Knowledge management in support of enterprise risk management

Risk management and knowledge management have so far been studied almost independently. The evolution of risk management to the holistic view of Enterprise Risk Management requires the destruction of barriers between organizational silos and the exchange and application of knowledge from different risk management areas. However, knowledge management has received little or no attention in risk management. This paper examines possible relationships between knowledge management constructs related to knowledge sharing, and two risk management concepts: perceived quality of risk control and perceived value of enterprise risk management. From a literature review, relationships with eight knowledge management variables covering people, process and technology aspects were hypothesised. A survey was administered to risk management employees in financial institutions. The results showed that the perceived quality of risk control is significantly associated with four knowledge management 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 knowledge management variables to the perceived value of enterprise risk management are not significant. We conclude that better knowledge management is associated with better risk control, but that more effort needs to be made to break down organizational silos in order to support true Enterprise Risk Management.

Risk management in organizations:an integrated case study approach

In any organization, risk plays a huge role in the success or failure of any business endeavour. Measuring and managing risk is a difficult and often complicated task and the global financial crisis of the late noughties can be traced to a worldwide deficiency in risk management regimes. One of the problems in understanding how best to manage risk is a lack of detailed examples of real world practice. In this accessible textbook the author sets the world of risk management in the context of the broader corporate governance agenda, as well as explaining the core elements of a risk management system. Material on the differences between risk management and internal auditing is supplemented by a section on the professionalization of risk – a relatively contemporary evolution. Enterprise risk management is also fully covered. With a detailed array of risk management cases – including Tesco, RBS and the UK government – lecturers will find this a uniquely well researched resource, supplemented by materials that enable the cases to be easily integrated into the classroom. Risk managers will be delighted with the case materials made available for the first time with the publication of this book.

Integrating risk management with performance management

This article argues that, post Enron, governance reforms around the world have served to raise the profile of risk management, and emphasise the need for a corporate wide approach to internal control that is overseen by the Board of Directors. In the US, this is most clearly demonstrated by the emergence of Enterprise Risk Management (ERM), defined as 'a process, effected by an entity's board of directors, management and other personnel, applied in strategy setting across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.' (COSO, 2004, p.2). In practical terms, however, the introduction of an enterprise wide holistic risk management system poses a big challenge to all but the smallest of organisations. The financial crisis has clearly shown that enterprise wide risk management remains a dream rather than a reality for even the world's largest and once highly respected companies.

Reporting and managing risk:a look at current practice at Tesco, RBS, local and central government

These case studies from CIMA highlight the need to embed risk management within more easily understood behaviours, consistent with the overall organisational culture. In each case, some form of internal audit team provides either an oversight function or acts as an expert link in that feedback loop. Frontline staff, managers and specialists should be completely aligned on risk, in part just to ensure that there is a consistency of approach. They should understand instinctively that good performance includes good risk management. Tesco has continued to thrive during the recession and remains a robust and efficient group of businesses despite the emergence of potential threats around consumer spending and the supply chain. RBS, by contrast, has suffered catastrophic and very public failures of risk management despite a large in-house function and stiff regulation of risk controls. Birmingham City Council, like all local authorities, is adapting to more commercial modes of operation and is facing diverse threats and opportunities emerging as a result of social change. And DCMS, like many other public sector organisations, has to handle an incredibly complex network of delivery partners within the context of a relatively recent overhaul of central government risk management processes. Key Findings: •Risk management is no longer solely a financial discipline, nor is it simply a concern for the internal control function. •Where organisations retain a discrete risk management cadre – often specialists at monitoring and evaluating a range of risks – their success is dependent on embedding risk awareness in the wider culture of the enterprise. •Risk management is most successful when it is explicitly linked to operational performance. •Clear leadership, specific goals, excellent influencing skills and open-mindedness to potential threats and opportunities are essential for effective risk management. •Bureaucratic processes and systems can hamper good risk management – either as a result of a ‘box-ticking mentality’ or because managers and staff believe they do not need to consider risk themselves.

Market risk reporting by the world's top banks:evidence on the diversity of reporting practice and the implications for international accounting harmonisation

The increasing adoption of international accounting standards and global convergence of accounting regulations is frequently heralded as serving to reduce diversity in financial reporting practice. In a process said to be driven in large part by the interests of international business and global financial markets, one might expect the greatest degree of convergence to be found amongst the world’s largest multinational financial corporations. This paper challenges such claims and presumptions. Its content analysis of longitudinal data for the period 2000-2006 reveals substantial, on going diversity in the market risk disclosure practices, both numerical and narrative, of the world’s top-25 banks. The significance of such findings is reinforced by the sheer scale of the banking sector’s risk exposures that have been subsequently revealed in the current global financial crisis. The variations in disclosure practices documented in the paper apply both across and within national boundaries, leading to a firm conclusion that, at least in terms of market risk reporting, progress towards international harmonisation remains rather more apparent than real.

