Better risk reporting can contribute to greater financial stability, but can never prevent business failure, according to the Institute of Chartered Accountants in England and Wales (ICAEW).
In a new report entitled Reporting Business Risks: Meeting Expectations, ICAEW sets out concrete recommendations for improving risk reporting while also warning against unrealistic expectations as to what it can achieve.
ICAEW’s report sets out seven principles to help improving 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.
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 on 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 on risk. It also highlights the subjective nature of risk, and warns risk report users not to expect miracles.
Robert Hodgkinson, ICAEW executive director, 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.”
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.”