concept of value-added can be defined as “Sales Value less the cost of purchased materials and services. This representing the worth of alteration in form, location or availability of a product or service”[1] (Tutor2u, 2010). Hence taking sales revenue the only item to be deducted is the cost of bought in goods and materials in order to arrive at the vale added figure.

Example:

Selling price per unit = $10

Cost of bought in goods = $6

Value added to unit = $10-$6=$4

The $4 is not profit as the manufacturer has to pay out others i.e. employees, creditors etc. However the $4 value added pays the wages, overheads and dividends.

Hence the detailed example might look like:

Business organizations

Source: (Tutor2u, 2010).

The benefits to be derived from the value-added are:

  • Value added statements are very easy to calculate and simple to produce in terms of putting together a financial statement;
  • It facilitates side by side comparison with other companies value added statements, this regardless of the other companies line of business;
  • A useful vehicle for internal company communications and in particular employee incentive schemes;
  • It measures the wealth of the company, as opposed to the view represented by a more formal profit and loss account statement.
  • This approach is less easy in terms of manipulation as opposed to a Profit and Loss Account and as such stands better scrutiny.

For investors, the review of the financial statements is the only real way of evaluating the performance of a company in their investment portfolio.  As such it might be considered as the only real means of evaluating and protecting their investment in a company. The problem with Financial Statements mainly relates to that of errors of omission and how significant these may be. For the Accountants and Auditors this exposes them to a potential liability and for the Company it could prove consequentially disastrous. As such it is prudent not just to rely upon the results of the financial statements as the only barometer to the Company’s health situation. “Without fundamental changes in how audits and related consulting services are sold, maintained, managed, and performed, the quality of audited financial statements will not improve” (Rasmussen, 2002).

Risk Assessment in Financial Management

Risk Management has intensified in the larger business Corporations. This particularly since the Enron scandal and Anderson Consulting firm.  Corporations now see Risk Management as a vital part of their Financial Management Strategy “hazard risk management has developed from its roots in insurance purchasing to become a core part of a company’s capital management strategy, similar to financial risk management. In short, risk managers now view risk management as financial management, and are making insurance purchasing decisions accordingly.” (Swanke, 2009).

Risk Assessment in Financial Management

Risk Management may be defined as the assessment, identification and prioritization of risks that will occur (probability) and then determine the consequences of these risks should they manifest themselves (impact). From this you can look at certain mitigation actions or avoidance plans in order to take corrective action before they actually impact. This can also be defined in terms of a composite risk index (CRI)

CRI= Impact of risk x probability of occurrence.

The Board of Directors have significant responsibility in Risk Management as defined by the Sarbanes Oxley Act “The Sarbanes-Oxley Act formalizes the important role that board members must play in the risk management process. According to this document, the board is expected to oversee an infrastructure that can define, analyze, measure and report on the effective control of risk inherent in the firm’s underlying financial activities and instruments used to manage risk.” (Association of Financial Professionals, 2010).

Since Enron Boards of Directors have become much more accountable for Corporate Risk Management and overseeing the financial well-being of corporate enterprises.

Works Cited

Association of Financial Professionals. (2010). Corporate Financial Risk Management. Retrieved 11 24, 2010, from Association of Financial Professionals: http://www.afponline.org/pub/store/pubs/cpfrmg.html

Rasmussen, J. L. (2002). Truth or Dare: Assessing the Reliability of Financial Statements. Retrieved 11 24, 2010, from Sage Forensic Accounting: http://www.sagefa.com/articles/Truth%20or%20Dare.pdf

Swanke, J. (2009, 1 19). Risk Management Really Should Mean Better Financial Management . Retrieved 10 24, 2010, from Property-casualty.com: http://www.property-casualty.com/Issues/2009/3/Pages/Risk-Management-Really-Should-Mean-Better-Financial-Management.aspx

Tutor2u. (2010). Definition of Value-Added. Retrieved 11 24, 2010, from Tutor2u: http://tutor2u.net/business/presentations/accounts/valueaddedstatement/default.html

[1] Original definition from the Chartered Institute of Management Accountants in the UK

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