Академический Документы
Профессиональный Документы
Культура Документы
Reporting risk
About ACCA
www.accaglobal.com/ri
1. Introduction 5
6. Conclusion 14
References 15
REPORTING RISK 3
ACKNOWLEDGEMENTS
The authors would like to thank the people who took the time to take part in this research. Their wide-ranging views have been
invaluable in clarifying the risk-reporting issues that need to be addressed.
Brian Abrey, (formerly) Senior Manager (risk), Group Treasury, Old Mutual Group
Ricky Cheng, Director, Risk Advisory Services, BDO Financial Services Ltd, Hong Kong
Frank Curtiss, Head of Corporate Governance at RPMI Railpen Investments
Simon Constant-Glemas, Vice President, Corporate and UK Country Controller, Shell
Syed Faraz Anwer, Partner for Risk Advisory and Business Improvement Services, AF Ferguson, Pakistan PwC Pakistan (a PwC
network member)
Jane Fuller, founder of Fuller Analysis, Co-Director of the Centre for the Study of Financial Innovation and Chair of the
Financial Reporting and Analysis Committee of CFA UK
Paul Green, Global Head of Risk and Compliance, Unilever Group
Ewald Mller, Director, Financial Analysis at the Qatar Financial Centre Regulatory Authority
Eric Tracey, investor, GO Investment Partners.
4
1. Introduction
REPORTING RISK 5
2. Risk reporting today
6
This view is reinforced by the research Across the board, there has been a
BOX 2.1: RISK DISCLOSURES that is available. BDO in Hong Kong, for definite improvement in the level of
example, states in its 2013 Corporate information disclosed, whether this is in
The Enhanced Disclosure Task Governance Review that about one- the oil industry, the tobacco industry,
Force (2012) sets out seven third of companies listed on the Hang manufacturing or retail, Brian Abrey
principles for risk disclosures. Seng Composite Index did not disclose argued. Now the market will really push
the processes they use for identifying, the less sophisticated [in terms of risk
1. Disclosures should be clear, evaluating and managing risks. Those reporting] sectors, and they will all need
balanced and companies that did report on risk- to change in the next five to ten years.
understandable. management processes, the report
adds, often struggled to explain them There are few industries more risky than
2. Disclosures should be and merely reported a list of risks that the extractive industries companies
comprehensive and include were identified and mitigated. The firm typically work in dangerous
all the banks key activities is hopeful, though, that things will environments, often in unstable regions
and risks. improve, saying in the report that it was (geographically and politically), and are
encouraging to see that more companies subject to unpredictable commodity
3. Disclosures should present have established separate risk prices and exchange rates. Risk
relevant information. committees, rather than addressing risks reporting has always been a
through the audit committee and board. contentious subject for the extractive
4. Disclosures should reflect industries, but the explosion and
how the bank manages its The big challenge now is the mass of subsequent spillage at BPs Deepwater
risks. companies whose risk reporting is Horizon oil rig in the Gulf of Mexico in
inadequate at best, said Frank Curtiss. 2010 brought the issue sharply to the
5. Disclosures should be There are some shining examples, fore. Simon Constant-Glemas, vice
consistent over time. good reports that tell the story honestly president corporate and UK country
and in the voice of the company. The controller at Shell, said that the disaster
6. Disclosures should be trick now is to get the others up to focused everyones mind on risk and
comparable among banks. speed. risk reporting.
REPORTING RISK 7
task of helping to set up a regulatory their management, weighing up their
BOX 2.2: LEADING THE WAY system and financial reporting regime attitude and appetite towards particular
IN RISK REPORTING for Qatars fledgling financial services areas of risk.
sector. Effective risk reporting is a
Preparers and users consulted for central element of its objective. Mller Ricky Cheng of BDO said that a report
this report identified a number of says that the financial crisis was a that demonstrates how management is
companies that, in their view, catalyst for a more focused handling tough or risky scenarios will
were leading the way in risk conversation about the value of risk be valuable to investors, because
reporting. reporting in many countries. linking between company objectives
and risk factors gives investors a better
Admiral its CEO statement He conceded, however, that risk idea about how the companys
highlights the risk relating to its reporting is something that is relatively performance will be affected if
change of strategy users agreed new to companies based in Qatar and particular risks materialise.
