Risk Reporting - a Study of Risk Disclosures in the Annual Reports of UK Companies by Linsley et al - Article Example

A critical Review of a Journal Article Linsley, P. M. and Shrives, P. J. (2006). Risk reporting: A study of risk disclosures in the annual reports of UK companies. The British Accounting Review 38(4), 387-404. The article is based on the aspect of risk management by providing an analysis of firms that have been affected by this issue. The article related to the literature gap in the reporting practices that firms employ when they want to report financial risks. Moreover, the article strives to highlight the relationship between the environmental risk and risk disclosures. Another issue discussed in the paper is the nature of risk disclosures by examining whether a risk disclosure can be regarded as either good or bad. From the article, it is evident that there is a gap in the available information about risks as a result of which there might be challenges in evaluating the level of risk in an organization (Linsley and Shrives 2006, p.387). The research problem in the article is to ascertain whether there is relationship between the risk disclosures that companies make in their annual reports and the sizes of the companies. Moreover, the study strives to answer the question of whether the risk disclosures are equivalent to the number of risks that the company may experience throughout the year. The problem being studied in the research also relates to monetary and non-monetary risk disclosures. The study attempts to ascertain whether companies are motivated to report these two types of risks. In answering the research question, the study attempts to uncover the differences between bad and good risks in an organization and their impact on the performance of the firm. In the United Kingdom, the issue of risk disclosures has dominated debates about the performance of firms. In this regard, the authors of the article strive to portray the relationship between the two aspects and how they affect organizational growth (Ahmed and Courtis 1999, p.36). The article can be regarded as interesting since it has looked at the issue from various dimensions. For example, the article has focused on the level of risk and its relationship with the firm size, as well as the risk disclosure for both monetary and non-monetary risks within an organization. What is more interesting about the article is that it reveals more information about the issue of risk disclosure in the United Kingdom by providing a comparison with other nations. The article is also interesting because it gives an analysis of both financial and non-financial institutions. This helps the reader to understand the relationship of disclosure in both financial and non-financial organizations that provide services. The article can also be regarded as interesting since it provides several strategies and methods of testing the hypothesis of the study (ICAEW 2011). The importance of the article cannot be underestimated. The findings of the research can inform research about risk disclosure. In addition, the article provides a platform through the reader can understand why some firms do not want to do risk disclosure. For example, the authors note that firms with high levels of risk are not willing to share any information regarding risks since they fear that this will put off current investors and potential investors. In addition, the article is important since the readers can understand the concept of voluntary risk disclosure. The importance of the article also relates to the information it gives about risk disclosures in small firms. From the article, it is clear that the level of risk disclosure is higher in small firms than in large firms. In addition, small firms view risk disclosure as an opportunity to improve the methods they use in reporting risks (Solomon et al 2000, p.450). The outcomes of the study are important since they provide proof about the issue of risk disclosure in organizations. The outcomes also highlight the laws that govern risk disclosure in the United Kingdom. In addition, the outcomes provide a distinction between non-monetary and monetary risk disclosures and what determines the categorization of such risks. For instance, non-monetary risk disclosures are outlined in the Turnbull Committee. Such a disclosure includes establishing strategies aimed at evaluating the management of risks within an organization. The results are also important since they document the various types of risks that may be experienced in an organization. For example, the article has discussed operations risk, financial risk, as well as strategic risks and categorized them as either monetary or non-monetary. Moreover, the outcomes reveal whether companies are more concerned about risks in the external environment or internal risks. From the outcomes, it is evident that most organizations concentrate more on disclosing the risks in the external environment and not internal risks (Unerman 2000, p.670). With the outcomes, researchers can gain an understanding of the disclosure rates and rely on the statistics to make recommendations on how risk disclosure should be conducted. Policy makers can also use the outcomes of the study to implement risk disclosure policies that should be adhered to by organizations. In addition, organizations can use the outcomes of the research to make improvements and adopt sound risk disclosure strategies. The government can apply the outcomes of the study to set laws and standards that firms ought to use when reporting monetary and non-monetary risks. Since the outcomes of the article are important, it is necessary that what is proposed in the article be employed by organizations, as well as policy makers. The authors of the article are motivated to write the article because of the increased attention to the issues of risk and risk management in the recent past. More specifically, the United Kingdom has been experiencing an increased attention towards disclosure requirements and risk management. The authors also wrote the article because of the risk management standards that have been provided by professional organizations in the recent past. With such changes in risk management, there has been a lot of emphasis on this issue and the author have sought to investigate further and add more knowledge about the issue of risk disclosure and management. The author are also motivated by the fact that many stakeholders consider it crucial for directors of organizations to communication information about risks. Given the many debates experienced in the United Kingdom about risk management, the authors sought to conduct more research about the issue (Saunders, Lewis and Thornhill 2009, p.36). This