ACCA Strategic Professional · Strategic Business Leader · Identification, assessment and measurement of risk
Orchid Pharma is considering entering an emerging market. The board identifies risks that include currency depreciation, political instability and uncertain enforcement of contracts, and wants to group them to assign owners. Which approach best supports identifying and categorising risks specific to the external environment of this decision?
A PESTEL-based analysis is best. It systematically structures external political, economic and legal sources of risk, such as instability, currency and contract enforcement, in a new market. Historic losses, internal controls and ratios do not reveal new external exposures.
- AReviewing only the company's historic loss records
- BUsing a PESTEL-based analysis to structure external risk sourcesCorrect
- CRelying on an internal audit of existing financial controls
- DApplying a ratio analysis of the current balance sheet
Explanation
Political, economic and legal exposures sit in the external environment, and a PESTEL framework gives a systematic way to identify and group them. Historic losses and internal controls do not capture new market risks, and ratios describe past financial position rather than forward-looking external threats.
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