The Joint Initiative on Accounting Reform
CFOs are wondering how backward-looking ‘profitability’ can transition to forward-looking ‘sustainability’ as the primary accounting measure of corporate performance. A joint initiative comprising RASB, ACCA, PRMIA, and the Durham University Business School believes Risk Accounting provides the answer.
A Call for Action
This call for action is directed to CFOs and CROs as well as subject matter experts from the accounting and risk domains; who support the adoption of a next generation accounting method ‘Risk Accounting’ that potentially enhances the quality and effectiveness of non-financial risk management information and ensures the secure transition from ‘financial profit’ to ‘corporate sustainability’ as the primary accounting measure of corporate performance.
PRMIA Publishes the Call for Action
…of the Joint Initiative on Accounting Reform in the November issue of their “Intelligent Risk” monthly publication
Risk Accounting Workshop organized by ACCA US in October 2022
Browse the lectures or watch the panel discussions of this 2-day workshop to understand more about Risk Accounting and how it can provide a common framework to join financial and risk reporting, with a view to making non-financial risk accumulations visible to all stakeholders.
From reducing or preventing losses, quantifiably optimizing operations, and monitoring risk exposure accumulations in real-time to possibly trading in risk units, isolated from the financial products that generated them, these are all possibilities the risk accounting method opens. They need to be explored and developed further, to be put to good use in the current climate of economic uncertainty.
PRMIA formally announces its membership of the JIAR
PRMIA’s November “Intelligent Risk” Edition publishes The Call for Action of the Joint Initiative on Accounting Reform
Joint Initiative Members
Leadership
Peter Hughes
Rachael Johnson
Justin McCarthy
Julian Williams
Why Risk Accounting is important to ESG & Sustainability Reporting
In his lecture, Peter explains why relevant and meaningful ESG and sustainability reporting needs to find the right balance between accounting for expected losses within the financial statements and narrative/statistical disclosures made outside the financial statements.
But first, accounting reform needs to focus on the quantification, aggregation, valuation and accounting for non-financial risks.
What this Call for Action Addresses
The Challenge
The greatest threat to an organisation’s sustainability is the emergence of unidentified and unreported exposures to non-financial risk that accumulate until they pass a tipping point when they mutate into losses euphemistically termed ‘unexpected’. Organisations have become increasingly susceptible to this threat due to two primary factors:
First, recent decades have seen exponential growth in exposure to non-financial risks both in terms of their size and complexity. Boards and C-suite executives must now navigate their organisations through a veritable minefield of non-financial risks that have evolved from simple and benign to complex and treacherous. They include manufacturing, transaction processing, climate change, supply chain, cyber, conduct, fraud, geopolitical, model and legal and compliance risks.
Second, enterprise and operational risk management (ERM & ORM) tools and techniques are appallingly weak. The information reported to boards, CEOs and CFOs on the status of non-financial risks is typically derived from subjective, non-aggregatable, non-comparable, colour-coded (red/amber/green) risk & control self-assessments thereby disenabling the analysis, monitoring and controlling of accumulating exposures to non-financial risks in the aggregate.
Control of the Risk Agenda
A combination of exponential growth in exposure to non-financial risks, weak and ineffective ERM and ORM tools and techniques and a history of unpredicted failures of influential corporations, most significantly during the global financial crisis of 2007/8, has undermined confidence in non-financial risk management and financial accounting and reporting. In response, legislators and regulators have progressively taken control of the corporate risk management agenda through ever-increasing volumes of statutes, regulations and public disclosure mandates.
Perversely, the consequential migration from boardrooms to legislators and regulators of a significant portion of the accountability for the management of non-financial risks has stifled the capacity of organisations to innovate, inhibited their freedom to operate and, paradoxically, further increased exposures to non-financial risk by adding a deep layer of regulatory and compliance risk.
The Response
To halt and begin to reverse this costly, anti-business trend boards, CEOs, CFOs and CROs need risk management systems that comprehensively and reliably identify, quantify, aggregate, value, report and account for exposures to non-financial risk. Such solutions have not materialised to date because of a wrongheaded but universally accepted mindset that a non-financial risk is inherently unobservable… only outcomes are observable.
This negative, anti-progressive mindset must change. Organisations must view non-financial risk as a financial abstraction in the same way that profit or loss, shareholders’ equity, ROE and unit cost are viewed as financial abstractions. If accountants can transform so many diverse financial abstractions into observable accounting measures, there’s no reason why they can’t do the same for non-financial risks and ESG attributes.
The Solution
Risk Accounting incorporates a non-financial risk quantification technique first pioneered at the Chase Manhattan Bank (now JPMorgan Chase) as a production (operations) risk measurement and management tool. In the aftermath of the global financial crisis of 2007/8 the technique was extended and codified at the Durham University Business School as an integrated non-financial risk management and accounting solution where it was proven for application in banks through laboratory testing. Further tests were successfully conducted against publicly available bank holding company financial statement (US GAAP) datasets provided by the Federal Reserve Bank of Chicago.
A Call for Action… How to Get Involved
If Risk Accounting is the solution that enables the successful transition from financial profitability to sustainability as the primary accounting measure of corporate performance, the task before us is formidable.
The engagement of subject matter experts from the accounting and risk domains will be vital to create and validate the tables and templates that comprise the method.
The engagement of CFOs and CROs from multiple industries is necessary to access live operating environments for field-testing.If the challenges set out above excite you and you want to take up this call for action, or you just want to learn more about the initiative, we would love to hear from you.
Simply send us an email on getinvolved@rasb.org with a brief bio, your corporate title, job title and contact details and we’ll revert with all the information you require.
Alternatively, you can also fill in the form to the left.
Get In Touch
Feel free to contact us regarding any questions or additional information.