Sample Research Proposal on The Impact of Financial Rish Management on Corporate Value

There can be few, if any, parts of the economy in which risk management is more important than the financial sector. Financial institutions account for a sizeable number of the world's leading companies and have a critical role to play in the economics of every country and thus in world economic order as a whole. The research will be focusing on the case study method that will provide detailed analysis of such Saudi Arabian companies such as known banks of the country as the business operation is being centered on taking risks in conditions of uncertainty. The process with such focus on how outcomes relate to effective risk management will be deemed important. The results should achieve in answering such issues and problems presented based on research findings and information researches to support whatever data is gathered respectively.         In modern competitive market economy, business organisations that are risk disinclined are unlikely to earn satisfactory returns. On the other hand, highly volatile returns are unlikely to find favour with capital markets anxious not to be surprised, particularly by bad news. Moreover, the research planning process is as much about doing the right things and not missing strategic opportunities, as it is about doing things right, essential if such Saudi company is to achieve its full potential. The application of Turnbull's approach may lead to some financial institutions realising that they are not taking enough risk; perhaps a new market can be identified and while there may be clear risks in being the first to enter there may equally be significant first-mover advantages to be gained.   INTRODUCTION When considering Saudi firm's financial risk management activities, there can ask of such questions like for instance, why do firms engage in such activities, and how do they do it? How firms engage in risk-management has been extensively considered. Methods to be utilized will involve the combining financial instruments such as shares, bonds, options and futures, in order to obtain a desired payoff profile (Smith and Smithson, 1998 p. 544). In this proposal assumption, there consideration as to why Saudi companies bother with financial risk-management? Is financial risk-management value adding? Shapiro and Titman (1998 p. 674) consider question of whether risk management is desirable. A firm's total risk consists of two elements; market risk and specific risk. STATEMENT OF PURPOSE   The purpose for the study then will basically to find out issues of financial risk of Saudi companies and how the management of that risk has affected the companies' business value. The idea of providing finance awareness of such situations that are not easy to handle with addressing to the financial experts of the company to possibly find out risk strategies and management approaches in order to avoid such negative implications of risks regarding to the finances of the companies just like banking sectors in Saudi Arabia reflecting to such standards and practices of accounting. The imperative purpose of identifying impacts of risk management in financial aspect and how things and operations of companies will be affected if not controlled and monitored well by the financial analysts and consultants, want went wrong and what could be the factors of such risks.   BACKGROUND The Banking Control Law requires that banks appoint two joint external auditors from a list of approved auditors who have been registered with the Ministry of Commerce for more than five years. The General Auditing Bureau and the Ministry of Commerce have issued comprehensive auditing standards and Saudi Arabian auditing standards. These standards address such issues as professional qualification, independence and impartiality, professional care, methods for planning an audit, control and documentation, audit evidence and the auditors' opinion. It is preferred that auditors be members of a professional organization, such as certified public accountants in the USA. There are no legal requirements or prohibitions relative to making a change in the appointed auditor. All Saudi banks are now audited by at least one local company representing one of the large international accounting firms (Capital Intelligence, 1999-2000 p. 222). Trading securities must be valued at cost upon acquisition and thereafter be marked to market value on an individual securities basis at the date of each financial period. Profit or loss realized from trading in securities and revaluation differences must be included in the income statement. Investment securities must be valued at cost, with any differences between cost and the nominal value of a security being recorded as premium or discount and amortized over the remaining life of the security. Temporary changes in market value of such securities must be ignored and only permanent changes must result in a revaluation of the securities. A permanent reduction in the value of a security must be reflected in the income statement.                   SIGNIFICANCE The significance of the study will relate to such ideas on assets and liabilities held by Saudi companies as there can be such subsidiaries that must be translated to local currency applying the spot rate of exchange and in way, will impede risks in financial matters. Thus, this study will help in achieving better stance as well as understanding of such company revenues, expenses, gains and losses must be translated using the weighted average spot exchange rate. The exchange differences that results from possible translation of financial statements prepared in other currencies should not appear in the income statement but should be taken to special equity reserves.   LITERATURE REVIEW According to the CAPM and APT models, well diversified investors hold portfolios that have already eliminated all of Saudi company's specific risk, but investors cannot eliminate market risk. The equilibrium market price of each firm's shares in the portfolio is such that expected returns only compensate investors for holding market risk, as embodied in a firm's beta. As such, risk-management activities by the firm are irrelevant in the sense that they are unable to add value. These activities may reduce total risk, but diversified investors have already done so by eliminating all of the specific risk. Hence, risk management activities will not increase the market price of the firm's shares. Shapiro and Titman (1998 p. 754) argue that, since financial instruments are fairly priced and compensate investors for market risk only, hedging risk through financial instruments is, at best, a zero net present value activity. In the worst scenario, risk management may actually be value reducing, since it may be a costly activity in terms of time and resources. The firm's risk management activities reduce total risk, but this will not affect the market risk. Aside, Sheperd and Titman (1998 p. 494) proceed to rescue risk management by showing that it can have an effect on firm value. They argue that total risk does matter, through its effects on the cash flows. A high level of total risk may increase expectations of financial distress, hence reducing the expected cash flows, and reducing firm value. Risk management aimed at reducing total risk, although not affecting the discount rate, may increase expected cash flows, which would be value increasing. Furthermore, company managers have an incentive to engage in risk management, even if this is not value increasing. Moreover, single company's financial distress may not be of much concern for a well-diversified investor as it could be disastrous for the management of that firm, in terms of loss of employment and reputation. It may be argued that management has a private discount rate which reflects total risk, and hence exceeds the social discount rate. Since the firm is valued in the market using, the management would have a lower private valuation of the firm than the market. Risk management could then be viewed as management's attempts to increase their private valuation towards the market valuation.       