Our mission “to position Risk Accounting as the universally adopted method of identifying, quantifying, aggregating, and reporting all forms of non-financial risks” is unquestionably ambitious. Indeed, we are constantly reminded of the challenges we face. For example, I was recently reading an academic paper from an eminent group of academics and practitioners on the topic of systemic risk and financial stability. It included this statement presented as fact, not conjecture:
“A risk is inherently unobservable – only outcomes are observable”.
My heart sank when I read this. For me, it’s an admission that risk managers and accountants have failed to provide banks’ boards, management, investors, and other stakeholders with a means of effectively monitoring accumulating risks. After all, if you can’t observe something… you have no means by which to manage it
Observation comprises two aspects: qualitative and quantitative. The ‘qualitative’ aspect is concerned with the presence or absence of expected properties in the object of our observation; ‘quantitative’ involves the assignment of numerical values to those expected properties through counting or measuring.
I fully accept that observing accumulating exposures to risk in financial institutions is tricky because of the juxtaposition between risk exposures and their related outcomes. Whereas exposures are subject to both financial and non-financial influences, all outcomes are ultimately expressed in financial terms. For example, the outcome of the subprime fiasco was an eruption of massive credit losses (financial) whereas a principal cause was the application of flawed risk-pricing models (non-financial).
So, declaring a risk to be “inherently unobservable” is probably because the non-financial portion of accumulating risk exposures is generally viewed as unquantifiable in financial terms. As a consequence, risk managers have defaulted to weak and highly ineffective self-assessments of risks and controls. Trust me, boards and c-suite executives constantly question what possible business value can be derived from subjective, non-aggregatable, and non-comparable traffic-light risk & control self-assessments (RCSAs).
Let me be clear… NON-FINANCIAL EXPOSURES TO RISK CAN BE QUANTIFIED. We have demonstrated this to be true through the information on our website, ongoing research conducted in collaboration with the Durham University Business School and the associated research papers published in academic journals and other articles, presentations, and speeches. We welcome every opportunity to demonstrate how it can be done. All it needs is a little imagination and the determination to fix a problem that has prevented risk management from fulfilling its true potential for far too long.