December 11, 2023 Focusing on risk
Anecdotally, around 335BCE when a group of Celtic leaders met with Alexander the Great, in response to a question on courage they replied that the only thing they feared was that the sky might fall on their heads. It’s a statement which has been interpreted in many ways over the years, not the least because it raises questions about risk and risk perception.
Let’s be honest, the question of risk is a challenge for any boardroom. If you were to sit down and list every possible thing that could go wrong across an organisation then, depending on the size of your company, preparing the list alone could take months or even years. And even then, in a changing world you would never be able to fully anticipate every potential event. If that is the case, how do boards determine what is likely to be a significant business risk that requires regular monitoring and what can be covered by some sort of business-as-usual plan?
The answer will depend partly on the nature of the business. For example, an agricultural company may well prioritise environmental risk factors, whereas a trading company may look more towards international trade factors or the need to maintain a robust technological infrastructure. Aside from business-specific risks companies could also take a lead from the way in which external bodies such as governmental organisations or industry regulators prioritise risk.
For example, on 6th December 2023 the Financial Reporting Council (FRC) announced its areas of focus for 2024. Whilst the FRC look to take a wide view of company reporting, over the forthcoming year it intends to pay particular attention to a few key areas. As well as looking at how companies are managing the implementation of IFRS 17 (Insurance contracts), and reviewing cash flow statements, the FRC intends to focus in on:
- Risks related to the current economic environment (for example: going concern, impairment, recoverability and recognition of tax assets/liabilities)
- Climate related risks, including TCFD disclosures
Recognising that some sectors are more vulnerable than others to risk, the FRC’s review panel will also prioritise companies within the following sectors:
- Construction & materials,
- Food producers,
- Gas, Water & Multi-utilities
- Industrial Metals and Mining
- Financial Services
That’s not to say that companies within other sectors can take a step back; as the FRC looks to take a snapshot of all sectors. This to ensure that corporate reporting is as clear and fair as possible whilst identifying any risk factors which may develop throughout the period.