CHIEF EXECUTIVES are becoming increasingly comfortable with disclosing information on risk profiles and risk management, according to an analysis of 2005 annual reports.
KPMG, which carried out the analysis, said listed firms here are becoming more comfortable with the Australian Stock Exchange’s good corporate governance principles, particularly principle 7 — recognise and manage risk. Last year, most firms provided only generic information. This year, disclosure has increased significantly, KPMG said.
“The first two years it was a real rush and everyone got things together just to get them into the annual report,” said Rob Hogarth, partner at KPMG.
“There was a ‘tick the box’approach. Companies were listing the principles and ticking them off in the annual report. Now that they’ve had more time to be considered about it they have put much more effort into disclosure.”
This year, 51 per cent of companies disclosed details of their risk profiles, compared with 18 per cent last year. For the 2004 financial year, 82 per cent did not disclose risk profile information. The majority (32 per cent) provided ‘basic’ disclosure covering a brief mention of risk management policies. However, there was strong growth in companies providing ‘good’ disclosure covering a list of business risks (15 per cent up from 5 per cent the previous year). Just 4 per cent made ‘strong’ disclosures with detailed information on each business risk facing the organisation.
The increased level of comfort with disclosure reflects a growing trend for third party organisations such as ratings agencies and insurers to take a heightened interest in risk. “There is evidence of third party interest in reporting in the US,” said Hogarth.
“Because SOX [the US Sarbanes-Oxley Act] is so prescriptive and detailed, there has been a lot of statistical analysis done on companies that have had qualifications and limitations in their sign-offs compared to those that haven’t. They have concluded that it is too difficult at this stage.
“The biggest trend that is emerging is that the ratings agencies are now quite serious about downgrading companies. There are signs that third party ERM interest is increasing here. I was talking to a client where we do a whole ERM exercise for them and they’ve been able to reduce their insurance premiums so it’s a really tangible benefit for them. I do feel this secondary aspect will drive a lot of development in this area,” said Hogarth.
Stuart Fagg is the Editor of Risk Management magazine, Lawyers Weekly’s sister publication.