Improving the relevance of risk factor disclosure in corporate annual reports

Abstract

This research develops a model for assessing the quality of risk disclosures and applies the proposed model to four companies in the food production and processing sector. We contribute to the literature by extending prior work on risk disclosure quality using a longitudinal approach to assess the quality of risk reporting. While previous studies have described disclosure practices, this paper adopts a normative approach to disclosure. By suggesting a way of improving risk reporting disclosures, the paper provides guidance for current and future company managers. In line with previous research, this paper identifies certain problems with existing risk disclosures. Results suggest that company managers prefer providing disclosures that are symbolic rather than substantive. We argue that institutional factors and proprietary costs contribute towards and can explain this behaviour.In suggesting a way forward we highlight the role that stakeholders including managers, users, regulators and auditors can play in improving the quality of risk reporting. Flexibility in reporting could be maintained by adopting a properly monitored 'comply or explain' approach.

The Effect of the 2007/2008 Financial Crisis on Enterprise Risk Management Disclosure of Top US Banks

“…Some studies Abraham & Shrives, 2014;Lajili & Zéghal, 2005) show shortcomings and a lack of transparency in risk disclosure due to the absence of standards and uniform measures for different risk components. For example, after investigating risk disclosures in a sample of TSE 300 Canadian companies, Lajili and Zéghal (2005) questioned the usefulness of such risk disclosures since they lack uniformity, clarity, and quantification.…”

“…Many studies suggest that risk-related disclosure is used by companies to signal the quality and strength of their risk management processes, and their ability to identify, assess, and manage risk. An improved level of risk disclosure allows them to distinguish themselves from other companies with less effective risk management processes (Ntim et al, 2013;Abraham & Shrives, 2014).…”

“…In this context, attention dedicated to risk disclosure in annual reports of companies has increased substantially, and many academic research studies investigated this topic (see Beretta & Bozzolan, 2004;Lajili & Zéghal, 2005;Linsley, Shrives, & Crumpton, 2006;Abraham & Cox, 2007;Dobler, Lajili, & Zéghal, 2011;Maingot, Quon, & Zéghal, 2012;Ntim, Lindop, & Thomas, 2013;Abraham & Shrives, 2014). All of them used content analysis in order to assess the presence of risk disclosure in annual reports, but few have investigated the effect of the crisis on the quality and the volume of ERM disclosure.…”

“…On the other hand, following the financial crisis, banks' reputations and investor confidence have been altered. In following legitimacy and signaling theory, banks will be prompted to disclose more ERM information (Ntim et al, 2013;Abraham & Shrives, 2014). This leads us to wonder if the financial crisis has had any impact on risk management disclosure in the annual reports of the American banking firms.…”

The effect of corporate disclosure policy on risk assessment and market value: Evidence from Tehran Stock Exchange

“…Corporate disclosure policy plays essential role for keeping investors inform about any possible risk in firms. Abraham and Shrives (2014) developed a model for evaluating the quality of risk disclosures and used it for four firms in the food production and processing sector. In their survey, adopted a normative technique to disclosure by recommending a way of improving risk reporting disclosures, they provided guidance for current and future company managers and determined certain problems with existing risk disclosures.…”