Experts call for constant review of corporate risk practices

Risk management practices and financial reporting have been high on the corporate governance agenda since the September 11 terrorist attacks and the spate of business failures during the past year, according to speakers at a corporate governance seminar held by insurance company AIG Europe in London last week.

Chris O’Donoghue, a non-executive director at UK-based consultancy The Risk Advisory Group, said corporates must learn to review risk in new ways and accept that the unthinkable can now happen. “The model of threats is changing. We need to develop a constant reassessment of risks,” he said.

O’Donoghue cited the increasing relevance of the Turnball guidelines for directors of listed companies on internal control systems. Published in September 1999, through the Institute of Chartered Accountants, the guidelines advise on control systems for any strategic, financial or operational risks that might be significant to the business achieving its objectives.

The issue of changing regulation and disclosure was also high on the agenda. Iain Roxborough, a litigation expert at global legal firm Clifford Chance, said the Financial Services and Markets Act of 2000 means management is expected to comply with the listing rules on adequate disclosure of price-sensitive information.

The issues are also hitting home in the US. Last December, a survey by global financial services provider Andersen claimed that two thirds of senior executives at US companies were not satisfied that their company had successfully identified and managed all their significant business risks – something Andersen will be all too aware of following its embroilment in the collapse of US energy company Enron.

US regulator, the Securities Exchange Commission (SEC), the American Institute of Certified Public Accountants and the five largest accounting firms have all issued statements this year on views regarding disclosure and financial reporting. The recommendations have addressed risk factors relating to a company’s ability to continue as a going concern, liquidity and capital resources, including off-balance sheet arrangements, related-party transactions and specific financial statement risks.

SEC chief accountant Robert Herdman argued in a recent statement for better disclosure on these matters. “While existing rules mandate explanations of material uncertainties, our hope is that public companies will go beyond the minimum legal requirements and serve investors with the very best possible discussion of the company’s financial position and operating results,” he said.