This paper examines risk information disclosed by UK public companies within their annual reports. The types of risk information disclosed are analyzed and the authors examine whether a relationship exists between company size or level of risk and risk disclosure totals.
No prior empirical studies of the risk information content of annual reports have been undertaken. To analyze the risk disclosures, a sentence‐based approach was used.
Overall the results indicate that the companies sampled are not providing a complete picture of the risks they face. There is minimal disclosure of quantified risk information and a significant proportion of risk disclosures consist of generalized statements of risk policy. More usefully directors are releasing forward‐looking risk information. The principal driver affecting levels of risk disclosure is company size and not company risk level.
Further risk disclosure research is possible in many different areas. Cross‐country studies could be undertaken as could risk disclosure studies within specific industry sectors. A limitation of the sentence‐based methodology is that it does not measure the quality of the risk disclosures and therefore different methods may be adopted in future studies.
Professional bodies attempting to improve risk reporting have not convinced directors of the benefits associated with greater voluntary risk disclosure. In the UK this has led to a mandatory requirement to provide better risk information being forced upon companies through legislation enacted by the UK government.
The area this paper researches is of particular importance given recent accounting scandals that have occurred. No previous risk disclosure studies have been published, therefore this exploration is also valuable in linking risk management and transparency.
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