Risk Accounting Standards Board

Accounting for the future

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Check out "The Means and Benefits of Tokenizing and Trading Risk Units"...

…our revolutionary whitepaper – a complete business case for using Risk Accounting to securely finance your risk exposures and risk mitigation improvement programs.

About RASB

RASB was established under the auspices of the Durham University Business School to conduct research into methods of quantifying and accounting for non-financial risks. The aim is to conceptualise a next generation accounting method and system “Risk Accounting” as an extension of management (cost) accounting systems.

RASB fulfills the role of risk accounting’s global standards-setter acting as a catalyst for collaboration and knowledge-sharing among industry leaders and fostering a community that drives innovation and best practices in non-financial risk management and accounting across industries.

RASB Constitution

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Download the RASB Constitution for your review.

"Op Risk Capital: Don’t Loathe It, Change It!"

In this thought-provoking article published by Starling Insights, author Peter Hughes challenges the traditional approach to operational risk capital in the banking industry.

The article explores the historical context of regulatory capital regimes and highlights the need for a more effective method of quantifying and aggregating operational risks. By examining the challenges faced and proposing a shift in perspective, Hughes advocates for a transformative approach to risk accounting standards.

This article invites readers to explore the potential benefits of embracing change in operational risk capital and its implications for the banking industry.

To read the full article…

Whitepaper Published!

The highly anticipated whitepaper titled

“The Means and Benefits of Tokenizing and Digitally Trading Risk Units – The next paradigm change in accounting and risk management”

has been published. Download it now using the link below:

The Risk Accounting Book - Available Now!

RASB has successfully codified a prototype risk accounting method and system. It has been laboratory tested and is ready for live simulation primarily through proofs-of-concept carried out in organisations’ operating environments.

When fully accepted, risk accounting will be an integral part of accounting and reporting systems: colour-coded ‘RAG’ (red, amber, green) assessments will be replaced by aggregatable risk analytics; expected losses associated with accepted non-financial risks will be accounted for and reported in financial statements; and the facility for organisations to underwrite and distribute accepted risks through tokenisation will be created.

This new book by Peter Hughes (RASB’s founding chairman) is available on Amazon and other reputable booksellers globally. It’s a comprehensive guide to the risk accounting method with worked examples of the method’s application and sample reports.

Accounting Profit vs. Corporate Sustainability

In response to escalating risks that are a constant threat to financial, environmental and social well-being, the investor community is pressing the accounting profession to focus corporate performance reporting on forward-looking sustainability.

Risk accounting enhances corporate reporting by quantifying and accounting for the probable future financial impacts of accumulating risks such as cyber, supply chain, operational, environmental, geopolitical, conduct, fraud, model and many others. In this way accounting profit or loss – the backward-looking or ‘historic’ perspective – is adjusted for the expected losses associated with accepted risks – the forward-looking or ‘future’ perspective.

The result is financial statements whose primary accounting measure of corporate performance and condition is backward- and forward-looking corporate sustainability in place of exclusively backward-looking accounting profit.

Key Metrics

Inherent Risk

The amount of operational risk in RUs before considering the effects of internal risk mitigation activities and processes (represents maximum exposure to non-financial risk)

Risk Mitigation Index

A measure of the effectiveness of internal operational risk mitigating activities and processes on a scale of zero to 100

Residual Risk

The amount of operational risk in RUs that remains after reducing Inherent Risk by the RMI (represents actual exposure to operational risk)

Risk Accounting’s Critical Features

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Standardisation:

The tables, templates and algorithms that comprise risk accounting are fully standardised to ensure the direct comparability of outputs within industry sectors.

Data quality:

A fundamental principle of risk accounting is that significant exposure to risk is created 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.

Tokenisation:

The ultimate risk management device is tokenisation that allows organisations to underwrite and distribute their accepted risks to investors.

In accounting terms, the probable future financial impacts of accumulating risks determined by risk accounting are posted to the income (P&L) statement as an expected loss provision with offset to the balance sheet as an expected loss capital reserve.

The exclusive purpose of the reserve is to finance risk mitigation improvements.

