A Framework for the Quality of Corporate Risk Disclosure

Abstract Corporate risk disclosure (CRD) has gained considerable attention particularly after the US accounting scandals and corporate failures of the early 2000s and the global financial crisis of 2007-8. These crises served as a wakeup call for companies, investors, policy makers, capital market authorities and other stakeholder groups to pay more attention to risk management and risk reporting. Consequently, there has been a growing demand for companies to provide more, and better, risk information (RI). Professional bodies have proposed guidelines encouraging companies to provide more information on their risk exposure. Furthermore, there have been regulatory responses with different countries issuing regulations that oblige companies to report RI. Previous studies have focused on examining CRD quantity and its determinants. While some studies suggest companies have increased their risk disclosures, others highlight that companies are not necessarily reporting more informative RI. Concerns have been raised about CRD quality and usefulness, and yet CRD quality is still an under-researched area. This study departs from the mainstream literature in that it develops an in-depth understanding of and a framework for CRD quality. This is the first study to investigate the perspectives of the different stakeholder groups on various aspects of CRD quality using semi-structured interviews. The findings reveal a lack of a common definition of risk among the interviewees and highlight the importance of CRD to information users and companies. The results indicate that CRD has improved, yet there is considerable room for improvement. The findings also demonstrate a number of incentives and disincentives for risk reporting that could help explain managers’ CRD decisions. The FASB’s qualitative characteristics have been operationalised in the context of CRD and a number of characteristics have been developed that could help improve and assess CRD quality. This study has important implications for CRD policy, practice and future research.