RASB helps boards of directors, CEOs, and CFOs achieve a more appropriate balance between direct governance of non-financial risks exercised from the boardroom and external control exercised through statutes and regulatory mandates.
The global risk landscape in which modern business is conducted has changed dramatically in recent times. Boards of directors, CEOs and CFOs must now navigate their organisations through complex and treacherous non-financial risk minefields with only colour-coded, non-aggregatable risk assessments to support them.
Without the ability to analyse risks in the aggregate and drill to the detail, it is questionable whether effective governance is feasible. Assigning accountability for closing gaps between actual risk mitigation and industry consensus best practice is inhibited if such gaps are not quantified, valued and accounted for in financial statements.
RASB is the custodian of a new integrated non-financial risk management and accounting framework we call ‘Risk Accounting’. Risk accounting identifies, quantifies, aggregates, values, reports and accounts for all forms of non-financial risk, including environmental, social and governance (ESG) risks. RASB believes that, if adopted, risk accounting will restore a more appropriate balance between governance exercised from the boardroom and control exercised through statutes and regulatory mandates.
The tables and templates that comprise risk accounting are fully standardised to ensure the direct comparability of outputs within and between organisations.
A fundamental principle of risk accounting is that significant exposure to non-financial risk is triggered upon the transfer of products and services to external parties. Thus, risk accounting’s starting point is the daily controlled and audited amount of sales by product registered in official accounting ledgers.
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.
Exposure to non-financial risk is calculated at the transaction level based on each products’ 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.
Risk accounting removes the subjectivity inherent in risk & control self-assessments by replacing the traffic light (red/amber/green) assessment metric typically used in risk & control self-assessment (RCSA) 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.
Aggregated exposures to non-financial 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 reduction. Managers will have the capability to analyse exposure to non-financial risk in the aggregate and drill to the detail.
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.
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