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28 Charter I September 2011
The risk oversight function of the board
of directors has never been more critical
and challenging than it is today. In the
context of the recovering global fnancial
crisis and the convalescing global economy,
companies now face risks that are more
complex, interconnected and potentially
devastating than ever before.
But what exactly is the proper role of the
board in corporate risk management? The
board cannot and should not be involved
in actual day-to-day risk management.
Directors should instead, through their risk
oversight role, question the risk management
processes designed and implemented by
executives and risk managers and ensure
adaptability to the board’s corporate strategy.
Directors have always been rightly
perceived as the custodians of shareholder
value. However, in the past fve years several
dramatic events have occurred in the fnancial
world which have called for directors to
become more profcient in issues of valuation.
Three areas in which directors’ exposure
to valuation risk have arisen are evolving
regulation, changing corporate balance sheets
and increasing fnancial market volatility.
As a result of changes to the way mergers
and acquisitions are recorded, the way
fnancial instruments and intangible assets
are carried in fnancial statements and the
way expenditures are recognised in relation
to share-based payments, directors are
required to form an annual view.
The increasing exposure in fnancial
statements and tax returns to business
valuation judgements changes directors’
responsibilities in a profound manner.
These responsibilities essentially have
moved from a faithful recording of the
past (as has been the case since the time
Pacioli frst invented modern accounting) to
the reasonableness of their estimates (as
encompassed in the numerous business
valuations required) of the future.
Business Valuation Special Interest
Groups are established across Australia,
providing education, networking and
updates on business valuation processes.
You can join the Business Valuation
Special Interest Group by making the
appropriate selection on the annual
Institute member subscription form,
which was sent out in early June. Online
subscription to the group is also available.
Subscription to the group is
open to anyone. For details visit
The risk oversight function of a board of
directors has changed radically in the
wake of the GFC.
Story Kamini Rambausek
making sure risk
As a trusted advisor, it is critical to
get the right inputs when conducting
business valuations. Members can
use this interactive two-day workshop
to familiarise with the fundamentals of
valuing a business and understand the
relative strengths of different valuation
methodologies. The workshops will be
held in major cities across the country in
October and November 2011.
For more information, visit
CHANGING BALANCE SHEETS
During the economic boom of the late
2000s, a number of transactions were
undertaken, often at historically high
prices. Consequentially, a large amount
of goodwill was recorded on the balance
sheet of many acquirers. For this reason,
as well as the increasing focus on non-
tangible components of strategic advantage,
intangible assets have increasingly made up
a signifcant part of the value of all Australian
industry sectors over the last 10 years.
On the other hand, there have been
a number of distressed acquisitions in
the aftermath of the GFC as companies
were focusing on maintaining liquidity
and managing funding. As a result, many
companies recorded a write-down of
goodwill and assets as market values of
companies and assets declined dramatically.
INCREASED MARKET VOLATILITY
The asset price volatility of the ASX 200
industry sector over the past 10 years
has increased almost threefold. This
means that viewing value as a stable and
relatively unchanging number over time
has now become a dangerously outdated
assumption. This increases directors’
exposure to hindsight observations in respect
of their business valuation judgements.
GUIDANCE FOR DIRECTORS
With valuation being a fundamental skill and
a challenging aspect of today’s corporate
landscape, the Institute has developed a
new thought leadership publication, as part
of a series of audit committee guides, called
Concise Guide to Managing Valuation Risk.
The guide provides information to assess the
board’s exposure to valuation risk, evaluate
the board’s expertise to deal with valuation
issues, and perform appropriate due
diligence when addressing questions around
The pervasiveness of valuation issues in all
aspects of an organisation creates reputational
and legislative risks for directors. To illustrate
this, the guide provides some useful questions
for directors based on valuation principles.
How do we assess pricing and return
on capital? How should we value capital
employed? What valuation techniques do we
adopt to measure remuneration?
A certain level of expertise needs to
exist around the board table (in particular a
complex interrelated set of fnancial skills and
business acumen). The guide explores the
skills needed and provides a list of questions
directors can ask to help them understand
the level of expertise inherent within the
organisation to deal with issues of value.
To download a copy of the guide,
go to charteredaccountants.com.au/
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