communicating risk information: the issue of risk disclosure professor philip linsley the university...
TRANSCRIPT
Communicating risk information:
The issue of risk disclosure
Professor Philip Linsley
The University of York
Session outline
• PART 1:– An introduction to how risk ideas have
developed in recent years
• PART 2:– The development of the idea of risk disclosure
ideas
Developing risk ideas
1980s 1990s 2000s
Risk must be controlled
Then value at risk (VaR)
develops (banks)
We need to decide on the bank’s risk appetite
Enterprise wide risk
management
(ERM)
Risk has a positive side
Non-financial firms appoint risk officers
Risk becomes connected to governance
(and financial reporting)
And then the banking crisis
happens 2007 ….
The rise of a risk management industry
ConsultingProfessional
risk management organizations
Risk management standards AS/NZS 4360: 1995
AS/NZS 4360: 2004
AS/NZS ISO 31000: 2009
Remember also
…. This is just considering risk in a corporate
context
Risk has become an important issue in other
areas …
Some important approaches to risk
Approach Based upon work by:
Risk Society Beck
Cultural Theory Douglas
Governmentality Foucault
Psychometric Slovic
Accounting & Risk
Accounting
Internal to a company
External to a company
Financial accountant
Management accountant
Internal auditor External auditor Other advice
disclosure
Risk & business
RISK IS IMPORTANT IN BUSINESS
Volatile environment
Essence of business
Risk management developments
BUT
INVESTORS & OTHER STAKEHOLDERS HAVE LIMITED RISK KNOWLEDGE
Institute of Chartered Accountants in England & Wales (ICAEW)
Financial Reporting of Risk – Proposals for a Statement of Business Risk
(1998)
Accounts – complex – little on risk
Corporate Governance CodeONLY REQUIRED
Annual review of internal control systems to be reported to shareholders
ICAEW ARGUED:OVERALL NEED FOR COHERENT VIEW OF RISK
UK quoted companies should report on their overall risk position
1. Identify & prioritise risks
2. Describe actions taken to manage risk
3. Identify how risk can be measured
Subsequent ICAEW Proposals
No Surprises: The case for better risk reporting
(1999)
No Surprises: Working for better risk reporting
(2002)
But what are the problems in disclosing risk?
ONE PROBLEM
Would it be better to disclose past risk information or forward-looking (future) risk information?
But issues arise when you ask directors to disclose forward-looking (future) risk information
Inherently uncertain
Stakeholders relying on the information
Safe harbour provision
ANOTHER PROBLEM
What about commercially sensitive risk information?
But issues arise when you allow directors to exclude commercially sensitive risk information?
Omissions imply whole risk picture unknown
Some directors may declare all risk information is sensitive
‘Boilerplate’ arises
ANOTHER PROBLEM
Should you allow directors to voluntarily disclose risk information?
Why would directors disclose risk information voluntarily?
Benefits for stakeholders & companyEncourages better risk management
Cost of capital reduction
Why would directors disclose risk information voluntarily?
Agency theory Jensen & Meckling (1976)
Signalling theorySpence (1973)
TWO MORE PROBLEMS
Would it be better to disclose risk information that is quantified or not?
Is the annual report the best place to disclose risk?
Risk disclosure requirements in different countries
USA
Item 1A of annual 10-K filing requires disclosure of risk factors
• Obesity concerns may reduce demand for some of our products
• Adverse weather conditions could reduce the demand for some of our products
• Increased competition in the marketplace could hurt our business
• If we do not anticipate evolving consumer preferences our business could suffer
UK
Section 417 of the Companies Act 2006 requires description of principal
risks and uncertainties in annual report
Germany
Companies required to describe material risks and opportunities
NOTE
1.There have been a number of reports
addressing this issue directly and indirectly
2. Financial firm’s risk disclosures are much more
complex