A Model for Corporate Risk Reporting Evaluation in Iran

Document Type : Research Paper

Authors

1 Ph.D Candidate in Accounting, Allameh Tabataba’i University, Tehran, Iran.

2 Associate Professor of Accounting, Allameh Tabataba’i University, Tehran, Iran.

3 Associate Professor of Industrial Management, Allameh Tabataba’i University, Tehran, Iran.

10.22103/jak.2021.17904.3531

Abstract

Objective: Risk information disclosure as a major part of the information needed for investors helps them to evaluate and meet corporate risk in their decisions. A review of the literature shows that there has been no comprehensive research on risk reporting evaluation and most studies have evaluated or measured risk reporting with a limited set of indicators. In addition, many of these studies focus mainly on the quality of risk disclosure and other aspects have remained largely overlooked. Accordingly, the purpose of this study is to identify dimensions, components and risk reporting indicators as well as to provide a model for evaluating corporate risk reporting in Iran.
 Methods: Based on study purposes, dimensions, components and indicators influencing corporate risk reporting were firstly extracted by studying the theoretical framework and Literature Review as well as conducting semi-structured interviews with experts that fuzzy Delphi technique was employed for their consensus and screening. In the following, relationships between the criteria were determined by the combined approach of Dematel and the Network analysis process (DANP), and then criteria were prioritized and weighted. The statistical population consists of all the individuals with expertise and experience in the field of risk reporting in Iran, including report preparation, monitoring, review, and standard-setting activities. The opinion of these experts is used to specify the final conceptual model. Purposive (snowball) sampling is used for semi-structured interviews until saturation is reached. The same sampling method is used for the FDM and DANP stages. Accordingly, 12 individuals are selected for the interview stage, 74 individuals for the FDM stage, and 15 people in the DANP stage.
 Results: In the first stage of this study, after identifying the dimensions, components, and indicators of risk reporting through a review of the literature, the structure of the initial conceptual model was verified through semi-structured interviews with a panel of experts, and two additional indicators (i.e., risk prioritization and internal overlap) were added to the initial set of indicators. As such, the initial conceptual model was developed with 3 dimensions, 3 components, and 14 indicators to be used in the fuzzy Delphi method (FDM). Results indicate that there is a consensus among experts on accepting the whole indicators determined on the fuzzy Delphi approach. Based on experts' perspectives, the quality dimension of risk disclosure is more important than dimensions of text structure and quantity of risk disclosure. As well, risk disclosure indicators coverage, risk disclosure outlook and the amount of the economic impact of risk disclosure dedicated the most weight.
 Conclusion: Study results demonstrate that the quality dimension is a net causer, while the dimensions of quantity and textual properties are net receivers. This suggests that high-quality risk disclosures by a company can also increase the quantity of its disclosures. In contrast, lengthy risk disclosures with poor quality cannot meet the information needs of stakeholders. Quality in the disclosure of risk information means that the company should report the types of risks it is exposed to, the impact of these risks, and the strategies and actions planned to deal with these risks. This in turn can increase risk disclosure quantity, while preventing the disclosure of redundant, boilerplate sentences and phrases in the risk report and increasing the density of risk disclosures. In addition, the fact that the quality dimension is a net causer and the text properties dimension is a net receiver suggests that adequate risk coverage and disclosure of the impact of risks and the outlook profile as measures of quality will prevent duplication of disclosures and boilerplate reporting by companies in the same industry. Study results demonstrate that reporting the main risks, managing these risks, and risk quantifying got high priority from experts' perspectives. the high weights of coverage, outlook profile, and type of economic effect suggest the critical role of understanding the types of risks that the company faces, reporting these risks as well as the management strategy/plan to deal with or mitigate them, and quantifying the impact of these risks on the financial position, financial performance and future cash flows of the company. These are exactly the factors that companies tend to avoid for the various motives that were discussed earlier in the literature review. Disclosure of all risks and how to manage them incurs costs to the company, and quantifying risks not only entails measurement problems and related costs, but also carries the risk of litigation by stakeholders if measurement is not accurate. Therefore, companies should try to balance stakeholder expectations with the costs and risks associated with corporate risk reporting. The greater importance of textual properties compared to quantity also shows that the lack of complexity, specificity, and lack of redundancy are more important than the length and frequency of reporting. The results of this study can be effective in evaluating, comparing, ranking corporate risk reports, planning regulations and guiding risk information disclosure by regulatory bodies, disclosing appropriate risk information by companies, enhancing stakeholder awareness of corporate risk, and improving decision-making. Given that the present research adopted the Delphi technique and data were collected through interviews and questionnaires, there are limitations related to instruments that were used, including the possibility of researcher bias.

Keywords

References

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History

  • Receive Date: 15 July 2021
  • Revise Date: 30 September 2021
  • Accept Date: 02 November 2021

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