Our Mission

is to promote accounting reform aimed at positioning sustainability as the primary performance accounting measure in place of financial profitability.

Risk AccountingRASB Forum

Proposition

An Era of Unprecedented Change

The global risk landscape in which organisations operate has evolved from simple and benign to complex and treacherous. Boards, CEOs and CFOs must now guide their organisations through a minefield of non-financial risks.

Organisations have also developed intangible assets over time that impact environmental and social wellbeing. These are the environmental, social and governance (ESG) attributes that enhance shareholder value. Boards, CEOs and CFOs are being pressed to measure and report the impact of their ESG intangibles.

Accounting standards and risk management tools and techniques have not kept pace with these changes.

Boards, CEOs and CFOs are Vulnerable

Despite their materiality, there are no accounting and auditing standards applicable to nonfinancial risk exposures and ESG intangibles. Their absence causes accounting reports to be of limited value, even misleading.

The nonfinancial risk management toolkit is weak. There is no generally accepted method of nonfinancial risk quantification thereby disenabling the analysis of accumulating nonfinancial exposures in the aggregate. Instead, operational and enterprise risk management typically relies on subjective, non-aggregatable, non-comparable, colour-coded (traffic-light), risk self-assessments that are not useful for effective governance or accountants.

This leaves boards, CEOs and CFOs vulnerable to unexpected losses.

Profitability vs. Sustainability

In response to escalating nonfinancial risks that threaten financial, environmental and social wellbeing, governments, regulators and investors are pressing organisations to focus their corporate reporting on sustainability in place of today’s backward-looking, point-in-time focus on profitability.

Of particular concern is the absence of an accounting expression for the impacts of climate change and the pandemic as well as escalating exposures to supply chain, manufacturing, cyber, conduct, geopolitical, model, fraud, legal and compliance and many other nonfinancial risks.

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The Need for Accounting Reform

The key to sustainability reporting is to value and account for nonfinancial risks and ESG intangibles such that audited financial statements acquire a forward-looking dimension thereby transitioning from a purely backward-looking point-in-time profitability perspective to a combined backward- and forward-looking sustainability perspective.

This will allow boards, CEOs, CFOs, governments, investors and other stakeholders to conclude with greater certainty on an organisation’s sustainability with increased capacity to provide investors with reliably predictable returns.

Risk Accounting

Overview

RASB has collaborated with academia in the codification of a standardised and integrated nonfinancial risk management and accounting framework termed ‘Risk Accounting’ that identifies, quantifies, aggregates, values, reports and accounts for all forms of nonfinancial risks and ESG intangibles.

For more information on risk accounting, visit https://risk-accounting.com.

To access research papers, articles and other documents on risk accounting, see ‘RASB Intelligence’ below.

Risk Accounting’s Critical Features

Standardisation:

The tables and templates that comprise risk accounting are fully standardised to ensure the direct comparability of outputs within and between organisations.

Data quality:

A fundamental principle of risk accounting is that significant exposure to nonfinancial risk is triggered upon the transfer of products and services to external parties. Thus, risk accounting’s starting point is the controlled and audited daily amount of sales by product registered in official accounting ledgers.

Implementation lite:

Risk accounting is an extension of management (cost) accounting and, consequently, leverages existing accounting infrastructure and the same accounting data aggregation paths that produce financial statements.

Aggregation enabled:

Exposure to nonfinancial risk is calculated at the transaction level based on each product’s risk characteristics and the volume/value of daily new business booked. Thus, granular calculations of exposure to risk can be validly aggregated across the vertical and horizontal dimensions of an organisation.

Auditable:

Risk accounting removes the subjectivity inherent in risk & control self-assessments (RCSAs) by replacing the traffic light (red/amber/green) assessment metric with a numeric measurement metric. The status of risk mitigation is established through comparisons of the actual status of risk management and mitigation against industry consensus best practices and/or best practice benchmarks. Thus, the outputs of risk accounting can be independently audited as there is only one valid response to each tested best practice for which an audit trail is provided.

Actionable:

Aggregated exposures to nonfinancial risk by product are used as the basis to allocate the opportunity cost of risk capital. Thus, initiatives that successfully reduce exposure to risk are immediately reflected in reduced capital charges providing the incentive for risk mitigation. Organisations will have the capability to analyse exposure to nonfinancial risk in the aggregate and drill to the detail.

Product pricing enabled:

The opportunity cost of risk capital is allocated to products based on actual sales data. Thus, the cost of capital is available to be incorporated into each product’s unit cost.

Why Risk Accounting?

Sustainability and Impact

Sustainability is an organisation’s capacity to provide investors with reliably predictable returns on their investment in financial, environmental and social terms. It requires focused and concentrated nurturing of both financial and non-financial capital: the former is the shareholder value-added through day-to-day business operations; the latter is the organisation’s human, intellectual, production and environmental attributes that positively impact financial, environmental and social wellbeing.

The Threat

The greatest threat to sustainability and impact is the emergence of unidentified and unreported vulnerabilities that, if unaddressed, accumulate until they pass a tipping point when they mutate into losses euphemistically termed ‘unexpected’. Material unexpected losses erode financial and nonfinancial capital, undermine the confidence of investors and other stakeholders, negatively impact on the ability to execute business strategies and, in extreme cases, result in bankruptcy.

The Challenge

Organisations have become increasingly susceptible to unexpected losses due to two primary factors:

First is the exponential growth in exposure to nonfinancial risks in recent decades due to dramatic increases in exposure to operational, cyber, supply chain, manufacturing, model, conduct, fraud and other nonfinancial risks. Indeed, global operating environments have evolved from simple and benign to complex and treacherous. Such developments have been further compounded by the sharpened focus on organisations’ environment, social and governance (ESG) risks attributes.

