Risk Management And Performance Measurement Notes

Lecture 4: Risk Management and Performance Measurement Objectives * Examine the role of performance measurement in risk management * Examine the potential advantages and disadvantages from quantifying risk in performance measures * Role of risk functions and risk 'experts' Topics * Emerging interdependencies between risk management and management accounting * Performance measurement and risk management * Constraints on linking performance management and risk management Emerging interdependencies between risk management and management accounting * Bhimani (2009) * Special issues of journal Management Accounting Research dedicated to "Risk Management, Corporate Governance and Management Accounting" * 1992 Cadbury report - widening of enterprise control practices to encompass risk management * COSO (2004) Enterprise Risk Management - Integrated Framework * "Enterprise risk management is a process, effected by an entity board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives" * Professional accounting firms * PWC: Governance, risk and compliance services ? "We support clients in identifying, understanding and managing risk and help ensure an appropriate balance between risks and opportunities" - PWC * Professional accounting bodies * Chartered Institute of Management Accountants (CIMA) ? Many courses on risk management * Financial report disclosures Performance measurement and risk management * Are performance indicators and risk indicators the same? * Quantitative expression of performance * Formal, well defined * Developed and monitored by 'experts' * But * Risk indicators usually contain: ? A measure of variance ? A tolerance trigger Value at Risk (VaR) * Common risk indicator * "A company disclosing, for instance, that it's daily VaR is $30 million at the 95% level, means that there is only a 5% chance the firm will incur more than a $30 million loss over the next day" - Jorion (2002) Course Notes Page 8 

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