Risk Reporting and Risk Management in Companies

Introduction

Risk reporting and risk management are very important in the life of organizations. There are various risk-reporting practices used by organizations that ignore adequate risk disclosures in annual reports and much of it depends on the sizes of the companies (Abraham, Marston & Darby 2012, p. 16-75). Another factor, which influences risk disclosure of companies depends on the environmental risks within their operations. There is a number of risk information concealed by companies such as those related to monetary assessments, but there is a willingness for disclosure of such risk information. Generally, the existing dominance in the risk management policies and the gap in the risk reports present a gap in risk information provided by companies and that makes it difficult for stakeholders to make adequate assessments on risk profiles of the companies of their interest (Linsley & Shrives 2006, p. 387-404).

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Literature review

The amount of risk information contained in the corporate annual reports has a negative relationship in long-term institutional share ownership (Linsley & Shrives 2006). This leaves investors with interest in firms having low-risk disclosures. Other determinants of risk information are governors, which receive influence from the varying responsibilities of the board of directors, and this depends on the executive and independent directors directly related to the risk information reporting process with no influence from dependent and non-executive directors. The form of reporting regulation determines risk reporting patterns and the information, which the annual reports contain (Abraham & Cox 2007, p. 227-248). The pattern of risk reporting in most countries and companies is consistent on financial categories and contains very little forward-looking and quantitative disclosure.

There is dominance in U.S countries with German firms coming second with risk reporting variation only having a partial relationship to domestic risk regulation for disclosure (Dobler, Lajili, Zeghal 2011, p.1-22). Nonetheless, there is an improvement in narrative reporting with reports on various market aspects with information of stakeholders and investors incorporated into the reports. Further, as (Campbell, Slack 2008, p. 56-70) asserted, the increase in the complexity of information in the risk reports voluntarily reported is responsible for the changes in narrative reporting. The importance of sufficiency in risk reporting helps investors in the evaluation of company risk profiles and gauging the suitability to their risk tolerance (Abraham, Marston & Darby 2012, p. 16-75).

Hypotheses

The level of readability of risk disclosure in reports is still very low in many companies. This is in support of findings in past research that there is significant difficulty in the readability of risk disclosure leading to minimal risk disclosure passages in annual reports of most companies (Dobler, Lajili, Zeghal 2011, p.1-22). No direct evidence exists in support of claims that there is voluntary information regarding news of bad risks in their companies. Several calls are for the presentation of adequate information regarding readability and understandability of risk information within company annual reports. It is necessitated by the need for investors and stakeholders to have a full understanding of the risk positions of the companies of affiliation. However, there are reports of an increase in risk disclosure within reports with clear indications of company risk positions. The readability of risk reports is essential for observation by company managers for support of risk information through enhancement of risk communication (Linsley & Shrives 2006). It, therefore, stays that the understanding of the implications caused by lack of disclosure and obfuscation makes it clearly understood by companies that clarity of risk position is an essential requirement for observation by company managers. The information is important to the market place and absolute transparency must prevail in reports containing risk information through clarity. There are calls for practical improvement of risk reporting with professional bodies keen on ensuring that companies understand the need for being clear about their risk positions (Abraham, Marston & Darby 2012, p. 16-75).

Through the recent interest in risk reporting by firms, the improvement of risk reporting practices is helpful in bridging the gap caused by the lack of risk disclosure. There is a significant gap in the nature of risk disclosure by companies with most companies concealing any monetary-related risks. There is incoherence in risk information in annual reports and that lack within the risk narratives is a consequent implication for the inability of stakeholders’ evaluation of company risk profiles. There is a tendency for most companies to conceal the true information of the risks within their companies. Companies keep important risk information from the public eye making the reports within their annual reports insufficient for making any relevant conclusions and analysis of the risk positions of the companies (Dobler, Lajili, Zeghal 2011, p.1-22). Generalization of risk information is insufficient for the maintenance of risk policy requirements since it leaves out vital information that investors and stakeholders require for evaluating the risk capacities in companies they already deal with or intend to make investments in the market.

The reason for minimal risk reporting has large blame on the lack of information for directors and company managers to understand the importance of maintaining clarity in risk reporting within their annual reports. This lack of information has a wide misunderstanding about the intentions of managers disregarding disclosure. For this reason, many are the instances such as in the UK making risk disclosure a mandatory legislative requirement by companies (Dobler, Lajili, Zeghal 2011, p.1-22). The legislation forces companies to disclose their risk information, especially in instances when management fails to disclose such information required by investors and stakeholders voluntarily (Linsley & Shrives 2006). Risk disclosure is the only means through, which there can be avoidance of the recent accounting scandals through the link of transparency and risk management. Transparency in risk reporting encourages integrity and clarity in financial markets. This helps in the maintenance of quality, strategizing of a mitigation process, and the achievement of financial and non-financial targets of performance for the continued and improved building of competitive advantage (Abraham, Marston & Darby 2012, p. 16-75).

