Risk Five-year trend analysis Quality of reporting I Time • Risk is one of the areas where many companies still struggle, and failings in risk management have been highlighted by the financial crisis. • Some improvements noticeable, largely in presentation of information and accessibility. • Business and industry specific risks are still missing from a large number of reports. Leading reporters: • Acknowledge opportunities as well as threats within the report. • Identify risks specific to the company. • Clearly explain risk identification, management and mitigation processes in place. • Link between the business model and the key risks which could impact on it. • Provide insight into impacts and changes during the year. nternally, many companies acknowledge that risk is an area of business which needed addressing post-financial crisis; though an analysis of corporate disclosure indicates that this fact is perhaps not yet reflected in reporting. With the Accounting Standards Board stating that 66% of reports are ‘falling short’ in relation to the risk reporting requirements of the Companies Act 2006, it is clear that there are still some concerns over the quality of disclosure. In part, this could be due to a cautious approach on the part of companies themselves, particularly in terms of liability and saying too much. Arguably therefore, this is the area which still requires the most attention, particularly if regulators want to get to a point where Annual Reports contain a clear list of the issues which ‘keep Directors awake at night’. What’s required? Risk reporting has again attracted the attention of regulators over the past year with the Financial Reporting Council and the Financial Reporting Review Panel in particular focusing their attentions on improving the quality of disclosure. The main issues cited for this area of reporting tend to be twofold: firstly, risk factors are often too numerous to all be considered ‘principal’ and specific to the entity in question. Secondly, the linkage between strategy and the risks which could affect the achievement of this strategy is often weak, or indeed non-existent, leaving the reader to draw their own conclusions. While we await the outcome of the FRC’s recent consultation on corporate reporting and the proposals from BIS on narrative reporting, the direction of travel is already starting to become clear: companies need to think about whether all the risks reported on are indeed ‘principal’ and focus on improving the explanations about how these risks could impact the achievement of corporate objectives over the long-term. Clearly this is going to be an issue which continues to receive significant scrutiny in the wake of the financial crisis and therefore it is important that companies respond to the attention of regulators in order to avoid the potentially more onerous requirements of a US style regime. 22 © Black Sun Plc 2011 www.blacksunplc.com
