Study Shows Level of Disclosed Risks Does Not Predict Business Performance
A study by the CGA-Canada Accounting and Governance Research Centre (CGA-AGRC) at the University of Ottawa examined the relationship between risk disclosure and business performance, and found that the level of disclosed risks does not appear to predict the company’s business performance. The study, Enterprise Risk Management and Business Performance during the Financial and Economic Crises, was published in Problems and Perspectives in Management.
Regulations require companies to disclose important trends and risks that have affected, or may in future affect, their financial statements. While major changes in business performance occurred during the financial crisis and economic recession of 2008 and 2009, company annual reports published in 2007 and 2008 identified only minor increases in disclosed risk exposure, risk consequences and risk management strategies. Moreover, the timing of changes in financial market, operational and accounting performance differed significantly. While the financial crisis had an immediate effect on measures reflecting the market value of equity, it had more of a delayed effect on sales and earnings before interest and taxes (EBIT) margins.
“Enterprise risk management (ERM) still has value,” says Daniel Zéghal, FCGA, Executive Director of the CGA-AGRC and a co-author of the study. “In fact, the findings may be pointing to the inefficiency of risk communication strategies rather than limitations of ERM programs. Firms that engage in ERM should be able to better understand the aggregate risk inherent in different business activities.”
Certain deficiencies in collecting and providing quality ERM information were identified in a previous study, which found that the 2008 financial crisis led to only modest changes in risk management disclosure at non-financial Canadian companies.
Zéghal adds that research on the relationship between company performance and disclosure of ERM information is still in its infancy. “More studies, using a much larger sample and a longer timeframe, as well as improved analytical tools, will help provide a clearer picture of the relationship between ERM and business performance.”
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