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.

Moral hazard, dividends, and risk in banks

In non-financial firms, higher risk taking results in lower dividend payout ratios. In banking, public guarantees may result in a positive relationship between dividend payout ratios and risk taking. I investigate the interplay between dividend payout ratios and bank risk-taking allowing for the effect of charter values and capital adequacy regulation. I find a positive relationship between bank risk-taking and dividend payout ratios. Proximity to the required capital ratio and a high charter value reduce the impact of bank risk-taking on the dividend payout ratio. My results are robust to different proxies for the dividend payout ratio and bank risk-taking. © 2014 John Wiley & Sons Ltd.

On the Lp-Norm Regression Models for Estimating Value-at-Risk

Analysis of risk measures associated with price series data movements and its predictions are of strategic importance in the financial markets as well as to policy makers in particular for short- and longterm planning for setting up economic growth targets. For example, oilprice risk-management focuses primarily on when and how an organization can best prevent the costly exposure to price risk. Value-at-Risk (VaR) is the commonly practised instrument to measure risk and is evaluated by analysing the negative/positive tail of the probability distributions of the returns (profit or loss). In modelling applications, least-squares estimation (LSE)-based linear regression models are often employed for modeling and analyzing correlated data. These linear models are optimal and perform relatively well under conditions such as errors following normal or approximately normal distributions, being free of large size outliers and satisfying the Gauss-Markov assumptions. However, often in practical situations, the LSE-based linear regression models fail to provide optimal results, for instance, in non-Gaussian situations especially when the errors follow distributions with fat tails and error terms possess a finite variance. This is the situation in case of risk analysis which involves analyzing tail distributions. Thus, applications of the LSE-based regression models may be questioned for appropriateness and may have limited applicability. We have carried out the risk analysis of Iranian crude oil price data based on the Lp-norm regression models and have noted that the LSE-based models do not always perform the best. We discuss results from the L1, L2 and L∞-norm based linear regression models. ACM Computing Classification System (1998): B.1.2, F.1.3, F.2.3, G.3, J.2.

Assessing personal financial management in patients with bipolar disorder and its relation to impulsivity and response inhibition

Introduction: Impulsivity and risk-taking behaviours are reported in bipolar disorder (BD). We examined whether financial management skills are related to impulsivity in patients with BD. Methods: We assessed financial management skills using the Executive Personal Finance Scale (EPFS), impulsivity using the Barratt Impulsiveness Scale (BIS) and response inhibition using an emotional go/no-go task in bipolar individuals (N = 21) and healthy controls (HC; N = 23). Results: Patients had fewer financial management skills and higher levels of impulsivity than HC. In patients and controls, increased impulsivity was associated with poorer personal financial management. Patients and HC performed equally on the emotional go/no-go task. Higher BIS scores were associated with faster reaction times in HC. In patients, however, higher BIS scores were associated with slower reaction times, possibly indicating compensatory cognitive strategies to counter increased impulsivity. Conclusions: Patients with BD may have reduced abilities to manage personal finances, when compared against healthy participants. Difficulty with personal finance management may arise in part as a result of increased levels of impulsivity. Patients may learn to compensate for increased impulsivity by modulating response times in our experimental situations although whether such compensatory strategies generalize to real-world situations is unknown.

Distress risk, growth and earnings quality

We extend and complement prior work by investigating the earnings quality of firms with different financial health characteristics and growth prospects. By using three alternative measures of default likelihood and two alternative measures of growth options, without being limited to a specific event, we provide a more comprehensive setup for analysing the earnings characteristics of the universe of firms than examining distressed firms with persistent losses, dividend reductions or bankruptcy-filings. Our dataset consists of 15,049 healthy U.S. firms over the period 1990-2004. Results show that the relation between earnings quality and financial health is not monotonic. Distressed firms have a low level of earnings timeliness for bad news and a high level for good news, and manage earnings toward a positive target more frequently than healthy firms. On the other hand, healthy firms have a high level of earnings timeliness for bad news. Growth aspects play an important role in a firm's ability to manage earnings. In contrast to the findings of prior studies, growth firms have greater earnings timeliness for bad news, whereas value firms manage earnings toward a positive target more frequently than growth firms. © 2011 The Authors. Abacus© 2011 Accounting Foundation, The University of Sydney.

