RISK REPORTING

         

The Issues Involved In Risk Reporting

The Issues Involved In Risk Reporting

Introduction

In recent decades, firms have reported a growing volume of information about the risks they face. The information has appeared in both their financial and non-financial reporting, and much of it has been in response to new disclosure requirements (Finucane, 2000, 1-17). Unfortunately the evidence on how useful this has been is mixed and a note of disappointment among those who have reviewed qualitative risk reporting in practice is common, though not universal. Various studies on the quality and usefulness of risk reporting are briefly summarised in Panel 2.1 (Finucane, 2000, 1-17). Firms' financial reporting as a whole - although it is not usually regarded as risk reporting - is also relevant to the assessment of risk in the sense of:

variability of returns to investors. As we noted in Chapter 1, people sometimes regard risk as

variability around an outcome; and

probability of default.

Performance Discussion as Risk Disclosure

ICAEW's No Surprises argued that discussion of past performance gives information about future risks and opportunities, and it identified and listed the implicit risk disclosures in five companies' annual reports. On this view, every identified cause of good or bad past performance is potentially a risk disclosure. Whatever factor has caused the good or bad performance in the past may or not be present in the future, and it therefore constitutes a risk that may affect future performance. On this view, much disclosure on risk is likely to appear outside what is labelled as risk reporting (Rabin, 2001, 219-232).

Different researchers define 'risk' disclosures in different ways. Some of them take the same view as No Surprises. One paper that defines risk disclosures in this way18 gives the following two examples (among others), both from FTSE 100 companies, of what it regards as risk disclosures:

'With over half our profits generated in the US, the dollar exchange rate is important - the 4% average strengthening of the dollar gave a £5m benefit on translation.'

'A combination of customer delays on existing programmes such as the C130J and C27J and the start-up of a number of new programmes such as the AS900 business/regional propulsion system led to manufacturing inefficiencies particularly at the Cowes site on the Isle of Wight. (Mentzer, 2001, 102-133)'

The first of these disclosures is a risk disclosure because it indicates that future results could be affected, either positively or negatively, by changes in the dollar exchange rate. The second is a risk disclosure because it indicates that future results could be affected, apparently only negatively judging from the information given, by future customer delays and by future start-ups of new programmes.

Research on the usefulness of the MD&A and similar forms of reporting therefore needs to be added to our review of risk reporting studies (Kitzinger, 2009, 55-69). Two papers on MD&A reporting in the US and one on MD&A reporting in Canada find evidence that it may be useful.19 One of these papers does not attempt to analyse which components of MD&A disclosures are ...