BDO survey results: BDO show shipping must improve its risk management procedures

Michael Simms, Partner, Shipping & Transport at BDO
Michael Simms, Partner, Shipping & Transport at BDO

Respondents to the BDO survey rated the extent to which enterprise and business risk management is contributing to the success of their organisation at an average 6.4 out of a possible maximum score of 10.0, compared to 5.9 in the 2018 survey. The BDO survey was launched in 2015 with a rating of 6.9.

Owners posted the highest score of all main respondents, followed by managers, but the ratings for charterers and brokers were significantly down on last year. Asia was ahead of Europe in terms of geographical sentiment, but both were behind the Middle East.

The cost and availability of finance was cited by 29% of respondents (up from 17% in the previous BDO survey) as the factor likely to pose the highest level of risk. It was the number one risk factor for owners, charterers and managers, and was deemed to pose the highest level of risk in all geographical areas with the exception of North America. Demand trends, cited by 18% of respondents, featured in second place having ranked first at 17% last year, followed by competition (down from 16% to 11%). Geopolitics were ranked in fourth place at 8%, compared to 6% a year ago. There were also noticeable increases in respect of breaches in health and safety (up from 1% to 6%) and fuel emissions (up from 3% to 7%).

Respondents to the BDO survey felt that the level of risk posed by most of the factors which impacted their business would remain steady over the next 12 months, with the exception of fuel emissions, bunker and fuel costs, cyber security and geopolitics, which were all perceived to have the potential for increased risk.

Overall, 67% of respondents (compared to 74% last time) felt that the senior managers in their organisations had a high degree of involvement in enterprise and business risk management. Meanwhile, 18% (up from 16% previously) said that senior management’s involvement was limited to ‘periodic interest if risks materialise’, 11% (up from 10% last time) said that senior management ‘acknowledged but had limited involvement in risk management’, and 4% (compared to 1% last time) said that senior management had no involvement whatsoever.

Overall, 34% of respondents (compared to 36% in the previous BDO survey) confirmed that enterprise and business risk was managed by means of discussion without formal documentation, while 43% noted that risk was documented by the use of spreadsheets or written reports, compared to 48% previously. Third-party software was employed by 10% of respondents (4% last time) to manage and document risk, while 8% used internally developed software, as opposed to 7% at the time of the previous survey.

On a scale of 1.0 (low) to 10.0 (high), changes to legislation (although down to 3.7 from 3.8 last time) was deemed the factor most likely to result in a material mis-statement in companies’ period-end financial statements. Next came non-compliance with existing legislation, estimates of claims and provisions, disclosure of commitments and contingencies, and automated IT processes for financial reporting, all of which recorded a rating of 3.5. The rating for changes in accounting standards, meanwhile, fell to 3.0 from 3.4 last time.

Michael Simms, Partner, Shipping & Transport at BDO, says, “There has never been a more obvious and pressing need for shipping to identify and reduce its exposure to risk. However, the findings of our survey suggest that the industry is still not fully cognisant of the nature and extent of the risks to which it is exposed, and will need to address a number of issues in order to preserve its integrity and to maintain and increase its attractiveness to existing and new investors alike.

“Shipping is a classic risk-and-reward industry, and one which throughout its history has both rewarded and punished those taking the risks. Generally speaking, those who do their due diligence, and who come up with a sound business plan, are the ones best placed to reap the rewards.

“In many respects, today’s industry faces the same challenges that it did two centuries ago, not least competition, tonnage supply and demand, and operating expenses. But there are new problems to be faced now, such as cyber security and the cost of environmental compliance, which today’s industry will ignore at its peril.

“Going forward, it may be expected that further attention will need to be paid by the industry to managing other emerging risks such as the OECD scrutiny of low-tax jurisdictions as well as the increased focus on the ‘greening’ of finance.

“The fact that cyber security and geopolitics were identified by the respondents to our survey as among those issues having the potential for increased business risk over the next 12 months suggests that the industry is well aware of the dangers posed in these two volatile areas. And yet only 2% of our respondents felt that IT and cyber security posed the highest risk to their organisation.

“The cost and availability of finance was far and away the biggest perceived risk, but sourcing finance will no longer be an issue for companies which are hacked out of business because of a lack of IT integrity and security. Meanwhile, given the proximity of the IMO 2020 implementation deadline, it was no surprise to see both fuel emissions and bunker and fuel costs rated as having increased business risk.

“The encouraging news is that the respondents to our survey emerged as significantly more satisfied than they were twelve months ago that sound enterprise and business risk management was contributing to commercial success. However, it was of note that fewer respondents than last year had a dedicated risk committee.

“Although there was an increase this time compared to 2018 in the number of such committees meeting on a quarterly, annual and semi-annual basis, there was disappointment in the shape of a fall, to the lowest level in the five-year life of the survey, in the number of senior managers with a high degree of involvement in risk management. Risk management must start at the top, and be seen to sit there comfortably.

“There was a decline both in the number of respondents who noted that risk was documented by the use of proper written documents, and in the level of undocumented risk management discussions. But whereas last year’s survey revealed a drop in the use of third-party software and in the use of software developed internally, this time the corresponding figures were up.

“Shipping is a highly entrepreneurial business, and entrepreneurialism and risk management can make uncomfortable bedfellows when one or other is hogging most of the bedclothes. Our survey suggests that the industry needs to improve its risk management procedures. Shipping confidence may be holding up reasonably well, but shipping cannot afford to be complacent about its exposure to risk. Awareness of risk should not be confused with risk aversion, which is not – and never will be – a characteristic highly prized in the international shipping industry.”

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