that placing this discussion in the that there is still a lot of work to do: The
CEOs statement was right. prevalence of risk reporting has Both preparers and users, though,
increased across the Middle East in the made a distinction between the various
Aggreko this report was admired past few years, but there is a lack of audiences of a risk report. Syed Faraz
for its personal voice and broad understanding of risk reporting, Anwer, partner for risk advisory and
refreshing honesty. a lack of skills around risk reporting, and business improvement services at PwC
a lack of understanding among users Pakistan, said that while institutional
BP the way the report set out about what risk reports are meant to investors attach great importance to
the risks the company faces was convey. risk disclosures, smaller investors are
described as focused and not yet aware of the benefits. This
precise. WHAT IS THE VALUE OF RISK makes it very difficult for organisations
REPORTING? to decide how much information to
BT it was agreed that the disclose and how to disclose it. They
company gave a very good Much of the improvement in risk also have concerns about how investors
description of its business model reporting has been driven by will perceive this information.
and a good, up-to-date risk compliance, but users and preparers Sometimes they feel that if there is
section, rather than repeating were keen to stress that risk reporting more risk information, then there is a
what it had said in previous years. brought benefits not only to users but perception that there is more risk.
to the organisations themselves.
Great Portland Estates it was According to Simon Constant-Glemas The concern for many preparers is that
agreed that the company of Shell, in the past, risk management risk information will be misunderstood
explained its strategy clearly and was focused on mitigation, but today it is by some investors an issue that is
discussed each risk with helpful part of adding value to the organisation. behind many of the problems with the
cross-references to other parts of quality of risk reporting today.
the report. High-quality risk reporting increases
investor confidence, not just in terms of Paul Green of Unilever summed it up
Provident Financial it was the risks being discussed, but also in when he said: Risk is a problem child.
agreed that the company the overall quality of management, There is broad acknowledgment that it
provided a great deal of useful agreed Frank Curtiss of Railpen is a way to hold boards accountable,
and necessary detail in its report, Investments. Paul Green, global head of but there has been no immediate
including the risk committees risk and compliance at Unilever, added advancement. As a tool, risk reporting
agenda. that comprehensive but targeted risk must be seen as part of the solution.
disclosures help investors to make Investors would value a report where
comparisons between companies and executives give a good account of
between the actions and behaviours of themselves.
8
3. What is wrong with risk reporting today?
REPORTING RISK 9
4. What does a good risk report look like?
10
DO PREPARERS AGREE? Simon Constant-Glemas of Shell argued QUALITATIVE ANALYSIS OF RISKS
that while he understood investors
The preparers consulted agreed that desire for as much information as One issue raised by users was the
more detail could and should be given possible, a more considered approach quality of information provided in risk
about risk, although improving the needs to be taken. Addressing all reports, particularly details about what
quality of risk reporting is an equally possible risks in a risk report would be future risks might arise and what they
pressing issue, rather than simply counterproductive more might mean. Jane Fullers view was that
advocating more information. Im in the comprehensive risk reporting doesnt risk reports rarely get to the
camp that says listed companies should mean better risk reporting, he said. At fundamentals of what an identified risk
be more forthright than they generally Shell we employ more than 100,000 would mean in practice. BPs risk
are when it comes to risk reporting in an people in 70 countries, so any risk thats reports before the Deepwater Horizon
annual report, said Paul Green of applicable to a large multinational accident, for example, might have
Unilever. It should obviously contain a would apply to us. It is much better to talked repeatedly about safety risks, but
statement on significant activities that provide a concise overview of the key there would have been little to help
have taken place during the year, the risks inherent in the business that are analysts in terms of what a rare accident
risks that have been investigated, most likely to prevent the achievement might mean, when looking at the
reviewed or assessed beyond the of its objectives. financial impact it would have.
business as usual perspective. That
much is not contentious, but it should Along with other preparers, Constant- Fuller suggested that a more useful
also include the risk-management Glemas argued that the main purpose approach for analysts would be for a
activities for material risk in more detail. of a risk report should be to provide company to say that accidents rarely
And it should definitely include a enough information for a useful happen but if one does, it will be very
forward view. conversation about risk between expensive for us and this is how we
would mitigate the impact. Or a
pharmaceutical company could disclose
It is easy to say what risks have been dealt with its general risk of litigation and say that,
in the immediate past, it is less easy to do so while it happens [only] on rare
occasions, if it does happen the cost is
looking to the future without painting a bland, considerable, perhaps illustrating this
by disclosing the biggest litigation
uninformative picture. It is a delicate balancing act. payouts in the sector in the past.
