Audit Director Roundtable Asia Emerging Risks Report

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Audit Director Roundtable®

Asia Emerging Risks Report

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A FRAMEWORK FOR MEMBER CONVERSATIONS

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These materials have been prepared by CEB for the exclusive and individual use of our member companies. These materials contain valuable confidential and proprietary information belonging to CEB and they may not be shared with any third party (including independent contractors and consultants) without the prior approval of CEB. CEB retains any and all intellectual property rights in these materials and requires retention of the copyright mark on all pages reproduced.

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EMERGING RISKS IN ASIA

1

Economic Slowdown: Slowdown worries continue to be the biggest risk in Asia for the second consecutive quarter, as GDP growth estimates continue to be reduced throughout the region.

Organizations typically react to an economic slowdown by focusing on cost cutting, paying particular attention to selling, general, and administrative (SG&A) costs. Instead, CEB research shows that organizations should:

■ Focus on reducing the cost of goods sold (COGS) while protecting investments in key growth bets;

■ Embrace risks or threats that emerge during slowdowns that the company is better suited to manage than its competitors; and ■ Pay heed to the increased tendency for employee fraud and misconduct.

2

Price War: The increasing number of new entrants in Asian markets has aggravated the risk of destructive price wars in the region, leading to fears of margin erosion, distorted customer expectations on price, and industry-level profitability issues.

Leading organizations avoid these destructive price wars by emphasizing product value differences that enhance long-term customer engagement. In addition, they focus on long-term, strategic defense of market position by avoiding price-based responses to competitors’ actions.

Finally, they communicate pricing decisions clearly so that customers and competitors do not misunderstand these actions for a price war.

3

Compensation Insufficient to Retain Talent: CEB research shows that staff in Asia are much more likely to leave their current organizations than their counterparts in other countries. By highlighting compensation as the biggest risk, executives in Asia indicate that this largely drives the inability to retain talent.

In reality, compensation is not the only reason for dissatisfaction among employees and their eventual departure.

Our research shows that several other elements of the employee value proposition (EVP), such as respect, work–life balance, and future career opportunities, are also important influencers of employee satisfaction.

Companies should craft their EVPs to take into account the factors considered important by the labor market, look to deliver on these other elements of the EVP as well, and not overemphasize compensation.

4

Foreign Currency Risks: Executives in Asia are concerned about high volatility in exchange rates and its impact on cash flows, debt servicing, and profitability. Leading organizations identify foreign exchange (FX) risks embedded in business processes rather than relying solely on FX risks flagged by business units. They assess the net FX exposure under different economic scenarios and stress test the results to avoid FX volatility.

In addition, progressive treasurers clearly specify an FX risk threshold (e.g., earnings at risk) they are comfortable with, and create a standardized FX policy that frames all FX hedging decisions. They educate business managers on the sources of FX risk and exposure limits, the types of exposures to be hedged, and preferred hedging instruments.

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EMERGING RISKS IN ASIA FOR THE NEXT 12 MONTHS

Top 15 Emerging Risks in Asia for the Next 12 Months

Very Rapid Velocity Rapid Velocity Slow Velocity

1 _{Overall Risk Score = (Average Score of Impact}2_{+ Average Score of Velocity + Average Score of Likelihood) x Percentage of Respondents Selecting the Risk.} 2 _{Average Score of Impact, Likelihood, and Velocity range from 1 (lowest) to 3 (highest).}

n = 268 executives.

Size of bubble represents the overall risk score.1

Pr obability Sc or e Impact Score Low High

Minor Very Serious

13. New Market Entrants

11. Inability to Meet Changing Customer Needs

12. Project Management/ Change Readiness Risk

10. Engagement Risk 4. Foreign Currency Risk

15. Political Risk 6. Inflation 8. Regulatory Risk 9. Strategy Execution 14. Product Innovation Risk 7. Competitor Innovation 5. Staff Bench Strength Risk 3. Compensation Insufficient to Retain Talent 2. Price War 1. Economic Slowdown

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EMERGING RISKS IN ASIA BY COUNTRY

Top 10 Country-Wise Emerging Risks in Asia

By Overall Risk Score

Rank China n = 33. Hong Kong n = 25. India n = 122. Singapore n = 41.

