The following is an excerpt from a newspaper report of July 21, 2010 appearing in the UK Daily Telegraph. Troubled housing group Con naught has been driven deeper into crisis after it discovered a senior executive sold hundreds of thousands of pounds worth of shares ahead of last month's shock profit warning. The company which lost more than 60% of its value in just three trading days in June, and saw its chief executive and finance

director resign, has launched an internal investigation into the breach of city rules.

Selling shares with insider information when a company is about to disclose a price-sensitive statement is a clear breach of FSA rules. Con naught, which specializes in repairing and maintaining low cost (government owned) housing, has fallen a total of 68% since it gave a warning that a number of public sector clients had postponed capital expenditure, which would result in an 80 million pound fall in expected revenue this year.

The group said that it had been hit by deferred local authority contracts which would knock 13m pounds off this year's profits and 16m pounds from next year's. It also scaled back the size of its order book from the 2.9 billion pounds it said it was worth in April to 2.5 billion. The profit warning also sparked renewed concerns about how Con naught accounts for its long-term repair and maintenance contracts.

Concerns first surfaced late last year with city analysts questioning whether the company was being prudent when recognizing the revenue from, and costs of, its long term contracts.

The company vehemently defended its accounting practices at the time and continues to do so. Chairman Sir Roy Gardner has tried to steady the company since his arrival earlier this year.'

(a) How would you describe the 'profits warning' risk event: is it brought about by market risk, credit risk, operational risk or business risk?

(b) From the newspaper report can you make any deductions about risk management strategies the management of the company could have taken in advance of this in order to reduce the loss to shareholders