ACCA Strategic Professional · Strategic Business Leader · Identification, assessment and measurement of risk
Brightwater Utilities is assessing its risk profile. Its regulated water pricing means revenues are largely fixed by the regulator, but it has significant debt at floating rates and a legacy IT system that frequently fails. A director argues the main risk to shareholder value is the fact that the regulator might change the pricing formula at the next review. Which statement correctly characterises the regulator risk in a risk classification?
It is an external regulatory or political risk. The pricing formula is set by the regulator, outside the company's control, though Brightwater can monitor and lobby. The floating rate debt and IT failures are distinct financial and operational risks.
- AIt is an internal operational risk, because the IT system could mis-bill customers
- BIt is an external risk, specifically political or regulatory, that the company cannot control but can monitor and influenceCorrect
- CIt is a financial risk, because it arises from floating rate debt
- DIt is a risk that should be ignored because revenues are regulated
Explanation
A change in the regulator's pricing formula originates outside the company, so it is an external regulatory or political risk. The firm cannot control it but can engage and plan for it. Floating rate debt and IT failure are separate internal or financial risks, and regulation does not remove the exposure.
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