1.Define Risk Reporting. What are the objectives of Risk Reporting?

Answer: Risk reporting is a method of identifying risks tied to or potentially impacting an
organization's business processes. The identified risks are usually compiled into a formal risk
report, which is then delivered to an organization's senior management or to various management
teams throughout the organization.

Risk reporting is the vehicle for communicating the value that the Risk function brings to an
organisation. It allows for proactive risk management as organisations identify and escalate
issues either as they arise, or before they are realised to take a proactive approach to managing
risks. enterprise involves the risk that it will fail to achieve its objectives. The higher the risks it
faces, the higher the return it will want to justify the risks that it takes. These risks are specific to
its particular business model and its particular circumstances, but other businesses that have
similar models and are in similar circumstances are likely to face similar risks.

Objectives of Risk Reporting:

1. Reduce information asymmetry: Investors face various kinds of risk.They face at one
remove the risks that the business faces – so if the business fails, they lose their money.
From this point of view, investors need information about risk so that they can perform
their own risk assessments. They take a business’s risks into account, so far as they are
aware of them, in considering whether and on what terms to invest in it. But they also
face additional risks because in some respects they have less information about the
business than its managers do. So market valuations of a company may be unduly high
(or low), and liable to sudden corrections as risks (or opportunities) that are known to
managers become public knowledge. The greater the uncertainties that investors
themselves face because of information asymmetry, the higher the return they are likely
to demand.
2. Better disclosure about the risks faced by a business reduces information asymmetry,
and so – it is often argued – should result in a lower cost of capital for the business.
Against this, it has been argued that the disclosure of risks of which investors would
otherwise have been unaware should increase the cost of capital as it increases the
perceived level of risk associated with the business.
 3. Effective stewardship: Improved information on risk also allows investors to make
better-informed decisions as to how they will choose to influence the actions of firms’
managers and where they will put their money.
4. Growing demand: in recent decades for businesses to report more and better information
about the risks they face. The demand for better risk reporting significantly improved.
5. Qality of risk reporting and may give rise to unrealistic expectations that risk reporting
can prevent future failures. It should not be expected, though, that risk reporting could
ever provide a reliable early warning system to tell users of accounts which businesses
are most likely to fail.
6. Fill up the gap of risk reporting:The demand for risk reporting of considering risk
reporting by businesses to be primarily for the benefit of investors, who we take to
include lenders as well as equity investors. But information on risk should be useful for
other stakeholders too.

Most importantly, the report suggests directions for change so as to improve the reporting of
business risks.

2. What are the guidelines of risk disclosure as per the proposal of ICAEW in 1997?

Answer: Proposal of Guidelines from ICAW: From 1997 onwards ICAEW issued a series of
reports calling for improved risk disclosures:

• Financial Reporting of Risk: Proposals for a Statement of Business Risk (1997)

• Inside Out: Reporting on Shareholder Value (1999)

• Internal Control: Guidance for Directors on the Combined Code (1999)

• No Surprises: The Case for Better Risk Reporting (‘No Surprises’) (1999)

• No Surprises: Working for Better Risk Reporting (2002)

• Prospective Financial Information: Guidance for UK Directors (2003).

companies report their risks, the actions they take to manage them, and relevant measurements,
capital will be made available to them at the lowest possible sustainable cost. Better information
on risks reduces investors’ uncertainties, thereby reducing the premium for uncertainty in the
firm’s cost of capital. Company managements should set themselves the goal of ‘no surprises’ –
that is, to avoid surprising the capital markets.

Financial Reporting of Risk sets out proposals for a statement of business risk by listed
companies. This would identify and prioritise key risks, describe actions taken to manage each
risk, and identify how risk is measured.

Inside Out is a call for listed companies to disclose more about their strategies and value drivers,
which would include ’better information about the risks and opportunities faced by the company.

Internal Control: Guidance for Directors on the Combined Code provides guidance for
directors of listed companies on the requirements, at that time, of the Combined Code of the
Committee on Corporate Governance for boards of directors to maintain and review ‘a sound
system of internal control’, including risk management. It gives advice to directors on, among
other things, assessing the effectiveness of the company’s risk and control processes and on the
disclosures to be made in accordance with the Combined Code.

No Surprises revisits the proposals in reporting. Those seeking information relevant to assessing
a firm’s risks may therefore need to review the whole of the annual report to extract what they
are looking for.

• Companies make more extensive risk disclosures in prospectuses than they do in subsequent
annual reports. Companies are urged to achieve in annual reports the standard of risk disclosure
found in prospectuses.

• It does not matter whether or not risk information is reported in a separate statement, as long as
it is reported somewhere in the annual report.

• Companies should disclose their strategies. This provides the context that allows readers to
understand their risk disclosures. Some of the objections to a separate risk report that we noted in
No Surprises remain relevant to contemporary calls for better risk reporting.

Prospective Financial Information: Guidance for UK Directors provides guidance on the

disclosure of prospective financial information (PFI). PFI is defined as ‘primary financial
statements and elements, extracts and summaries of such statements and financial disclosures
drawn up to a date, or for a period, in the future’. PFI is therefore a specific forecast, rather than
a vague forecast that, eg, ‘profits are expected to be satisfactory’.

The report states that:

‘Published PFI should be accompanied by disclosure of the assumptions on which it is based. In

order for users to be able to evaluate these assumptions, the related risks, uncertainties and
sensitivities will also need to be disclosed in a way that makes their significance understandable
to users.’