By: Mohammed Khalil Al Jallad

Edited by: Ayman Abdelrahim


Retail Risk

The 2014 Global Retail Development Index1, issued by A.T. Kearney, indicated that gross domestic product of the Middle East will continue growing, which will bolster consumer confidence. Further, upcoming monumental events, such as Expo2020 in Dubai and Football World Cup 2022 in Qatar, will have a positive impact on the retail sector. There are other factors which will boost the growth of the retail sector, such as the construction boom in the region supported by significant national investments in infrastructure.

The expansion in retail stores operating under international or local trademarks will increase the potential business risks and force companies to draw up policies and action plans to curb such risks. Furthermore, the role of the internal auditor has become pivotal to evaluating the effectiveness of policies and procedures; and informing senior management of any improvements that may assist in achieving the objectives of the company.

The proper management of business risks at retail stores boosts competitiveness. The senior management team should view risk management a means to assist in making decisions concerning the company’s investments and its sustainability thereof. Accordingly, we have to review the most critical risks faced by retail stores, the auditor’s role, and the sufficiency of internal controls to address such risks.

 

1.   A Decline in Consumer Spending

The decline in consumer spending is the greatest danger facing retail stores, as it has a material impact on cash flows, which in turn affects the day-to-day operations relating to purchases from suppliers and meeting the daily obligations of the company. Consumer spending is affected by a host of factors that the company cannot easily control, such as local and international economic factors and the price of oil.

The role of the internal auditor should be to ensure that the company:

  • Takes proper procedures to monitor and consider the impact of the changes in economic indicators such as government spending, oil prices, and unemployment;
  • Monitors a consumer confidence index designed to measure consumer optimism on market conditions, and constitutes a tool for predicting consumer behavior;
  • Adopts a proper strategy to increase consumer spending; and
  • Monitors daily sales and considers the consequences of any decrease in these sales.

 

2.   Reputation Risks

The retail sector is characterized by direct contact with consumers and the worse problems for retail stores if when customers stop buying from these stores or view them negatively. Further, reputation risks have increased due to social media and the internet. Accordingly, any shortcomings in consumer satisfaction may quickly impact a store’s reputation and hence its revenue.

The role of the internal auditor should be to ensure that the company:

  • Conducts periodic consumers satisfaction surveys and formulates surveys to predict customer needs and expectations;
  • Adopts a consumer relation management system to deal with any complaints and reply to any inquiries;
  • Analyzes mystery shopper results to measure the quality of the rendered services as well as the quality of the employee-consumer relation;
  • Provides proper training to employees; and
  • Draws up a policy for dealing with social media with swift replies to any negative comments affecting the stores or products.

 

3.   Intense Competition

Retail business is known for intense competition due to limited barriers to entry. An increase in competition may hinder revenue growth. Competition through product price reduction is a major factor in consumer purchasing decisions.

The role of the internal auditor should be to ensure that the company:

  • Determines its competitors and periodically monitors product prices in the market;
  • Uses the concept of loyalty cards which helps in consumer analysis as well as predicting the products that satisfy consumer expectations;
  • Adopts a product pricing strategy by understanding consumer behavior and the manner by which they make purchasing decisions; and
  • Works out a plan for sales increase by taking advantage of sporting events, beginning of the school year, and holidays.

 

4.   Supply Chain Failure

Lack of goods to display is a sensitive issue for day-to-day operations and can result from a failure in the supply chain.

The role of the internal auditor should be to ensure that the company:

  • Qualifies more than one supplier without depending on a specific supplier;
  • Uses proper forecasting of sales;
  • Adopts stock management policy;
  • Controls the stock periodically and maintains reasonable levels. This ensures smooth store operation without facing any product shortage; and
  • Adopts an automated system to review the level of available stock in the stores to meet any increase in the sales of a specific product as well as securing direct supply to the stores.

 

5.   Online Shopping

Online shopping is one of the emerging risks that may increase due technological developments. A recent study issued by PricewaterhouseCoopers2 in early 2015 showed that online shopping is expanding at the expense of traditional retail stores. The study indicated that smart phones play a pivotal role in the online shopping boom, as 17% of the respondents shop weekly online whilst 28% prefer traditional retail stores.

The role of the internal auditor should be to ensure that the company:

  • Adopts creative ways to encourage consumers to visit their stores;
  • Develops a website displaying the its goods and promotions;
  • Allows for shopping via e-mail; and
  • Reviews marketing studies relating to online shopping trends in order for the company to develop proper plans for addressing the same.

 

6.   Failure to Comply with Laws and Legislation

Failure to maintain the validity of agreements and licenses (lease agreements, business license, advertising license, etc.) may cause the retail stores to face closure, incur financial losses or pay penalties. This would also impact the Company’s reputation. Some activities necessitate certain licenses, such as professional practice for employees in pharmacies as well as obtaining health certificates for laborers in restaurants.

The role of the internal auditor should be to ensure that the company:

  • Adopts procedures for identifying and complying with any changes made to laws and legislations;
  • Adopts procedures for following up on the terms of agreements and licenses; and
  • Fixes a time period for initiating the action required for renewing agreements and licenses prior to expiry.

 

7.   Fraud and Theft

Fraud risk arises when customers pay using counterfeit money or credit cards, and employees manipulate discounts granted to them to sell goods at a cheaper price. Further, direct thefts from retail stores either by customers (stealing goods) or by store employees (stealing goods or money) occurs very often.

The role of the internal auditor should be to ensure that the company:

  • Uses money counting equipment and counterfeit detectors;
  • Controls credit card transactions on a daily basis.
  • Develops a clear policy on employee discounts, including a maximum amount of the discount granted to each employee, and develops a periodic report on the same;
  • Hires security employees at stores containing high value goods, and insures goods against theft; and
  • Carries out a daily inventory of cash registers and compares cash with the total sale movements.

 

8.   Improper Storage of Goods

Goods are sometimes stored in an improper manner. They may be stacked without any consideration of the safety factors inside the stores. Thus, it becomes very difficult to deal with any fire or emergency. It is also necessary to comply with the requirements of goods storage to avoid any damage thereto in the same manner adopted for handling medicine and foodstuffs requiring storage in an environment at a specific temperature.

The role of the internal auditor should be to ensure that the company:

  • Develops procedures for storing goods in compliance with the safety conditions;
  • Periodically reviews storage conditions for each type of good; and
  • Secures goods against fire and maintains a valid insurance policy.

 

Conclusion

The retail store business is vulnerable to several risks that should addressed in order to avoid potential losses. The importance of the internal auditor’s role is to ensure the sufficiency and effectiveness of policies and procedures established to mitigate such risks. The development of a risk based audit plan helps the internal auditor to cover the high risks affecting retail stores, and evaluate the established controls to adequately address such risks.

References:

  1. http://www.atkearney.com/consumer-products-retail/global-retail-development-index
  2. http://www.pwc.com/gx/en/retail-consumer/retail-consumer-publications/global-multi-channel-consumer-survey/assets/pdf/total-retail-2015.pdf

 


 

MOHAMMED JALLAD, CIDA, CFC is an audit and accounting professional who works at a leading institution in Kuwait.