The value of risk reporting:a critical analysis of value-at-risk disclosures in the banking sector

This paper critically reviews the evolution of financial reporting in the banking sector with specific reference to the reporting of market risk and the growing use of the measure known as Value at Risk (VaR). The paper investigates the process by which VaR became 'institutionalised'. The analysis highlights a number of inherent limitations of VaR as a risk measure and questions the usefulness of published VaR disclosures, concluding that risk 'disclosure' might be more apparent than real. It also looks at some of the implications for risk reporting practice and the accounting profession more generally.

A fuzzy expected value approach under generalized data envelopment analysis

Fuzzy data envelopment analysis (DEA) models emerge as another class of DEA models to account for imprecise inputs and outputs for decision making units (DMUs). Although several approaches for solving fuzzy DEA models have been developed, there are some drawbacks, ranging from the inability to provide satisfactory discrimination power to simplistic numerical examples that handles only triangular fuzzy numbers or symmetrical fuzzy numbers. To address these drawbacks, this paper proposes using the concept of expected value in generalized DEA (GDEA) model. This allows the unification of three models - fuzzy expected CCR, fuzzy expected BCC, and fuzzy expected FDH models - and the ability of these models to handle both symmetrical and asymmetrical fuzzy numbers. We also explored the role of fuzzy GDEA model as a ranking method and compared it to existing super-efficiency evaluation models. Our proposed model is always feasible, while infeasibility problems remain in certain cases under existing super-efficiency models. In order to illustrate the performance of the proposed method, it is first tested using two established numerical examples and compared with the results obtained from alternative methods. A third example on energy dependency among 23 European Union (EU) member countries is further used to validate and describe the efficacy of our approach under asymmetric fuzzy numbers.

Knowledge management applied to enterprise risk management

Risk and knowledge are two concepts and components of business management which have so far been studied almost independently. This is especially true where risk management (RM) is conceived mainly in financial terms, as for example, in the financial institutions sector. Financial institutions are affected by internal and external changes with the consequent accommodation to new business models, new regulations and new global competition that includes new big players. These changes induce financial institutions to develop different methodologies for managing risk, such as the enterprise risk management (ERM) approach, in order to adopt a holistic view of risk management and, consequently, to deal with different types of risk, levels of risk appetite, and policies in risk management. However, the methodologies for analysing risk do not explicitly include knowledge management (KM). This research examines the potential relationships between KM and two RM concepts: perceived quality of risk control and perceived value of ERM. To fulfill the objective of identifying how KM concepts can have a positive influence on some RM concepts, a literature review of KM and its processes and RM and its processes was performed. From this literature review eight hypotheses were analysed using a classification into people, process and technology variables. The data for this research was gathered from a survey applied to risk management employees in financial institutions and 121 answers were analysed. The analysis of the data was based on multivariate techniques, more specifically stepwise regression analysis. The results showed that the perceived quality of risk control is significantly associated with the variables: perceived quality of risk knowledge sharing, perceived quality of communication among people, web channel functionality, and risk management information system functionality. However, the relationships of the KM variables to the perceived value of ERM are not identified because of the low performance of the models describing these relationships. The analysis reveals important insights into the potential KM support to RM such as: the better adoption of KM people and technology actions, the better the perceived quality of risk control. Equally, the results suggest that the quality of risk control and the benefits of ERM follow different patterns given that there is no correlation between both concepts and the distinct influence of the KM variables in each concept. The ERM scenario is different from that of risk control because ERM, as an answer to RM failures and adaptation to new regulation in financial institutions, has led organizations to adopt new processes, technologies, and governance models. Thus, the search for factors influencing the perceived value of ERM implementation needs additional analysis because what is improved in RM processes individually is not having the same effect on the perceived value of ERM. Based on these model results and the literature review the basis of the ERKMAS (Enterprise Risk Knowledge Management System) is presented.

