ASSIGNMENT

Assignment

Abstract

This paper reviews and discusses the main argument of the paper 'Risk management versus operational action: Basel II in a Swedish context' by Gunnar Wahlström in relation to control and accountability. It also discusses the role of accountants and accounting practices in managing contemporary organisations.

Main Arguments

Accounting risks are a “hot” issue in the world of practice. The Basel Committee has issued a new capital accord and in this accord operational risk is singled out for particular emphasis. The new accord will form a cornerstone in the creation of a climate of stability for financial systems around the world (Danielsson et al., 2002a). The new accord is risk-sensitive, meaning that banks' own internal methodologies are emphasised more than before to compute minimum capital requirements, which will be their buffer in the event of a financial crisis (Basel Committee on Banking Supervision, 2001c and Basel Committee on Banking Supervision, 2001d). As will be demonstrated in the literature review, not much is known today about bank managers' perceptions of risk and the likely effects of the new accord. It is also worth noting that a number of researchers have specifically called for empirically based studies on perceptions on risk in practice (Hodder et al., 2001, Hopwood, 2000, Ryan, 1997 and Schrand and Elliott, 1998).

From a theoretical point of view, the main proposal of the new accord is that operational risk should be measured using statistical models, and, in particular, using the VaR (Basel Committee on Banking Supervision, 1996, Danielsson, 2002, Danielsson et al., 2002a and Szegö, 2002). Consequently, statistical risk modelling, such as VaR, is expected to create stability in financial systems. However, like all statistical models, the VaR and similar models are based on assumptions. If the regulations that are applied are based on theories that are built on assumptions, they ought to describe reality. Statistical risk modelling and VaR have been criticised as being problematic to use in practice7 (AAA, 1977, Basak and Shapiro, 2001, Blum, 1999, Crockett, 2000 and Danielsson, 2002; Danielsson et al., 2001, 2004; Danielsson and Zigrand, 2001, Fama, 1998, Fama and French, 1992, Morris and Shin, 1999, Persuad, 2000 and Szegö, 2002).

Importantly, as stipulated in the new accord, banks will be obliged to publicly report on operational risk (Basel Committee on Banking Supervision, 2001b). In essence, all banks have to provide a quantified figure for their estimated operational risk. More specific disclosure requirements are outlined in Appendix B. The supervisory authorities have recognised that banks are somewhat less than enthusiastic about these regulations (Meyer, 2000), although it is claimed that the cost of disclosing the information can be regarded as relatively small (Basel Committee on Banking Supervision, 2001b).

The disclosure rules in the new capital accord do not stand in conflict with accounting standards issued by the IASB or FASB (Basel Committee on Banking Supervision, 2001b; BIS 73rd Annual Report, 2003) although the accord in fact regulates disclosure of operational risk in annual reports.

The stability of global financial markets rests on the capital accord issued by the Basel ...