topic is relevant to the current environment since, in the modern world, there are many organizations that fail to disclose risks to the public. As a result, some investors may end up being misinformed and can even invest in companies that are making losses. The relevance of the study also emanates from the fact that there is deficiency in risk disclosure, which should be addressed (Holland and Foo 2003, p.4). The authors have made an immense contribution to literature since the findings can be applied in other studies, as well as add to the knowledge about risk disclosure. The conceptual framework used in the study was Innovest EcoValue21TM Ratings, which the researchers employed to measure the level of risk disclosures in the environment, as well as the number of risks that are reported in a business environment. The authors used this model to determine the number of organizations among the samples that engaged in risk disclosure and the extent to which they disclose the risks. The theory has been used appropriately in the paper as the authors have assessed the level of risks in all the organizations used as samples. The key motivating literature in which the study depends is citation. Throughout the paper, the authors have cited their source of information and studies that talk about the issue of risk disclosure in organizations. Thus, most of the information is based on the works of other authors. One of the papers used in the study is “Concealment of negative organizational outcomes: an agency theory perspective” written by Abrahamson and Park. The other paper that the authors of the article use is “Associations between corporate characteristics and disclosure levels in annual reports”, which is written by Ahmed and Courtis. The information from the two papers, among others, forms the basis for research into the issue of risk disclosure (Abrahamson and Park 1994). The research method that the researchers chose to use is quantitative research. The researchers took quantitative data of 79 firms in the United Kingdom. Moreover, there were calculations of percentages and recording of statistics of the firms with regard to their level of risk disclosure. Tables have been used to record quantitative data about the types of risks in organizations and the level of these risks. Through quantitative research, the mean disclosure rate in the firms has been provided. Statistics have also been used to test the hypothesis and compare the variables used in the study (Beretta and Bozzolan 2004, p.265). Another research method that could be used to collect data about the question under discussion is qualitative research. For instance, the researchers could have conducted surveys through the use of questionnaires and interviews. The advantage of the research method used is that it helps to collect statistics about the issue being discussed. Thus, the method provides information that can be analyzed statistically. The disadvantage of the method is that it does not give descriptive information, which could be crucial in providing explanations about the topic (Beattie et al 2004, p.206). The selected sample comprises of 79 firms in the United Kingdom whose financial reports have been analyzed. The selection of the samples was based on the annual reports of the firms and an analysis of the extent to which risk disclosure is conducted in the firms. The organizations selected comprise of companies facing financial, as well as non-financial risks. In addition, the sample was based on institutional investors in the United Kingdom and their compliance with the standards set by professional firms. The sampling method used in this study is systematic selection whereby representative organizations are used as samples in the study. The issue of reliability and validity has been addressed in the study in that the data collection procedure applied the relevant research criteria. Ethical principles were followed and the researchers were objective when collecting the data from the organizations. The results of the study have been analyzed through the use of several methods. One of the methods used to analyze the results is the use of ratios. Some of the methods to measure the risks include quiscore, asset cover, BIE index, EcoValue Rating Model, as well as beta factor and gearing ratio. The strengths of the methods used in analysis is that they provide quantitative data about the topic. In addition, the methods provide an association between the various forms of risks in an organization. However, there are some weaknesses in the analysis of data since descriptive information has not been provided. The recommendations of the study are in line with the findings and results. In the future, such a research study should utilize several methodologies in the collection of data. It is essential to collection qualitative data in such a case. References List Abrahamson, E., Park, C. (1994). Concealment of negative organizational outcomes: an agency theory perspective. Academy of Management Journal 37 (5), 1302–1334. Ahmed, K. and Courtis, J.K. (1999). Associations between corporate characteristics and disclosure levels in annual reports. British Accounting Review 31 (1), 35–61. Beattie, V., McInnes, W. and Fearnley, S. (2004). A methodology for analyzing and evaluating narratives in annual reports: a comprehensive descriptive profile and metrics for disclosure quality attributes. Accounting Forum 28 (3), 205–236. Beretta, S. and Bozzolan, S. (2004). A framework for the analysis of firm risk communication. The International Journal of Accounting 39 (3), 265–288. Holland, L. and Foo, Y.B. (2003). Differences in environmental reporting practices in the UK and US: the legal and regulatory context. British Accounting Review 35 (1), 1–18. ICAEW (2011). Reporting Business Risks: Managing Expectations. Available online at http://www.icaew.com/en/technical/financial-reporting/information-for-better-markets/ifbm-reports/reporting-business-risks-meeting-expectations Linsley, P. M. and Shrives, P. J. (2006). Risk reporting: A study of risk disclosures in the annual reports of UK companies. The British Accounting Review 38(4), 387-404. Saunders, M., Lewis, P. and Thornhill, A. (2009). Research Methods for Business Students Importance of theory in research (Chapter 2 (5th edition). London, Wiley. pp 36-41. Solomon, J.F., Solomon, A., Norton, S.D., Joseph, N.L. (2000). A conceptual framework for corporate risk disclosure emerging from the agenda for corporate governance reform. British Accounting Review 32 (4), 447–478. Unerman, J. (2000). Methodological issues: reflections on quantification in corporate social reporting content analysis. Accounting, Auditing and Accountability Journal 13 (5), 667–680. Read More