Moore Stephens identifies weak spots in shipping risk management

Confidence in the ability of sound risk management to contribute to commercial success in the shipping industry has fallen in the last 12 months, according to the latest annual Shipping Risk Survey from leading accountant and shipping adviser Moore Stephens.

Respondents to the survey rated the extent to which enterprise and business risk management is contributing to the success of their organisation at an average 5.9 out of a possible score of 10.0, compared to 6.8 in the 2017 survey.

Brokers returned the highest rating, followed by ship managers. For the first time in the four-year life of the survey, Europe was behind Asia in terms of geographical sentiment, but it was the Middle East which once again returned the highest figure (6.8).

Overall, respondents rated the extent to which enterprise and business risk was being managed effectively by their organisations at 7.3 out of 10.0, up from the rating of 7.1 recorded last time to the highest figure in the life of the survey. Charterers expressed the highest level of confidence in this regard.

Demand trends was cited by 17% of respondents (up from 16% in the previous survey) as the factor likely to pose the highest level of risk to their organisation. The cost and availability of finance (up from 13% to 16%) featured in second place, followed by competition, down from 14% to 13%. Operating costs were ranked in fourth place at 9% compared to 10% last year. There were also significant increases for bunker and fuel costs (up from 4% to 7%) and geopolitics (up from 4% to 6%). Meanwhile, supply of crew declined from 6% to 3%.

Geographically, demand trends remained the number one concern in Europe, Asia and the Middle East.

Respondents to the 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 demand trends, fuel emissions, bunker and fuel costs and geopolitics, which were all perceived to have the potential for increased risk.

Overall, 73% of respondents (compared to 69% last time) felt that the senior managers in their organisations had a high degree of involvement in enterprise and business risk management. Meanwhile, 16% said that senior management’s involvement was limited to ‘periodic interest if risks materialise’, while 10% said that senior management ‘acknowledged but had a limited involvement in’ enterprise / risk management.

Overall, 36% of respondents (compared to 30% in the previous survey) confirmed that enterprise and business risk was managed by means of discussion without formal documentation, while 48% noted that risk was documented by the use of spreadsheets or written reports, compared to 45% previously. Third-party software was employed by 4% of respondents (14% last time) to manage and document risk, while 7% used internally developed software, as opposed to 10% at the time of the previous survey.

On a scale of 1.0 (low) to 10.0 (high), changes to legislation were deemed the factor most likely to result in a material misstatement in companies’ period-end financial statements. Next came estimates of claims and provisions, vessel impairment, disclosure of commitments and contingencies, and loan covenant non-compliance.

Michael Simms, Moore Stephens partner, Shipping Industry Group, says: “Shipping is a high-risk industry, and one where inattention to the proper identification and management of risk can have catastrophic consequences. It is not possible to take the risk out of shipping. But it is possible to reduce the levels of risk by identifying potential hazards and then putting in place measures to eliminate or reduce them.

“Traditionally, this has not been something at which shipping has excelled. Too often in the industry, the risk has outweighed the reward. But there has never been a more pressing need for shipping to address the way in which it analyses and manages risk.

“The nature of risk itself is changing, not least with the insidious increase in levels of cyber-crime. And the need to manage risk effectively is the subject of increasing legislation, notably in the form of the UK Corporate Governance Code and more stringent requirements in other jurisdictions.

“Our survey reveals that shipping is responding on some levels to existing and new challenges relating to the management of risk, but falling short in others. The disappointing news is that the respondents to our survey emerged as significantly less satisfied than they were 12 months ago that sound enterprise and business risk management was contributing to commercial success.

“On the plus side, almost three-quarters of respondents reported that their senior managers had a high level of involvement in risk management. There was a small increase in the number of respondents who noted that risk was managed by the use of proper written documentation, accompanied by an increase in the level of undocumented risk management discussions. But there was a 10% drop in the use of third-party software, and a smaller decline in the use of software developed internally.

“The findings of the survey suggest that shipping still has some way to go in order to significantly improve its risk management profile. This is particularly relevant if, as seems likely, we are beginning to see the start of a recovery in the industry’s fortunes after a ten-year slump. New opportunities will bring more – and some new – risks, and these will need careful management.

“Respondents to our survey deemed demand trends to be the biggest risk they face. They also identified fuel emissions, bunker and fuel costs, and geopolitics as posing an increased risk to their businesses over the next 12 months.

“There are sound reasons to explain why respondents should identify the potential risks to business posed by these classic elements of shipping practice. But it is open to question whether it is entirely prudent to classify certain other risks as merely ‘steady’, including the risk posed by the likes of cyber security, which is an increasing threat in shipping, as are changes to corporation tax and transfer pricing legislation around the world.

“This is not the time for shipping to be taking its eye off the risk ball. The tone at the top is everything, the starting point for good practice and transparent management which can improve the confidence of investors and other stakeholders. Shipping businesses which fail to recognise and address their genuine level of exposure to threat are at great risk of both financial and reputational damage.”

Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping, offshore maritime and transport & logistics adviser. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 614 offices of independent member firms in 112 countries, employing 30,168 people and generating revenues in 2017 of $2.9 billion. www.moorestephens.co.uk/shipping-transport


For more information:
Michael Simms
Moore Stephens LLP
Tel: +44 (0)20 7334 9191
michael.simms@moorestephens.com">michael.simms@moorestephens.com

Moore Stephens says shipping must improve risk management

Not enough companies in the shipping industry are following joined-up risk management procedures, according to international accountant and shipping adviser Moore Stephens.