REPORTING RISK 11
Simon Constant-Glemas of Shell said in the balance sheet and notes to keep secret. Its precisely because it is
that difficult conversations about Black accounts. The feedback to the proposal sensitive that something should be
Swan events do take place within showed that investors would value the reported to shareholders.
companies or at least, they should. I use of the confidence accounting
strongly believe that a thorough approach by audit committees, when Preparers with a strong record in risk
consideration of everything that could they are considering critical accounting reporting say that it is possible to
possibly go wrong is an important part judgements and assumptions as part of produce a useful risk report without
of good risk management, even if the the fair, balanced and understandable disclosing sensitive information. Simon
full details are not disclosed publicly, requirement. Constant-Glemas of Shell said he did
he said. But I do wonder if enough not think that competitive advantage
thinking goes on around rare events I RISK REPORTING AND SENSITIVE was an issue: You can strike a balance
suspect that not enough people INFORMATION between referencing risk and not giving
considered the probability of the entire away critical information. The vast
inter-bank lending system grinding to a There is clearly a gap between what majority of the time some information
halt overnight before the financial crisis investors want from a risk report and will be in the public domain already and
happened. what companies believe is appropriate so, if necessary, a more generic
to disclose. Many companies argue that reference can be made.
Disclosing the details of this providing any more detail than they
conversation in a risk report, though, is currently do would require them to Paul Green of Unilever suggested that
another thing altogether, said disclose commercially sensitive regulatory intervention might be
Constant-Glemas. The biggest worry is information. needed to stimulate more comparable
that highlighting the possibility of levels of disclosure by companies. We
events and quantifying the financial This argument is not popular with users. might not want to talk too much about
impact could frighten investors, but he I think its used too much as an excuse the risk conversation that goes on
also had concerns about whether a and it tends to infantilise the role of inside the boardroom, but every
quantitative estimate would be investors, said Jane Fuller. Theyre business has plenty of data about risks
meaningful: The nature of Black Swan effectively saying that they dont want that have happened. I think it would be
events means that it is difficult to think to frighten the horses. Eric Tracey said a big step forward to force companies
about what the impact of an event he was not impressed when commercial to disclose all of this relevant risk data
could possibly be, let alone put a sensitivity was used as a barrier to risk in their annual reports in a structured,
reliable figure on it. The context of reporting: Its a fantastic smokescreen consolidated section, rather than its
probability is difficult to get across. to hide all sorts of things and I dont being lost within the report. Yes, it
give it much credence at all. You ought would be sensitive, but everyone would
There is a school of thought, though, to be able to describe your risks without be in the same boat and they would
that probability-based accounting giving away something that you should have to be transparent.
could bring significant benefits to
accounting in general. In 2012 ACCA,
along with Long Finance and the
Chartered Institute for Securities &
Investment, published a proposal
(Harris et al. 2012) on confidence
I think it would be a big step forward to force
accounting, which set out how accounts companies to disclose all of this relevant risk data
might better convey levels of
confidence in reported numbers by
in their annual reports in a structured, consolidated
taking into account the uncertainties section, rather than its being lost within the report.
inherent in many of the values reported
12
5. What is the future of risk reporting?
REPORTING RISK 13
6. Conclusion
The views of preparers, users and other the debate, engaging with companies
interested parties consulted for this and taking an interest in what they
report suggest that there is a growing report on risk. It is clear that users and
momentum behind the desire to investors find risk reporting, when done
improve risk reporting. Risk reporting is well, extremely useful; a proactive
clearly in an evolutionary stage, but the involvement in the debate by users can
sensitive nature of risk means that only encourage better practice.
preparers are still learning how best to
approach the subject. There are opportunities here, too, for
companies. Good risk reporting gives
The problem, clearly articulated by the investors confidence about the
users quoted above, is that risk company, its business model and its
reporting is too formulaic and as a management. Greater disclosure of
result provides little information of any risks is not a threat; it is a chance to
real use. There is an argument that demonstrate the strength of the
increased regulation of risk reporting companys controls and management.
would only encourage a compliance-
based approach that would exacerbate Everyone has an interest in improving
the problem of generic reports. That is risk reporting; the conversation must
why it is critical that investors and other continue.
interested stakeholders get involved in
14
References
REPORTING RISK 15
POL-AFB-RR
ACCA 29 Lincoln's Inn Fields London WC2A 3EE United Kingdom / +44 (0)20 7059 5000 / www.accaglobal.com