Project risk management in analytic framework

Risks and uncertainties are part and parcel of any project as projects are planned with many assumptions. Therefore, managing those risks is the key to project success. Although risk is present in all most all projects, large-scale construction projects are most vulnerable. Risk is by nature subjective. However, managing risk subjectively posses the danger of non-achievement of project goals. This study introduces an analytical framework for managing risk in projects. All the risk factors are identified, their effects are analyzed, and alternative responses are derived with cost implication for mitigating the identified risks. A decision-making framework is then formulated using decision tree. The expected monetary values are derived for each alternative. The responses, which require least cost is selected. The entire methodology has been explained through a case study of an oil pipeline project in India and its effectiveness in managing projects has been demonstrated. © INTERNATIONAL JOURNAL OF INDUSTRIAL ENGINEERING.

Project risk management:a combined analytic hierarchy process and decision tree approach

Time, cost and quality achievements on large-scale construction projects are uncertain because of technological constraints, involvement of many stakeholders, long durations, large capital requirements and improper scope definitions. Projects that are exposed to such an uncertain environment can effectively be managed with the application of risk management throughout the project life cycle. Risk is by nature subjective. However, managing risk subjectively poses the danger of non-achievement of project goals. Moreover, risk analysis of the overall project also poses the danger of developing inappropriate responses. This article demonstrates a quantitative approach to construction risk management through an analytic hierarchy process (AHP) and decision tree analysis. The entire project is classified to form a few work packages. With the involvement of project stakeholders, risky work packages are identified. As all the risk factors are identified, their effects are quantified by determining probability (using AHP) and severity (guess estimate). Various alternative responses are generated, listing the cost implications of mitigating the quantified risks. The expected monetary values are derived for each alternative in a decision tree framework and subsequent probability analysis helps to make the right decision in managing risks. In this article, the entire methodology is explained by using a case application of a cross-country petroleum pipeline project in India. The case study demonstrates the project management effectiveness of using AHP and DTA.

Risk management in oil and gas construction projects in Vietnam

Purpose - The purpose of the paper is to the identify risk factors, which affect oil and gas construction projects in Vietnam and derive risk responses. Design/methodology/approach - Questionnaire survey was conducted with the involvement of project executives of PetroVietnam and statistical analysis was carried out in order to identify the major project risks. Subsequently, mitigating measures were derived using informal interviews with the various levels of management of PetroVietnam. Findings - Bureaucratic government system and long project approval procedures, poor design, incompetence of project team, inadequate tendering practices, and late internal approval processes from the owner were identified as major risks. The executives suggested various strategies to mitigate the identified risks. Reforming the government system, effective partnership with foreign collaborators, training project executives, implementing contractor evaluation using multiple criteria decision-making technique, and enhancing authorities of project people were suggested as viable approaches. Practical implications - The improvement measures as derived in this study would improve chances of project success in the oil and gas industry in Vietnam. Originality/value - There are several risk management studies on managing projects in developing countries. However, as risk factors vary considerably across industry and countries, the study of risk management for successful projects in the oil and gas industry in Vietnam is unique and has tremendous importance for effective project management.

Decision support system for risk management:a case study

This study demonstrates a quantitative approach to construction risk management through analytic hierarchy process and decision tree analysis. All the risk factors are identified, their effects are quantified by determining probability and severity, and various alternative responses are generated with cost implication for mitigating the quantified risks. The expected monetary values are then derived for each alternative in a decision tree framework and subsequent probability analysis aids the decision process in managing risks. The entire methodology is explained through a case application of a cross-country petroleum pipeline project in India and its effectiveness in project management is demonstrated.