Dividend increases and initiations and default risk in equity returns

This study extends the Grullon, Michaely, and Swaminathan (2002) analysis by incorporating default risk. Using data for firms that either increased or initiated cash dividend payments during the 23-year period 1986-2008, we find reduction in default risk. This reduction is shown to be a priced risk factor beyond the Fama and French (1993) risk measures, and it explains the dividend payment decision and the positive market reaction around dividend increases and initiations. Further analysis reveals that the reduction in default risk is a significant factor in explaining the 3-year excess returns following dividend increases and initiations. © Copyright Michael G. Foster School of Business, University of Washington 2011.

Knowledge management in support of enterprise risk management

Risk management and knowledge management have so far been studied almost independently. The evolution of risk management to the holistic view of Enterprise Risk Management requires the destruction of barriers between organizational silos and the exchange and application of knowledge from different risk management areas. However, knowledge management has received little or no attention in risk management. This paper examines possible relationships between knowledge management constructs related to knowledge sharing, and two risk management concepts: perceived quality of risk control and perceived value of enterprise risk management. From a literature review, relationships with eight knowledge management variables covering people, process and technology aspects were hypothesised. A survey was administered to risk management employees in financial institutions. The results showed that the perceived quality of risk control is significantly associated with four knowledge management 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 knowledge management variables to the perceived value of enterprise risk management are not significant. We conclude that better knowledge management is associated with better risk control, but that more effort needs to be made to break down organizational silos in order to support true Enterprise Risk Management.

The complements towards developing a new risk management framework and Its applicability to the Nigerian power sector

The availability of regular supply has been identified as one of the major stimulants for the growth and development of any nation and is thus important for the economic well-being of a nation. The problems of the Nigerian power sector stems from a lot of factors culminating in her slow developmental growth and inability to meet the power demands of her citizens regardless of the abundance of human and natural resources prevalent in the nation. The research therefore had the main aim of investigating the importance and contributions of risk management to the success of projects specific to the power sector. To achieve this aim it was pertinent to examine the efficacy of risk management process in practice and elucidate the various risks typically associated with projects (Construction, Contractual, Political, Financial, Design, Human resource and Environmental risk factors) in the power sector as well as determine the current situation of risk management practice in Nigeria. To address this factors inhibiting the proficiency of the overarching and prevailing issue which have only been subject to limited in-depth academic research, a rigorous mixed research method was adopted (quantitative and qualitative data analysis). A review of the Nigeria power sector was also carried out as a precursor to the data collection stage. Using purposive sampling technique, respondents were identified and a questionnaire survey was administered. The research hypotheses were tested using inferential statistics (Pearson correlation, Chi-square test, t-test and ANOVA technique) and the findings revealed the need for the development of a new risk management implementation Framework. The proposed Framework was tested within a company project, for interpreting the dynamism and essential benefits of risk management with the aim of improving the project performances (time), reducing the level of fragmentation (quality) and improving profitability (cost) within the Nigerian power sector in order to bridge a gap between theory and practice. It was concluded that Nigeria’s poor risk management practices have prevented it from experiencing strong growth and development. The study however, concludes that the successful implementation of the developed risk management framework may help it to attain this status by enabling it to become more prepared and flexible, to face challenges that previously led to project failures, and thus contributing to its prosperity. The research study provides an original contribution theoretically, methodologically and practically which adds to the project risk management body of knowledge and to the Nigerian power sector.

Financial Transaction Tax: Small is Beautiful

The case for taxing financial transactions merely to raise more revenues from the financial sector is not particularly strong. Better alternatives to tax the financial sector are likely to be available. However, a tax on financial transactions could be justified in order to limit socially undesirable transactions when more direct means of doing so are unavailable for political or practical reasons. Some financial transactions are indeed likely to do more harm than good, especially when they contribute to the systemic risk of the financial system. However, such a financial transaction tax should be very small, much smaller than the negative externalities in question, because it is a blunt instrument that also drives out socially useful transactions. There is a case for taxing over-the-counter derivative transactions at a somewhat higher rate than exchange-based derivative transactions. More targeted remedies to drive out socially undesirable transactions should be sought in parallel, which would allow, after their implementation, to reduce or even phase out financialtransaction taxes.