Rest of Southeast Asia1

n = 24.

1 Economic Slowdown Economic Slowdown Economic Slowdown Economic Slowdown Staff Bench Strength Risk 2 Strategy Execution Regulatory Risk Foreign Currency Risk Price War Compensation Insufficient

to Retain Talent 3 Price War Staff Bench Strength Risk Price War Compensation Insufficient

to Retain Talent

Competitor Innovation

4 Staff Bench Strength Risk Price War Inflation Regulatory Risk Economic Slowdown 5 Compensation Insufficient

to Retain Talent

Strategy Execution Compensation Insufficient to Retain Talent

Inflation Engagement Risk

6 Supply Chain Risk Competitor Innovation Engagement Risk Staff Bench Strength Risk Senior Management Turnover Risk 7 New Market Entrants Compensation Insufficient

to Retain Talent

Project Management/ Change Readiness Risk

Compliance Risk Inability to Meet Changing Customer Needs

8 Competitor Innovation Inflation Strategy Execution Strategy Execution New Market Entrants 9 Inability to Meet Changing

Customer Needs

M&A Risk Regulatory Risk Competitor Innovation Inflation

10 Senior Management Turnover Risk

Engagement Risk Competitor Innovation Engagement Risk Regulatory Risk

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SLIGHT DISCONNECT IN RISK PERCEPTION BETWEEN AUDIT AND BUSINESS

Top 10 Emerging Risks by Finance and Audit Versus Rest of the Organization

By Overall Risk Score

Risk Finance and Audit Rank Rest of the Organization Rank

Economic Slowdown 1 1

Price War 2 2

Foreign Currency Risk 3 5

Inflation 4 6

Compensation Insufficient to Retain Talent 5 3

Staff Bench Strength Risk 6 4

Compliance Risk 7

-Regulatory Risk 8 9

Project Management/Change Readiness Risk 9

-Political Risk 10

-Other Risks Highlighted by the Rest of the Organization

■ Competitor Innovation: Rank 7 ■ Engagement Risk: Rank 8 ■ Strategy Execution: Rank 10

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INCORPORATE NONTRADITIONAL ASSURANCE

ACTIVITIES

Balance of Audit Activities in a Given Year

Traditional Assurance to Nontraditional Assurance

Despite the threat

of strategy risks, the

typical audit department

continues to spend most

of its time on traditional

assurance activities

covering financial and

compliance risks.

1% 60% 29% 10% 0% 100%

Traditional 20% Nontraditional80% Traditional– 50% Nontraditional50% Traditional– 80% Nontraditional20% Traditional– n = 77.

“I know in my bones this is

the direction Internal Audit

has to move to advance our

profession.”

VP and Chief Audit Executive

Consumer Services Industry

“We need to shift our focus

so that 80% of our work is

strategically focused, while

20% should focus on the more

traditional audit engagements

around financial, compliance,

and operational risks.”

Chief Audit Executive Financial Services

Industry

“By having a strategic focus,

we won’t be providing less

assurance, but more. This

concept is not mutually

exclusive from providing core

objectives and assurance.”

Head of Internal Audit Leisure Industry

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ASIA EMERGING RISKS SURVEY

The Asia Emerging Risks Survey

The Q3 2012 Asia Emerging Risks Survey, designed by CEB’s Audit Director Roundtable, captures and analyzes senior executives’ opinions on emerging business risks in Asia and provides actionable insight into identifying and mitigating these risks.

Survey Methodology

The survey asks executives to identify the top five risks in Asia and provide an estimate of probability, impact, and velocity for each of these risks. In addition, the survey also asked executives to provide leading indicators and mitigation strategies adopted to navigate these risks.

We organized each of the emerging risks into specific risk categories such as macroeconomic, financial, operational, etc. The appendix contains the list of risk categories and definitions of individual risks in each of these categories.

Request for Ongoing Participation

Click here to register for the Q4 2012 Asia Emerging Risks survey.

Key Highlights of the Report

■ Risk insights from more than 250 senior executives in Audit, Finance, HR, IT, Legal, Marketing, Sales, and Strategy at Asia’s leading companies ■ Analysis of top 10 emerging risks in key Asian markets, with an estimate of their impact, probability, and velocity

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