Introduction
The incorporation of a company is no easy task as it involves numerous legal procedures and regulations to comply with. These regulations are imposed by regulatory agencies on behalf of the government and have arisen out of situations that made it mandatory for the government to impose them in order to keep a legal check on industries and companies.
This particular plan throws light on the various types of regulatory risks involved in a business and remedial measures to overcome them. Apart from this, a special mention of environmental regulation is also explained which constitutes a major concern for businesses and industries today.
The environment issue has been a long standing concern especially with industries contributing profusely to the rapid depletion of environment. Pollution of air, water and even land through emission of toxic gases and industrial wastes led to this compulsory regulation. Industries engaged in the production or even higher use of potentially environment harmful substances come under the EPA restrictions. Regulatory compliance forms a necessary part in creating goodwill for companies.
Tort liability
Hefty fines are imposed on companies for violating regulations of the law. The violation of a tort puts the company in bad light and the litigation that follows is an invitation for negative publicity. Industries consuming large amounts of fossil fuels and those engaged in similar businesses have to be vigilant in complying with the environment regulations. With the growing need for environment conservation, various Acts have been enacted with a strong conservation motive, thereby making the regulations inflexible and sterner with increasing pressures (Barry.D.D, 1970).
Identifying the regulatory risks
Risks are inherent in every business, and risks like price risk, market risk, credit risk, liquidity risk are common to all businesses. The businessman should be able to anticipate these risks well in advance and be prepared to deal with them. The risk of violation of laws should also be given significant consideration. However the regulatory risks differ in minor ways depending upon the type of company. Industries have to consider more risks than that of a business as it will also include manufacturing risks. This risk would include contingencies involving shortage of raw material, man power, problems and risks related to machinery and technology. We have elaborated the types of risks below and also provided measures to overcome them.
Credit risk and liquidity risk
Credit risks arise when clients or customers fail to make payments within the prescribed due date, this accounts for bad debts which are a loss to the business. Liquidity risk is the failure of obligations by a company due to its inability to obtain adequate funding, liquidate assets with minimal loss or make up for certain exposures due to market disruption, etc.
Interest rate risk
Interest rate risk arises refers to the risk that arises when the value of fixed income security possessed by an organization changes due to the fluctuations in the market interest rates. (Crouhy.M, Galai.D,& Mark.R, 2006)
Price risk
This type of risk arises out of changes in market value of products and services which will result in the decrease for demand.
Foreign exchange risk
It is a risk arising due to the movement in the foreign exchange value. For example, when the dollar value decreased, the foreign companies dealing dollars faced a set back.
Reputation risk
A bad reputation among the public due to certain happenings or incidents is reputation risk. For example, Exxon Valdez, an oil tanker on its way to California, struck a reef in Prince William Sound, releasing 11 million gallons of crude oil into the sea which resulted in a huge environmental destruction. It turned out the company failed to show that it had an effective in place to deal with the crises. The reputation risk arises mainly due to the negligence from the company’s part.
Compliance risk
This is a common risk which can be seen frequently happening in companies. This risk involves the violation of rules and regulations, laws or the ethical standards. Violation of laws results in payment of fines which are a great loss to the business. It also damages the reputation which will affect the goodwill and clientele of the business in the long run. Strict regulations are imposed on environmental issues these days, with the growing pressures of environment conservation. Hefty fines are paid as compensation and large sums are also spent on litigation for not complying with rules of the EPA (Pricewaterhousecoopers, 2001).
Measures to overcome the above mentioned risks
- Credit risks arise when too much of credit is offered to the clients or customers, and when they fail to make payments on time. This risk is more common in large undertakings where credit constitute most of the sales. In such a case, sales on credit basis are also inevitable. Some suggested measures to avoid this risk are by offering discounts for payments made before the due date. And a strict credit policy can also be adopted.
- Liquidity risks can be overcome by foreseeing the future need for additional capital during the course of an obligation. A prudent approach should be taken to overcome this risk. A certain amount of money can be set aside to meet the requirements when there is inadequate fund. The pay-back method can also be adopted to avoid this risk.
- The interest rare risk can be overcome by companies when they approach a bank’s treasury and enter into an Interest Rate Swap (IRS). It is a kind of an agreement that allows the company to cover the cash flows that can replace its short term floating interest rate risk by a fixed rate. (Singh.M, 2008)
- The Price risk is one which is influenced by the market. It is not very easy to avoid this risk. One can perhaps monitor or observe the changing trends in the market and try to foresee the changes and take the necessary steps to resist the change.
- The Foreign Exchange risk is similar to that of the price risk in that it is influenced by the market. Though it is quite hard to adopt specific measures for this risk, one can monitor the changes in the market and take steps prepare the company to withstand the effects of the risk
- Reputation risk is one which many companies face. Reputation is all about the opinion or the image that the public hold about the company. In the case of the Alumina.Inc, the company could not save its face when a crisis occurred. Therefore to build up the image of a company, one can undertake good Public Relations activities. This will ensure smooth communication between a company and its publics, thereby building up a good image of the company in the minds of the people.
- The compliance risk is one where the company is solely to be blamed for violating laws. To overcome this risk, strict codes of conduct can be framed and heavy fines can be demanded from the individual in question. The implementation of such policies may differ with different companies. Each company may adopt a policy that suites its nature of business and so on.
Conclusion
A business is always prone to many risks and it is impossible for a business to be devoid of any risk. Every task comes with a risk and it is left to us to determine methods to overcome them. Therefore in the passages mentioned above, we have analyzed the various regulatory risks that can affect a business and the possible measures to overcome them.
References
- Barry.D.D (1970): Governmental Tort Liability (Electronic Version): Brill Archive. Web.
- Crouhy.M, Galai.D,& Mark.R (2006): The Essentials of Risk Management (Electronic Version) : McGraw-Hill Professional. Web.
- Pricewaterhousecoopers (2001): The Regulatory Risk Management Handbook (Electronic Version) : M.E. Sharpe. Web.
- Singh.M (2008): Overcoming Interest Rate, Inflation Risks With The Right Swap: Business Times(Electronic Version).