Enterprises Should Not Expect Much from Risk Reporting

In the aftermath of the global financial crisis, there have been many calls for improved risk reporting; by banks in particular but also by business in general. The hope is that this will make future crises less likely.

 

The report follows from ICAEW’s 2010 report “Audit of Banks: Lessons from the Crisis,” which identified potential ways of improving the way banks present risk. It explores current risk reporting across various sectors in different countries and identifies challenges faced when reporting risk. It also highlights the subjective nature of risk, and warns risk report users not to expect miracles.

 

 Robert Hodgkinson said: “There is scope to enhance risk reporting, but it is important to appreciate that risk reporting in itself creates risks and is, therefore, seen as a risk management exercise. Risk reporting requirements vary greatly from country to country but there are some common principles that could enhance this type of reporting around the world.”

 

ICAEW’s report sets out seven principles to help improve risk reporting. These are: providing information that allows users to make their own assessment of risk; focusing on quantitative information rather than long, descriptive risk lists; integrating information on risk with other disclosures; thinking beyond the annual reporting cycle and updating information on changes in key risks more than once a year; keeping lists of principal risks short to make it less likely they will be ignored; highlighting current concerns; and reviewing experience of risk in the current period.

 

Hodgkinson continued: “There are a number of ways that risk reporting can be improved and made more objective and useful. The danger is that people expect it to foretell impending events. Risk relates to an uncertain future, and some risks will always seem more important – and more likely – to one person than to another.

 

“Unforeseen problems do not necessarily mean that the risk assessment was wrong. With the benefit of hindsight, people wonder why firms failed to foresee a problem, and can forget that the future is always full of unknowns, including ‘unknown unknowns’.”