Second is the weakness of today’s enterprise and operational risk management tools and techniques. Boards, CEOs and CFOs question what possible business value can be derived from subjective, non-aggregatable, non-comparable, colour-coded risk & control self-assessments.

Control of the Risk Agenda

Heightened exposure to nonfinancial risks, weak and ineffective enterprise and operational risk management methods and systems and a history of unpredicted failures of influential corporations have combined to cause legislators and regulators to progressively take control of the risk management agenda through a veritable tsunami of statutes, regulations and public disclosure mandates.

Perversely, the consequential migration from boardrooms to legislators and regulators of the accountability for the management of nonfinancial risks has stifled the capacity of organisations to innovate, inhibited their freedom to operate and, paradoxically, further increased nonfinancial vulnerabilities by adding a deep layer of regulatory and compliance risk.

The Response

To halt and begin to reverse this costly, anti-business trend boards, CEOs and CFOs need risk management systems that comprehensively and reliably identify, quantify, aggregate, value, report and account for exposures to non-financial risk. Such solutions have not materialised to date because of a wrongheaded but universally accepted mindset that a nonfinancial risk is inherently unobservable… only outcomes are observable.

This is an unacceptable human condition. An exposure to a nonfinancial risk is a financial abstraction in the same way that profit, shareholders’ equity, ROE and unit cost are financial abstractions. If accountants can transform so many financial abstractions into observable accounting measures, there’s no reason why they can’t do the same for nonfinancial risks.

The Solution

RASB is the custodian of a new non-financial risk quantification and reporting technique ‘Risk Accounting’ that was first pioneered at JPMorgan Chase (Chase Manhattan) as an operations risk measurement and management tool. In the aftermath of the global financial crisis of 2007/8 it was extended and codified in academia as an integrated nonfinancial risk management and accounting solution.

The risk accounting method has been proven through laboratory testing in academia and a test application against publicly available accounting (GAAP) datasets such as that provided by the Federal Reserve Bank of Chicago.

Risk accounting has the potential to provide boards, CEOs and CFOs with the tools and information they require to identify emerging non-financial risks with real- or near-real time quantification, aggregation, valuation, accounting and reporting.

RASB Board Members

Peter Hughes

Peter is Chairman of the Risk Accounting Standards Board. He is a chartered accountant and a visiting fellow and member of the advisory board of Durham University Business School’s Centre for Banking, Institutions and Development (CBID) research group. He was formerly a banker with JPMorgan Chase where he held senior positions in finance, operations, risk management, treasury & trading and audit.

Dr. Colin Lawrence

Colin is currently on the Board of OSTC Ltd where he chairs the Risk and Compliance Committee and he is additionally a member of the Audit Committee. He also sits on the academic advisory board of IHS Markit and PRMIA UK (Professional Risk Managers’ International Association). He is an honorary visiting professor of risk management at the UCL in the department of computer sciences and a senior advisor to Stratagem, a strategic consulting company, and to Basinghall Analytics.

Dennis Philip

Dennis is a Professor in Finance at the Durham University Business School and Director of its Centre for Banking, Institutions and Development (CBID) research group. He holds a PhD in Finance from Cass Business School. His research contributes to the understanding of the interactions between firm characteristics and financial markets. His research has been funded by financial companies, central banks and recently from the European Commission.

Mahmoud Marzouk

Mahmoud is a lecturer in accounting and finance at the University of Leicester School of Business and a member of the RASB Risk Accounting Standards Board (RASB). He holds a PhD and an MRes from the University of York. Mahmoud has extensive teaching and research experience in Egypt and the UK. In addition to his extensive teaching experience across a range of Accounting and Business modules at both undergraduate and postgraduate levels he also mentors and supervises undergraduate, postgraduate and PhD students.

Paul Costea

Paul is a seasoned marketing and sales professional with a diverse background covering advertising, media, business consulting, and over 20 years in enterprise software solutions, currently acting as RASB’s COO.

Paul is a law school graduate with a master of business administration from the Romanian Academy of Economic Studies and a Professional Diploma in Management from Open University UK.

RASB Intelligence

Operational Risk Metrics: Seeing Is Believing – GARP article

Operational Risk Metrics: Seeing Is Believing – GARP article

GARP.org article by Peter Hughes Tests conducted by researchers at the Durham University Business School, in collaboration with the Risk Accounting Standards Board (RASB) found that exposures to the operational risks of U.S. banks may have increased by as much as 60%...

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Where Next with Operational Risk? – GARP article

Where Next with Operational Risk? – GARP article

Observation and measurement issues pose continuing challenges As a researcher, I spend a good deal of time reading academic papers. One recently came into my hands written by an eminent group of academics and practitioners on the topic of systemic risk and financial...

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The Rise of a Complexitocracy – GARP Article

The Rise of a Complexitocracy – GARP Article

Can accounting help restore simplicity and comparability to financial and risk reporting? Published by Peter J. Hughes on GARP.org (Fri., Jly 31st, 2020) “Complexitocracy” is not in the dictionary. But maybe it should be. If it were, the definition would be something...

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Is accounting to blame for the pandemic? – PRMIA Article

Is accounting to blame for the pandemic? – PRMIA Article

by Peter j. Hughes, published by PRMIA in the July 2020 issue of "Intelligent Risk" Banks and airlines have something in common: they both have the potential to transform an isolated and sometimes freak event into a global economic crisis. In fact, any industry whose...

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Accounting’s Operational-Risk Missing Link – GARP Article

Accounting’s Operational-Risk Missing Link – GARP Article

A void that limits the influence of risk management and, at worst, increases the probability of unexpected losses. It is sound accounting practice to adjust accounting profits for expected future losses associated with the exposures to risk created when making those...

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