Managing risk in software development projects:a case study

Purpose - The main objective of the paper is to develop a risk management framework for software development projects from developers' perspective. Design/methodology/approach - This study uses a combined qualitative and quantitative technique with the active involvement of stakeholders in order to identify, analyze and respond to risks. The entire methodology has been explained using a case study on software development project in a public sector organization in Barbados. Findings - Analytical approach to managing risk in software development ensures effective delivery of projects to clients. Research limitations/implications - The proposed risk management framework has been applied to a single case. Practical implications - Software development projects are characterized by technical complexity, market and financial uncertainties and competent manpower availability. Therefore, successful project accomplishment depends on addressing those issues throughout the project phases. Effective risk management ensures the success of projects. Originality/value - There are several studies on managing risks in software development and information technology (IT) projects. Most of the studies identify and prioritize risks through empirical research in order to suggest mitigating measures. Although they are important to clients for future projects, these studies fail to provide any framework for risk management from software developers' perspective. Although a few studies introduced framework of risk management in software development, most of them are presented from clients' perspectives and very little effort has been made to integrate this with the software development cycle. As software developers absorb considerable amount of risks, an integrated framework for managing risks in software development from developers' perspective is needed. © Emerald Group Publishing Limited.

People, technology, processes and risk knowledge sharing

The present global economic crisis creates doubts about the good use of accumulated experience and knowledge in managing risk in financial services. Typically, risk management practice does not use knowledge management (KM) to improve and to develop new answers to the threats. A key reason is that it is not clear how to break down the “organizational silos” view of risk management (RM) that is commonly taken. As a result, there has been relatively little work on finding the relationships between RM and KM. We have been doing research for the last couple of years on the identification of relationships between these two disciplines. At ECKM 2007 we presented a general review of the literature(s) and some hypotheses for starting research on KM and its relationship to the perceived value of enterprise risk management. This article presents findings based on our preliminary analyses, concentrating on those factors affecting the perceived quality of risk knowledge sharing. These come from a questionnaire survey of RM employees in organisations in the financial services sector, which yielded 121 responses. We have included five explanatory variables for the perceived quality of risk knowledge sharing. These comprised two variables relating to people (organizational capacity for work coordination and perceived quality of communication among groups), one relating to process (perceived quality of risk control) and two related to technology (web channel functionality and RM information system functionality). Our findings so far are that four of these five variables have a significant positive association with the perceived quality of risk knowledge sharing: contrary to expectations, web channel functionality did not have a significant association. Indeed, in some of our exploratory regression studies its coefficient (although not significant) was negative. In stepwise regression, the variable organizational capacity for work coordination accounted for by far the largest part of the variation in the dependent variable perceived quality of risk knowledge sharing. The “people” variables thus appear to have the greatest influence on the perceived quality of risk knowledge sharing, even in a sector that relies heavily on technology and on quantitative approaches to decision making. We have also found similar results with the dependent variable perceived value of Enterprise Risk Management (ERM) implementation.

Strategic and operational risk in an international collaboration agency: a knowledge management solution

The International Cooperation Agency (identified in this article as IDEA) working in Colombia is one of the most important in Colombian society with programs that support gender rights, human rights, justice and peace, scholarships, aboriginal population, youth, afro descendants population, economic development in communities, and environmental development. The identified problem is based on the diversified offer of services, collaboration and social intervention which requires diverse groups of people with multiple agendas, ways to support their mandates, disciplines, and professional competences. Knowledge creation and the growth and sustainability of the organization can be in danger because of a silo culture and the resulting reduced leverage of the separate group capabilities. Organizational memory is generally formed by the tacit knowledge of the organization members, given the value of accumulated experience that this kind of social work implies. Its loss is therefore a strategic and operational risk when most problem interventions rely on direct work in the socio-economic field and living real experiences with communities. The knowledge management solution presented in this article starts first, with the identification of the people and groups concerned and the creation of a knowledge map as a means to strengthen the ties between organizational members; second, by introducing a content management system designed to support the documentation process and knowledge sharing process; and third, introducing a methodology for the adaptation of a Balanced Scorecard based on the knowledge management processes. These three main steps lead to a knowledge management “solution” that has been implemented in the organization, comprising three components: a knowledge management system, training support and promotion of cultural change.