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Research method

The research method used for this study will be interviewing investment analysts and preparers of annual reports. There will also be an analysis of annual reports of 5 companies. There will be confidentially semi-structured interviews with report preparers and investment analysts within the period of June 2011 and January 2012. Through the guidance of the literature review, there will be a questionnaire with open-ended questions (Abraham, Marston & Darby 2012, p. 16-75). There will be 10 buy-sides, 5 sell sides, and 15 analysts. Interviews with preparers will have ten FTSE-100companies, 3 FTSE-250 and a company in the AIM listings. Letters of request for participation and sample questions will be sent to participants in advance. All interviews will be in the presence of at least one researcher for recordings that will be later transcribed and analyzed for coding (Linsley and Shrives 2006).

Result method

Information for analysis is necessarily recorded from various sources for the sake of ensuring accuracy in the credit reports. The sources used are mainly result in announcements and management for accurate information, though internet bulletins and news channels with financial information can also play some role in the provision of information relevant to risk analysis. The highly ranked source of information is from meetings with company management as it is during the process of announcements or soon after. These meetings provide room for gaining ample information received from other complementary sources, which give little information regarding strategies and associated risks. On the other hand, annual reports give room for analysis of trends used to understand the associated risks and operating performances useful for first-time assessment of an investment (Linsley & Shrives 2006).

The information that company annual reports contain relates to company sizes and is based on strategic and financial risks while others focus on empowerment through management remuneration sub-categories. In annual reports, there is very little historical information on economic and performance circles and targets. Through analysis of narrative information, minimal reports exist on monetary matters as compared to non-monetary issues. The reports dwell much on neutral and good news with little focus on damaging information. Most companies provide clear risk factor statements in their annual reports. Most of the risks are provided in generality without any focus on risk rankings with very few companies making any focus on the provision of risk mitigation information (Abraham, Marston & Darby 2012, p. 16-75).

Apparently, the reason for segmental disclosure of risk reports by most companies results from the fear of disclosing information to competitors. This bars disclosure because companies dislike disclosing principles-based regulations and facts that may damage the reputation of their companies. it is also apparent that lack of disclosure results from the fact that top managers like remaining aggressive and any revelation of risk factors impinge on that position leaving them with the only option of concealing any information of failures within their companies.

There exist mixed feelings regarding the factors that influence information disclosure regarding risks. The regulations are given regarding risk reporting influence the decision of giving minimal or extensive risk disclosure within annual reports. However, it is common that most companies only provide minimal risk information because of influences of commercial sensitivity. In the annual reports, there is no need for disclosure of debt covenants and banks ensure confidentiality, which prevents report preparers from making publications of debt covenants and making the information accessible to competitors (Berríos 2013, p. 105-118). Another fact is that the complexity of loans agreements does not allow for effective summarization for inclusion with the annual reports. The remuneration of management is extensively included in the annual reports and this is an aspect present in most company reports. However, it is too general and calls for comprehensive reporting disclosure of the organization’s incentives such as internal controls for the prevention of rogue trading. There is a better explanation and understanding of these as Linsley & Shrives (2006) assert, using signaling theory, agency theory, proprietary cost theory and legitimacy theory regarding disclosures of risk as well as non-disclosure.

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Conclusion

A couple of companies recognize the importance of the provision of clear layouts of the risk factors they face and possible means of mitigation clearly marked as risk, impact and mitigation within the risk reports. It is also important for companies to respect requests from FRC for the provision of strategies for mitigating risks as a sign of adherence to best practice needs. It is under the disposal of every company to identify the importance of risks by providing them within the risk reports (Abraham, Marston & Darby 2012, p. 16-75).

References

Abraham, S., Cox., P., 2007. Analyzing the determinants of narrative risk information in UK FTSE 100 Annual Reports. The British Accounting Review 39, 227-248.

Abraham, S., Marston, C and Darby, P. (2012). Risk reporting: Clarity, relevance and location. Institute of Chartered Accounting Of Scotland. pp. 16-75

Berríos, MR 2013, ‘The Relationship Between Bank Credit Risk And Profitability And Liquidity’, International Journal Of Business & Finance Research (IJBFR), 7, 3, pp. 105-118, Business Source Complete, EBSCOhost.

Campbell, D., Slack, R. (2008), Narrative Reporting. Analysts perceptions of its value and relevance. Web.

Dobler, M., Lajili, K., Zeghal, D. (2011). Attributes of corporate risk disclosure. An international investigation in the manufacturing sector. Journal of International Accounting Research. Vol. 10, No.2, pp.1-22.

Linsley, P.M., Shrives, P.J. (2006), ‘Risk reporting: A study of risk disclosures in the annual reports of UK companies’, British Accounting Review, 38(1) pp.387-404.

Linsley, P.M., Shrives, P.J. (2006), ‘Risk reporting: A study of risk disclosures in the annual reports of UK companies’, British Accounting Review, 38(1) pp.387-404.

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