METHODOLOGY Questionnaire and interview research methods are to be of use for data collection as part of research project concerned with internal audit in Saudi Arabia. Questionnaires are to be sending to and interviews will be conducted with directors of internal audit departments in companies in the Saudi Arabian corporate sector and external auditors working in Saudi Arabia. Information to address the first research question about the perceptions of external auditors of the internal audit function in the Saudi Arabia corporate sector was obtained by responses showing the level of agreement to five statements concerned with their perceptions of the independence, objectivity, expertise, scope and effectiveness of internal audit. Responses to each perception were scored on a five-point scale ranging from high score of 5 (=strongly agree) to low score of 1 (=strongly disagree). In addition, further information need to be obtain from the research interviews with external auditors. The second research question about the level of co-operation between the internal and external auditors was assessed by the questionnaire responses of internal auditors to four questions on the questionnaire relating to the level of cooperation as to whether there is access to the working papers of and allowing access to the internal auditor's working papers by the external as the responses need have sought to questions in the research interviews. In the case of external auditors, information about the level of cooperation can be achieved through using research interviews. To increase the questionnaire response rate preliminary contact are to be made with potential respondents before posting the questionnaire. This preliminary contact establish as to whether or not the company had an internal audit function, which was necessary because the internal audit function in Saudi companies have a number of names. In order to establish the credibility of the research and to encourage responses two covering letters and a stamped envelope addressed to the first author were sent with the questionnaire. Follow-up letters are to be sent to non-respondents and further follow-up procedures in the form of company visits and telephone calls can possibly be carried out. Interviews The interviews are to be designed to enhance and supplement the information gained from the two questionnaires about the internal audits in Saudi Arabia. Of the internal and external auditors responding to the two questionnaires, 15 interviews were conducted with directors of internal audit departments and 13 with external auditors. The interviews to be utilized have to be structured and the interviews with external auditors were tape-recorded. The interviews with the directors of internal audit departments need not to be on tape because it can possibly reduce their willingness to discuss sensitive issues, notes will undertaken in the interviews.       TIME SCALE/RESEARCH PLANNING & PROBLEMS   The research process of the study can be best illustrated with the use of the 'Research Process Onion'. The Onion refers that in order to come to the central issue of how to collect the data needed to answer ones research questions, there are important layers of the onion that need to be peeled away: the first layer raises the question of the research philosophy to adopt, the second considers the subject of research approach that flows from the research philosophy, the third examines the research strategy most applicable, the fourth layer refers to the time horizon a researcher applies to his research, and the fifth layer is the data collection methods to be used (Saunders et al., 2003 p. 362). Figure one shows how the researcher conceptualized the research approach to be applied for the study in order to come up with the pertinent data needed to answer the research questions and arrived at the fulfillment of research objectives.     Other research tools Findings, Outcomes Case Study and Analysis Sampling for Questionnaire   Observation, Description Figure One: Research Process Onion                 Case study is defined as strategy for doing research that involves an empirical investigation of a particular contemporary phenomenon within its real life context with the utilization of various sources of evidence and that one has the considerable ability to generate answers where data collection methods applicable with such approach include questionnaires, interviews, observation and documentary analysis (Robson, 2002 p. 532; Saunders et al, 2003 p. 628). Furthermore, case studies are usually based on interviews conducted over short time (Saunders et al., 2003 p. 432). Finally, the last layer of the research process onion is the data collection of the study. The questionnaire is designed and created in order to empirically find out certain relevant information and evidences as administered to group of respondents to complete and realize the purpose of questionnaire as to whatsoever results the case study and questionnaire will be giving respectively.                                           TIMETABLE     Activity Month         Aug Sep Oct Nov Search for Related Literature         Selection of the  Topic         Definition of the Problem         Development of the Objectives         Selection of Methodology         Check the availability of resources         Verify the accessibility of the resources         Write the draft of the proposal         Prepare interview schedule         Secure adviser's approval         Do the needed revisions         Test research tool validity         Select the study sample         Conduct research proper         Administer research tools         Do the assessment techniques         Gather and analyze results         Do the necessary data presentation         Interpret findings         Preparation of the final report         Formulation of conclusions and recommendations         Preparation of the table of content, appendices         Editing and Final Formatting         Printing                        Furthermore, risks that threaten financial institution's objectives will often range from functional risks through strategic issues. Consider the foreign exchange trading activity in Saudi bank. There is clearly certain risks as left to operate free of internal controls, can run up significant losses. This risk is located in defined area of such bank's activities but its potential impact should not be underestimated, operational problems in financial institution can be life-threatening probably to a greater extent than operational problems in many other businesses. Identifying the existence of potential risks does not necessarily mean that action is required to mitigate all of them. Risks must be prioritized, by means of assessing the likelihood of occurring and extent of impact high likelihood and high impact suggesting priority for action. However, risk prioritization frameworks do not remove the need for judgment and there is a danger that such frameworks can give an air of spurious objectivity to the results. The inherent uncertainty associated with determination of risk assessments should not be forgotten. Care need to be taken not to unduly weight action according to whether risk falls just inside or out of quadrant or category, the direction of movement of risks needs to be factored into the equation with attention paid with importance.