The board of directors, executives and risk knowledge management

Enterprise Risk Management (ERM) and Knowledge Management (KM) both encompass top-down and bottom-up approaches developing and embedding risk knowledge concepts and processes in strategy, policies, risk appetite definition, the decision-making process and business processes. The capacity to transfer risk knowledge affects all stakeholders and understanding of the risk knowledge about the enterprise's value is a key requirement in order to identify protection strategies for business sustainability. There are various factors that affect this capacity for transferring and understanding. Previous work has established that there is a difference between the influence of KM variables on Risk Control and on the perceived value of ERM. Communication among groups appears as a significant variable in improving Risk Control but only as a weak factor in improving the perceived value of ERM. However, the ERM mandate requires for its implementation a clear understanding, of risk management (RM) policies, actions and results, and the use of the integral view of RM as a governance and compliance program to support the value driven management of the organization. Furthermore, ERM implementation demands better capabilities for unification of the criteria of risk analysis, alignment of policies and protection guidelines across the organization. These capabilities can be affected by risk knowledge sharing between the RM group and the Board of Directors and other executives in the organization. This research presents an exploratory analysis of risk knowledge transfer variables used in risk management practice. A survey to risk management executives from 65 firms in various industries was undertaken and 108 answers were analyzed. Potential relationships among the variables are investigated using descriptive statistics and multivariate statistical models. The level of understanding of risk management policies and reports by the board is related to the quality of the flow of communication in the firm and perceived level of integration of the risk policy in the business processes.

Quality risk in global supply network

Purpose - The rise of recent product recalls reveals that manufacturing firms are particularly vulnerable to product quality and safety where goods and materials have been sourced globally. The purpose of this paper is to explore the issues of quality and safety problems in global supply networks, and introduce a supply chain risk management (SCRM) framework to reduce the quality risk. Design/methodology/approach - A conceptual SCRM framework for mitigating quality risk is developed. In addition, four SCRM treatment practices are proposed by consolidating the empirical literature in the operations management and supply chain management areas. The general feasibility was discussed based on literature. Findings - The research has identified the root causes of the recent product recalls and a series of product harm scandals ranging from automobiles to unsafe toys. Supply chains are extended by outsourcing and stretched by globalization, which greatly increase the complexity of supply networks and decrease the visibility in risk and operation processes. Originality/value - The paper identifies four SCRM practices, and proposes two distinct antecedents that can prompt the effectiveness of SCRM. © 2011 Emerald Group Publishing Limited. All rights reserved.

Real options and multinational investments : an empirical study of risk, performance and organisational awareness

DUE TO COPYRIGHT RESTRICTIONS ONLY AVAILABLE FOR CONSULTATION AT ASTON UNIVERSITY LIBRARY AND INFORMATION SERVICES WITH PRIOR ARRANGEMENT This thesis is a cross-disciplinary study of the empirical impact of real options theory in the fields of decision sciences and performance management. Borrowing from the economics, strategy and operations research literature, the research examines the risk and performance implications of real options in firms’ strategic investments and multinational operations. An emphasis is placed on the flexibility potential and competitive advantage of multinational corporations to explore the extent to which real options analysis can be classified as best practice in management research. Using a combination of qualitative and quantitative techniques the evidence suggests that, if real options are explored and exploited appropriately, real options management can result in superior performance for multinational companies. The qualitative findings give an overview of the practical advantages and disadvantages of real options and the statistical results reveal that firms which have developed a high awareness of their real options are, as predicted by the theory, able to reduce their downside risk and increase profits through flexibility, organisational slack and multinationality. Although real options awareness does not systematically guarantee higher returns from operations, supplementary findings indicate that firms with evidence of significant investments in the acquisition of real options knowledge tend to outperform competitors which are unaware of their real options. There are three contributions of this research. First, it extends the real options and capacity planning literature to path-dependent contingent-claims analysis to underline the benefits of average type options in capacity allocation. Second, it is thought to be the first to explicitly examine the performance effects of real options on a sample of firms which have developed partial capabilities in real options analysis suggesting that real options diffusion can be key to value creation. Third, it builds a new decision-aiding framework to facilitate the use of real options in projects appraisal and strategic planning.