A void that limits the influence of risk management and, at worst, increases the probability of unexpected losses.
It is sound accounting practice to adjust accounting profits for expected future losses associated with the exposures to risk created when making those profits.
Accounting provisions for expected credit losses have been required since 2018; there is no equivalent requirement to account for the expected losses associated with non-financial risks.
Operational risk managers should ponder on how their work would be viewed if color-coded risk and control self-assessments (RCSAs) were to be translated into an expected loss accounting measure that is used to adjust profits.
The resulting shift in management’s focus onto a risk mitigation and loss prevention agenda will inevitably be counterbalanced by the greater accountability and visibility of operational risk management.
These attributes relative to non-financial risks are potentially available in a new and developing branch of accounting, “risk accounting.” They acknowledge that its successful adoption requires accountants and risk managers to collaborate in a common endeavor aimed at taking the reporting of non-financial risks to the next level.
Risk Needs an Accounting Representation to be Visible to the Top Decision Makers
GARP Article by Peter J. Hughes – Chairman of the Risk Accounting Standards Board
This is a cornerstone article showcasing the importance of proper accounting treatment of risk exposures, with the aim to integrate both financial performance and risk accumulations in a comprehensive view over the business.
Past performance in terms of financial statements and future outlook in terms of size of probable future losses can only be put together by Risk Accounting.