Published: June 23, 2022
A successful financial reporting season is one where you act to achieve your objectives rather than react to problems. To get there, you need the right kind of planning so you can spot the trouble ahead and take control early. Performing an annual risk assessment may be the ticket to help you achieve a successful reporting season.
Risk assessments are essential to a strong control environment. That’s why risk assessment is a core component of the internal control process described in the Budgeting, Accounting and Reporting System (BARS) Manual, based on the Standards for Internal Control in the Federal Government. Auditors inquire about whether you’ve performed a financial statement risk assessment because it helps them assess the overall strength of your control environment and gauge overall audit risk.
A formal financial risk assessment process allows you to proactively identify and respond to risks or challenges. However, there’s no need to create your own process. SAO has a new and improved financial reporting risk assessment tool that you can modify as needed. Here’s how to get started with a few easy steps.
Step 1: Define your objectives
Be clear on your financial reporting objectives so that you know the goals you are trying to achieve. For example, you might want to receive a Government Finance Officers Association award for excellence in financial reporting or complete your financial report two weeks early. Be specific about the who, what, when, where, and how of these objectives, and how you will measure success. Decide what is important to you so you can identify the risks or challenges that might stand in your way.
Step 2: Decide on your risk appetite
Spend some time thinking about your organization’s risk tolerance regarding these particular objectives. It’s important to consider your risk appetite before you go too far with your analysis, because it can influence just how much risk mitigation you will need to do.
Step 3: Identify risks or challenges
Assemble a team of people who are knowledgeable about your financial reporting processes. With the team, brainstorm a comprehensive list of potential risks or challenges that might keep you from achieving your financial reporting objectives.
You can use SAO’s list of questions in the financial reporting risk assessment tool to help prompt discussion and generate a complete list of risks.
Step 4: Decide on the significance of risks
For each risk or challenge, decide whether it presents a low, medium, or high risk to meeting your objectives. This will depend on the probability of the risk occurring, the effect it could have, and overall nature of the risk.
Step 5: Decide on a risk response
Decide which risks you will address and develop a plan to either reduce, avoid, share (transfer), or accept the risk. Be sure to document your implementation plan, assign responsibility for action steps, and monitor your progress.
Keep in mind that you won’t reduce risk to zero in many cases—there will be some residual risk (or leftover risk) remaining after you’ve taken action. You should feel less pressure knowing residual risk is common and expected. It just needs to be at a level that your government’s leaders are comfortable with, given their risk appetite.
So, get ready to rock it with our new and improved financial reporting risk assessment tool! That way, you will be fully prepared for next year’s financial reporting season.
Remember, we’re here to help. You can submit technical accounting and financial reporting questions to our HelpDesk in the client portal.
If you have other questions, comments or suggestions, feel free to email us at Center@sao.wa.gov.