Philip Linsley

Risk reporting by the largest UK companies: readability and lack of obfuscation

Purpose - The purpose of this paper is to examine risk disclosures by UK companies within their annual reports. Tests are performed to measure the level of the readability of the risk disclosures and to assess whether directors are deliberately obscuring bad risk news. Design/methodology/approach - The paper draws upon methodologies developed in prior empirical studies of annual report readability. Thus it uses the Flesch Reading Ease formula to measure the readability of the risk disclosures and coefficients of variation are used to measure obfuscation. A content analysis approach is adopted to identify risk disclosures. Findings - The paper finds that the mean Flesch reading ease ratings for the sample companies are all below 50 indicating that the level of readability of the risk disclosures is difficult or very difficult and this supports prior research examining the readability of sample passages in annual reports. No evidence is found to suggest that directors are deliberately obfuscating or concealing bad risk news through their writing style. Research limitations/implications - The paper also finds that the Flesch reading ease ratings measure the readability, not the understandability, of disclosures and whilst actions can be taken to minimise problems associated with reliability when performing content analysis they cannot be wholly eliminated. Practical implications - The paper shows that there have been calls for improved risk disclosures to enable stakeholders to better understand a companys risk position. Requiring directors to issue extra risk information will not, however, lead to enhanced risk communication unless the readability of the risk disclosures is also improved. Originality/value - In this paper it is shown that there have been no prior studies that focus upon testing for readability and obfuscation in risk disclosures. It is important that transparent risk information is provided to the marketplace and therefore this study is valuable in its examination of the clarity of communication of published risk information.

Transparency and the disclosure of risk information in the banking sector

The essence of any bank is that it is a risktaking enterprise and therefore, as a part of good corporate governance, it is expected that relevant risk-related information will be released to the marketplace. Currently, however, it is suggested that there is insufficient disclosure of risk information by banks and as a consequence Pillar 3 of Basel II lays out a comprehensive framework for risk disclosures with the intention that this will enable stakeholders to assess the risk pro.le of a bank. In addition, one outcome of the UK company law review is that there will be a requirement for all quoted companies to discuss risks and uncertainties within the annual report. This paper analyses these risk disclosure requirements while also reviewing current bank disclosure practices within the context of this risk disclosure debate. The important issues of disclosure of forward-looking risk information, location of disclosure and proprietary risk information are also discussed together with their implications for the proposed disclosure requirements.

Examining risk reporting in UK public companies

Purpose – This paper examines risk information disclosed by UK public companies within their annual reports. The types of risk information disclosed are analyzed and the authors examine whether a relationship exists between company size or level of risk and risk disclosure totals. Design/methodology/approach – No prior empirical studies of the risk information content of annual reports have been undertaken. To analyze the risk disclosures, a sentence-based approach was used. Findings – Overall the results indicate that the companies sampled are not providing a complete picture of the risks they face. There is minimal disclosure of quantified risk information and a significant proportion of risk disclosures consist of generalized statements of risk policy. More usefully directors are releasing forward-looking risk information. The principal driver affecting levels of risk disclosure is company size and not company risk level. Research limitations/implications – Further risk disclosure research is possible in many different areas. Cross-country studies could be undertaken as could risk disclosure studies within specific industry sectors. A limitation of the sentence-based methodology is that it does not measure the quality of the risk disclosures and therefore different methods may be adopted in future studies. Practical implications – Professional bodies attempting to improve risk reporting have not convinced directors of the benefits associated with greater voluntary risk disclosure. In the UK this has led to a mandatory requirement to provide better risk information being forced upon companies through legislation enacted by the UK government. Originality/value – The area this paper researches is of particular importance given recent accounting scandals that have occurred. No previous risk disclosure studies have been published, therefore this exploration is also valuable in linking risk management and transparency.

Restoring reputation and repairing legitimacy: a case study of impression management in response to a major risk event at Allied Irish Banks plc

Risk events can cause significant damage to a firms reputation and legitimacy. From the perspective of legitimacy theory, there are four broad strategies to restore reputation and repair legitimacy in response to a risk event. The annual report is a potential vehicle for communicating these strategies to the firms stakeholders and, therefore, the discretionary disclosures explaining the strategies implemented can be regarded as a means for managing reputational risk. This paper analyses annual report disclosures published in response to a major risk event at Allied Irish Banks plc. The empirical results suggest that legitimacy theory can usefully explain the disclosures. However, the findings from the case analysis also indicate that the disclosures made by Allied Irish Banks plc were not wholly effective in re-establishing legitimacy and thereby demonstrate the need for effective internal control and risk management systems that reduce the likelihood of risk events occurring in the first place.

Employing neo-Durkheimian institutional theory in cross-cultural accounting research

Purpose The purpose of this paper is to propose Neo-Durkheimian institutional theory, developed by the Durkheimian institutional theory, as developed by anthropologist Mary Douglas, as a suitable theory base for undertaking cross-cultural accounting research. The social theory provides a structure for examining within-country and cross-country actions and behaviours of different groups and communities. It avoids associating nations and cultures, instead contending any nation will comprise four different solidarities engaging in constant dialogues. Further, it is a dynamic theory able to take account of cultural change. Design/methodology/approach The paper establishes a case for using neo-Durkheimian institutional theory in cross-cultural accounting research by specifying the key components of the theory and addressing common criticisms. To illustrate how the theory might be utilised in the domain of accounting and finance research, a comparative interpretation of the different experiences of financialization in Germany and the UK is provided drawing on Douglas’s grid-group schema. Findings Neo-Durkheimian institutional theory is deemed sufficiently capable of interpreting the behaviours of different social groups and is not open to the same criticisms as Hofstede’s work. Differences in Douglasian cultural dialogues in the post-1945 history of Germany and the UK provide an explanation of the variations in the comparative experiences of financialization. Originality/value Neo-Durkheimian institutional theory has been used in a wide range of contexts; however, it has been little used in the context of accounting research. The adoption of the theory in future accounting research can redress a Hofstedian-bias in accounting research.

The Routledge companion to accounting and risk

To date, there has been little consideration of the many different ways in which accounting and risk intersect, despite organisations being more determined than ever to build resilience against potential risks. This comprehensive volume overcomes this gap by providing an overview of the field, drawing together current knowledge of risk in a wide range of different accounting contexts.

Cultural Theory of Risk and the Notion of “Management Accountants as Strategists”

It has become commonplace to claim that accountants must supplement their technical accounting skills with strategic capabilities and be “active participant(s) in the decision-making process” (Latshaw & Choi, 2002, p. 27). Thus, it has been argued that finance departments should become central to the decision-making process. Further, it has been suggested that accountants should provide strategic advice to managers working in other parts of the organization and that a pre-requisite for progression to finance director roles is the capacity to be a proactive strategist (Grundy, 2007).