Asia Emerging Risks Report

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CORPORATE INTEGRITY PRACTICE

AUDIT DIRECTOR ROUNDTABLE®

Asia Emerging Risks Report

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A FRAMEWORK FOR MEMBER CONVERSATIONS

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From the AUDIT DIRECTOR ROUNDTABLE of the CORPORATE INTEGRITY PRACTICE www.adr.executiveboard.com

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EMERGING RISKS IN ASIA

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Economic Slowdown: Despite the high growth rates enjoyed by Asian economies, executives in Asia see an economic slowdown as the biggest looming risk. 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 competitors, and ■ Pay heed to the increased tendency for employee fraud and misconduct.

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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 this as the biggest driver of 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 opportunity, 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.

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Staff Bench Strength Risk: Bench strength is a challenge in Asia, not only because of lower intent from employees to stay in their current jobs, but also because of the lower _{tenures and levels of experience of leaders in general.} The best companies build their leadership bench in Asia by:

■ _{Stabilizing leadership through better engagement,}

■ _{Strengthening leadership capabilities in the competencies that matter, and}

■ _{Enabling stronger leadership by providing powerful support systems without building costly leadership development bureaucracies.}

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Strategy Execution Risk: Companies have high growth expectations from Asia, but executives see strategy execution as one of the biggest risks in Asia. Current levels _{of economic uncertainty, high inflation, and commodity price volatility are all likely playing a role in hampering strategy execution efforts.} Our research shows that strategic missteps have the greatest impact on shareholder value. Audit must step up its coverage of key strategic risks by:

■ _{Auditing the documentation of company objectives and strategy,} ■ _{Evaluating the effectiveness of strategy communication, and}

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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 Pr obability Sc or e Impact Score Senior Management Turnover Risk

New Market Entrants

Inability to Meet Changing Customer Needs Engagement Risk

Foreign Currency Risk Inflation

Regulatory Risk

Extreme Commodity or Energy Price VolatilityCompetitor Innovation

Staff Bench Strength Risk Compensation Insufficient

to Retain Talent

Price War

Pricing Risk

1 _{Overall Risk Score = (Weighted}2_{Average Score of Impact + Weighted Average Score of Velocity + Weighted Average Score of Likelihood) x Percentage of Respondents Selecting the Risk.} 2 _{Weights range from 1 to 3 for each of the parameters: impact, likelihood, and velocity.}

n = 370 executives.

Size of bubble represents the overall risk score.1

Low High

Minor Very Serious

Economic Slowdown

Strategy Execution

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EMERGING RISKS IN ASIA BY COUNTRY

Top 10 Country-Wise Emerging Risks in Asia

By Overall Risk Score

Rank China Hong Kong India Singapore Rest of Southeast Asia1

1 Economic Slowdown Compensation Insufficient

to Retain Talent

Economic Slowdown Economic Slowdown Compensation Insufficient

to Retain Talent

2 Staff Bench Strength Risk Economic Slowdown Inflation Staff Bench Strength Risk Staff Bench Strength Risk

3 Strategy Execution Staff Bench Strength Risk Foreign Currency Risk Compensation Insufficient

to Retain Talent

Price War

4 Price War Strategy Execution Compensation Insufficient

to Retain Talent

Regulatory Risk Extreme Commodity or

Energy Price Volatility

5 Compensation Insufficient

to Retain Talent

Compliance Risk Price War Strategy Execution Economic Slowdown

6 Inflation Engagement Risk Staff Bench Strength Risk Price War Strategy Execution

7 Competitor Innovation Senior Management

Turnover Risk

Strategy Execution Competitor Innovation Competitor Innovation

8 Engagement Risk Competitor Innovation Extreme Commodity or

Compliance Risk Inability to Meet Changing

Customer Needs

9 Extreme Commodity or

Extreme Commodity or Energy Price Volatility

Competitor Innovation Engagement Risk Engagement Risk

10 Inability to Meet Changing

Customer Needs

Inability to Meet Changing Customer Needs

Regulatory Risk Inability to Meet Changing

Customer Needs

Supply Chain Risk

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DISCONNECT IN RISK PERCEPTIONS 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

Foreign Currency Risk 2

-Strategy Execution 3 5

Regulatory Risk 4

-Extreme Commodity or Energy Price Volatility 5 9

Staff Bench Strength Risk 6 3

Inflation 7 7

Compliance Risk 8

-Compensation Insufficient to Retain Talent 9 2

Liquidity/Credit Crunch 10

-Other Risks Highlighted by the Rest of the Organization

■ Price War: Rank 4

■ Competitor Innovation: Rank 6

■ Engagement Risk: Rank 8

■ Inability to Meet Changing

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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 the

majority 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 in order 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 Q2 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 insights 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 Q3 2012 Asia Emerging Risks survey.

Key Highlights of the Report

■ Risk insights from more than 300 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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CORPORATE INTEGRITY PRACTICE