04 Mar Reporting risk
Let’s start with a given. As a company director you are following the requirements of the Companies Act 2006 in taking reasonable care, skill, and diligence. Accordingly, you are considering a range of scenarios including the likely consequences of any decision in the long term, the impact of the company’s operations on the community and the environment, and the likely impact on the company of any external forces.
In other words, risk and the potential outcomes of risk are fairly high on the directorial agenda. But how much of your work on risk awareness is actually shared outside the confines of the company, or even of the boardroom? Admittedly there may well be some areas of risk planning which can stay in-house; either because they are commercially sensitive or because there is little sense in sharing ‘what if’ scenarios which are very unlikely to come to fruition.
However, there are a number of scenarios for which it is vitally important that planning and risk appraisals are shared; most particularly when such information could materially impact either on wider public planning or on the decisions which a potential investor or lender might make. Two of these scenarios were highlighted in February 2020 by the Financial Reporting Council (FRC).
The first relates to the way in which companies and auditors are responding to the potential impact of climate change. Announcing a major review of the way in which potential climate change risks are assessed and reported on, Jon Thompson, FRC’s CEO said “not only do boards of UK companies have a responsibility to report their impact on the environment and the risks of climate change to their business, but investors expect them to operate sustainably.”
The second scenario relates to the potential impact of the coronavirus, COVID-19. Acknowledging that the extent of the risk and the degree to which it might crystallise depends on company specific business circumstances, nevertheless the FRC emphasised that companies should consider the possible impact of COVID-19 and any mitigating actions taken when reporting principal risks and uncertainties. Areas for consideration include the potential impact of disruptions to the supply chain, staff shortages due to illness, and reduced customer demand.
The FRC also commented that those with December year ends should consider reporting these risks as non-adjusting post balance sheet events. Those with later reporting dates may need to adjust year-end balances, particularly if impairment tests reveal an impact on assets or liabilities.