By Mark Vaessen, Global IFRS Leader at KPMG
The balancing of risk and opportunity lies at the heart of corporate reporting. Indeed, in the financial crisis that began in 2008, we lacked insights into the risks that were building up. Admittedly, there were already warning signs to be found in corporate financial statements prior to 2008, if people had looked hard enough. But clearly more needs to be done by preparers to explain to investors the risks companies face and how they are dealing with them.
This is especially true for financial institutions that were at the heart of the crisis. For the financial sector, perhaps there needs to be a forum where banks feel safe to talk to investors to find out what they are worried about and then provide them with the appropriate information.
Safety is not just an issue for bank executives; if corporate risk reporting is to go beyond the boiler plate and include a thorough discussion of the topic, companies may need safe harbors in the laws of various jurisdictions that provide some protection for companies from litigation.
In any case, the key for investors is not just to understand a company’s exposure to risk, but to hear an explanation of what is being done about it, and this boils down to strategy. In fact, investors may tolerate a higher level of risk if they believe it is accompanied by greater opportunities.
On this point, the debate is likely to be: how can companies provide more information about risk without engendering more risk (legal and otherwise) by doing so?