The second annual Moore Stephens Shipping Risk Survey revealed a fall, when compared to last year, in the overall level of satisfaction on the part of respondents that sound risk management had contributed to the success of their organisations. The involvement of senior management in managing risk at the highest level also declined against last year.

Respondents to the survey rated the extent to which enterprise and business risk management is contributing to the success of their organisation at an average 6.6, on a scale of 1 (low) to 10 (high), compared to 6.9 last time. Under a quarter of respondents (23%) returned a rating of 8.0, compared to 26% last time, while 70% put the figure at more than 5.0 out of 10.0, as opposed to 74% in 2015.

Overall, respondents rated the extent to which enterprise and business risk was being managed effectively by their organisations at 7.0 out of 10.0 (unchanged from last time). One respondent noted, “Financially well-managed shipping companies need only fear another collapse in rates and values,” but another said, “We misjudge the market and don’t take the right course of action to protect profits.”

Demand trends were deemed by the greatest number of respondents to pose the highest level of risk to their organisation, closely followed by competition, with the cost and availability of finance in third place. One respondent said, “Market reports are uncertain. Company-specific risk matrices need to be drawn up on the basis of experience, fundamentals and hindsight following evaluation of available market analysis reports which are, however, uncertain.”

Respondents to the survey felt that the level of risk posed by most of the factors which impacted their business would remain largely unchanged over the next 12 months, with the exception of tonnage supply and competition, which were perceived to have the potential for increased risk. No-one overall expected less risk in any of the categories.

Overall, 69% of respondents felt that the senior managers in their organisations had a high degree of involvement in enterprise and business risk management, as opposed to 72% in the previous survey. Meanwhile, 20% said senior management’s involvement was limited to “periodic interest if risks materialise” (up from 18% last time), while almost 10% of respondents (up from 8%) said that senior management “acknowledged but had a limited involvement in” enterprise/risk management. Just over 1% said that senior management had no involvement whatsoever.

One respondent said, “The problems are internal rather than external. We are not versatile enough. Emerging IT is not a risk in itself, but we are too slow to adapt to changing needs and competition.” Elsewhere it was noted, “Embedded derivatives are not being disclosed. For example, bunker escalation clauses in contracts of affreightment are de facto derivatives, but I have never seen them disclosed separately.”

Overall, 35% of respondents (compared to 37% in the previous survey) confirmed that risk was managed by means of discussion without formal documentation, while 41% noted that risk was documented by the use of spreadsheets or written reports, compared to 42% previously. Internally developed software was employed by 17% of respondents (13% last time) to manage and document risk, as opposed to the 5% who used third-party software.

On a scale of 1.0 to 10.0, estimates of claims and provisions, and changes to legislation (both 4.2) were deemed the most likely factors to result in a material mis-statement in companies’ period-end financial statements. Impairment involving vessels in use (4.0) featured in third place in this regard.

Michael Simms, Moore Stephens Partner, Shipping & Transport, says, “The survey revealed that risk is being managed effectively within a high percentage of those organisations which participated in the survey. It is nonetheless disappointing to find that confidence in the level to which enterprise and business risk management contributes to the success of shipping organisations has fallen slightly in the past 12 months. So, too, has high-level involvement by senior managers.

“Shipping is a risky business, one in which an unwillingness to take any risk whatsoever sometimes represents the biggest risk of all. But that does not mean that the industry can afford to ignore or underestimate risk. It must achieve the right balance between risk and reward, and especially so when reward levels are low, as they are at present. The rewards may vary, but the risk will not go away.

“The shipping industry’s level of vulnerability is reflected in the diverse nature of the threats identified by respondents to the survey. Few other industries could claim to be exposed to risks arising from economic uncertainty, mis-diagnosed analyses, renegotiation of existing contracts, lack of financing, uncertainty over asset valuations, defaults on loan repayments, political sanctions, monopolistic policies, regulatory changes, falling crude oil prices, customer insolvency, fears over the Chinese economy, uncertainty in Europe (and not just as a result of Brexit), and plain old supply and demand.

“Since the start of the worldwide economic downturn in 2008, shipping has coped, to varying degrees of success, with what might be regarded as the ‘traditional’ risks associated with operating in the industry. But there is also a growing threat from extraneous factors such as cyber-security and the increasing level of IT-related risk. The industry’s risk profile is changing, and with that the industry itself must change its approach to identifying risk. For some, outsourcing is a solution. However, managing the risk of doing this must not be overlooked. If the risk is not recognised, it cannot be controlled.

“The key to identifying and mitigating any type of risk lies in the application of sound, firm-wide governance control systems. Simply paying lip-service to corporate governance will not do. The tone needs to be set by senior management, leading from the front.

“A rating of 7.0 out of 10.0 in respect of the level of effective management of risk at companies which participated in the survey is not too discouraging. But it needs to be higher, as does the figure of just over 40% of companies which formally document the management of risk. Not enough companies are pursuing joined-up risk management procedures. Ultimately, the price to pay for inefficient management procedures, and the failure to monitor risk in a systematic and documented fashion, could be corporate failure.”

Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping, offshore maritime and transport & logistics adviser. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 657 offices of independent member firms in 106 countries, employing 27,613 people and generating revenues in 2015 of $2.7 billion. www.moorestephens.co.uk

For more information:
Michael Simms
Moore Stephens LLP
Tel: +44 (0)20 7334 9191
michael.simms@moorestephens.com