Q. Discuss critically the issues involved in Risk Reporting?
Risk reporting is the process of distributing information in regards to risk to the internal and external stakeholders, focusing on the disclosure of risk information. Corporate risk reporting plays an important role for the stakeholders in assessing the risk profile of the company. Helping them to better understand and align the risk profile with their holdings (Berg, 2010). Rules on risk disclosure in the company reports are designed in order to improve transparency and reduce market disorientation. Thereby improving the market efficiency of the capital markets. With the financial crises main focus of attention is directed at the importance and issue relating to risk reporting (Abraham and Marson 2012)
Risk is driven by internal and external factors and is viewed by ASB and ICAEW as an uncertainty on the amounts of benefits that includes both gains and exposures to loss. According to Beretta and Bozzalon (2004), risk disclosures are the consequences to the explanation that communication of factors has a potential to affect expected results (Abraham and Marson 2012) So in order to understand what disclosure information is required for risk reporting, it is important to understand what kind of risk is affecting the organisation. The main goal of having financial instruments is to make profits and prevent losses; there is always uncertainty on whether this goal is achieved (Sutton, 2004). This uncertainty can be divided to three main categories: credit risk, liquidity risk and market risk that looks into currency risks, interest rate risks and other price risks. The main reason for risk reporting is due to agency theory, information asymmetry, information risk, signalling perspective, modern portfolio theory and political cost issues. Due to these aspects and position the information that banks have and users of the annual report differ (Sutton, 2004). To reduce this issue disclosing information is important to reduce the information asymmetry and reduce cost of capital.
Importance of Risk Reporting
Risk reporting is an important tool organisations use for risk management, making sure the risk is identified and solve the issues relating to risk as they arise or before they are realized. Effective risk reporting focuses on how risk activities can affect the organization and individual in the profile (Abraham, and Marson 2012). It also makes sure that risk management is included in the leadership and decision making of the organization, making sure an oversight is provided on the business operations. Another important aspect of risk reporting is it helps in providing transparency over the important areas of the operations creating a continuous improvement, as areas of concern are highlighted and the organization can resolve the issues faster. Another important aspect of risk reporting is it provides assurance to the regulators, management and the board as the...