This is achieved by converting the reserve into tradable digital risk tokens that can be sold and traded on the open market.

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.

Enhanced Risk & Control Self-Assessment (E-RCSA)

RCSAs that typically use a ‘RAG’ (red, amber, green) assessment metric are enhanced by replacing RAG with a numeric measurement metric thereby enabling the processing of E-RCSAs by risk accounting’s algorithms.

E-RCSA questionnaires are fully standardised for each industry sector and include questions whose response can either be binary (‘yes’ or ‘no’ answer) or require selecting an applicable benchmark from a drop-down box. Each E-RCSA question and benchmark is assigned an expertly calibrated risk mitigation impact factor that is processed by risk accounting’s algorithms dependent upon E-RSCA responses.

Aggregatable:

Risk accounting’s algorithms produce risk analytics based on three sources of input: product risk factors; the volume/value of daily new business booked by product; and the results of E-RCSAs that interact with each product.

Risk analytics are aggregated across the vertical and horizontal dimensions of an organisation by multiple reporting categories such as group, business line, cost centre, risk type, product, customer and geography.

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Actionable:

Risk accounting enables the analysis of accepted risks in the aggregate and drilling to the detail to determine causality. The successful implementation of risk mitigation improvements is reflected in revised E-RCSA inputs which, in turn, update risk analytics for the associated risk reduction impacts. In this way, risk accounting incentivises and prioritises risk mitigation improvements.

Portfolio View:

Risk accounting provides a portfolio view of accepted risks making classic portfolio management techniques available to users. They include trending, ranking, limit-setting and monitoring, risk budgeting and monitoring, predictive modelling and benchmarking.

Auditable:

Risk accounting’s algorithms use relatively simple mathematical formulae that are standardised for each industry sector. Auditors can independently recalculate outputs with relative ease.

The three sources of input to risk accounting’s algorithms are auditable:

  • Product risk factors are assigned and documented during ‘Product Review & Approval’ and are available for audit inspection.
  • The volume/value of daily new business booked by product can be validated against official accounting records.
  • Questions in E-RCSA questionnaires are structured so there can only be one right answer for which an audit trail is provided.

Product pricing:

Risk accounting calculates accepted risks for each product.

The opportunity cost of risk capital, calculated using an organisation’s hurdle rate (required rate of return on capital), is allocated to products in proportion to residual risks.

Thus, the opportunity cost of risk capital can be incorporated into each product’s unit cost according to the risks actually accepted. This enhances the information available to support product pricing and the monitoring of profit margins.

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Learn more about the Joint Initiative on Risk Quantification led by RASB in partnership with the Association of Chartered Certified Accountants (ACCA), Professional Risk Managers’ International Association (PRMIA) and Durham University Business School (DUBS).

RASB Board Members

Steve Bailey

Steve is Chairman and CEO of the Risk Accounting Standards Board and a serial investor in innovative technology-based organizations, along with involvement in academia.

He has over 40 years of experience in senior roles in Finance, Technology, Sustainability, and Security. He developed the ‘Background Checking’ terminology and techniques for global digital ID verification. He is a qualified accountant (FCCA) and former ACCA Council Member and technology board advisor to FCA and FASB.

Peter Hughes

Peter is the creator of the risk accounting method and founding Chairman and Director of the Risk Accounting Standards Board.

He is a chartered accountant and a visiting fellow at the Durham University Business School.

He was formerly a banker with JPMorgan Chase where he held senior positions in finance, operations, risk management, treasury & trading and internal audit.

Dr Tom Butler

Dr. Tom Butler, a Professor at Cork University Business School, led the Governance Risk and Compliance Technology Centre in Ireland from 2013 to 2022. His research focused on AI technologies for regulatory compliance and risk management in financial institutions. He collaborated with global systemically important banks, UK law firms, the Bank of England, and the Financial Conduct Authority. Dr. Butler also served as a member of the Expert Group on Regulatory Obstacles Financial Innovation at the European Commission. His ongoing research involves regulatory and operational risk, as well as cyber resilience, in collaboration with professional services firms in the UK and Europe.

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.

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.

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