Actually this post is a follow up on the last one on IFRS challenges - as it is about risk It tagged it with the #RiskTalk series.The second big area for erroneous reporting is in the area of risks reported publically and guidance given on forecasts. Already in 2009 the FREP stated that there is an increased reluctance by the issuing companies to report on concrete risks affecting there business. Even more forecasts tend to be very optimistic to avoid write-offs of goodwill due to the financial crisis - if not partially omitted at all.
Actually this is not surprising. Information in the financial statements are treated like statements in press releases. As nobody knows for sure how the publicity reacts it is assumed that every information given needs to be sold as positively as possible. That clashes very naturally when giving out information on risk.
Everybody reading financial reports knows that the bulk of risk information given is general information related to any business of the level of warnings written on a pack of toothpicks "Danger of pricking!" or on a coffee-to-go "Hot means that you may burn yourself!". As the rules for giving and distributing this information are increasingly strict everybody tries to stay on safe ground here. As for reading letters of reference specific expertise is needed to read between the lines to find the occasional information nugget. My personal take on this is that this is not helping at all - hours are spent on preparing and formulating those statements and high-paid analysts then have to read "we have currency risk" or "the markets may decrease".
It has to be stated that risk management is very often not treated rationally. We mostly do it because we have to but we actually do not like it. Very often those looking at the risk side of something are treated as pessimists or doomsayers, at the same time risk is ignored instead of being consciously treated. On the other side we have often risk specialists who overdo by trying to calculate and project risk to a level of detail that doesn't help or even reflect the input parameters accuracy.
When inquiring information on the risks of something I ask for clear statements: What could happen that affects our plans? How probable is it? What could be the damage? What are the measures taken to make that risk bearable?
The only time I get nervous is when the last question is not answered to satisfaction. And I believe that this is the same with analysts or shareholders - we should give it a try to give them less but better information on the risks of the business they invest in. Name the risk and state the measures in response - that will give them the chance to decide if and how to invest with much more confidence. I am fully aware that this kind of information needs to be treated cautiously. But not in such a way that the FREP has to state "..., our examinations in this area revealed an increasing reluctance of companies to specify the concrete risks that make it possible for investors to obtain an appropriate picture of the risks associated with future development of the group of companies."
If you agree or feel that I am to harsh on this - I'd appreciate your comments and ideas on this!