Accountability
& Risk
Management
Summary of the Lectures
Given in 2021/2022 | Summary by LouisT
,Contents
Chapter 1. Introduction to the course ................................................................................................... 6
1.1 Introduction to Corporate Governance ................................................................................. 6
1.1.1 Principles towards Corporate Governance in The Netherlands. ................................... 6
1.1.2 Accountability and Corporate Governance.................................................................... 6
1.1.3 Risk Management and Corporate Governance.............................................................. 6
1.2 Introduction to Accountability ............................................................................................... 6
1.2.1 Hierarchical Accountability ............................................................................................ 7
1.2.2 Holistic Accountability .................................................................................................... 7
1.3 Introduction to Risk Management ......................................................................................... 7
1.3.1 Preventable Risks ............................................................................................................ 7
1.3.2 Strategy Risks .................................................................................................................. 7
1.3.3 External Risks .................................................................................................................. 7
1.4 Case Study ............................................................................................................................... 9
1.5 The final word to Kuhn (1987) .............................................................................................. 12
Chapter 2. Internal Controls & Risk Management .............................................................................. 13
2.1 COSO Framework .................................................................................................................. 13
2.1.1 Categories of Objectives ............................................................................................... 13
2.1.2 Components and principles of internal control ........................................................... 13
2.2 Wirecard ................................................................................................................................ 15
2.3 Paper: Gabbioneta (2013) .................................................................................................... 17
2.3.1 Motivations ................................................................................................................... 17
2.3.3 Parmalat Case ............................................................................................................... 17
Chapter 3. Enterprise Risk Management ............................................................................................. 20
3.1 Definitions: ERM ................................................................................................................... 20
3.2 Capabilities: ERM .................................................................................................................. 20
3.3 Misconceptions: ERM ........................................................................................................... 20
3.4 COSO cube in ERM ................................................................................................................ 21
3.4.1 COSO cube in ERM (New model) .................................................................................. 22
3.5 The Nature of risk culture..................................................................................................... 22
3.5.1 Effectiveness of risk culture.......................................................................................... 22
3.5.2 Embedding a risk culture .............................................................................................. 23
3.6 The interrelated nature of Risk Appetite and Risk Tolerance ............................................. 23
3.6.1 Risk Appetite ................................................................................................................. 23
3.6.2 Risk Tolerance ............................................................................................................... 24
3.6.3 Risk Appetite & Risk Tolerance .................................................................................... 25
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, 3.7 Risk Management ‘mistakes’ by Taleb et al. (2009) ............................................................ 26
3.7.1 Black Swan Events ........................................................................................................ 26
3.7.2 Focus of Risk Management........................................................................................... 26
3.7 The Risk Management of Nothing by Power (2009)............................................................ 27
3.7.1 Three design flaws ........................................................................................................ 28
3.7.2 Conclusions ................................................................................................................... 29
Chapter 4. Accountability for Sustainable Business ............................................................................ 30
4.1 The evolution of ESG / Sustainability Reporting ................................................................. 30
4.1.1 Terminology .................................................................................................................. 31
4.1.2 IFRS vs Europe ............................................................................................................... 31
4.1.3 COSO.............................................................................................................................. 33
4.1.4 Different ESG-Related Reporting Frameworks ............................................................ 33
4.1.5 IFAC 2021 ‘Call to Action’.............................................................................................. 36
4.2 Evolutions in Risk Reporting: The Taskforce on Climate-Related Financial Disclosures
(TCFD) 39
4.2.1 Motivations ................................................................................................................... 39
4.2.2 TCFD............................................................................................................................... 39
Chapter 5. Accountability for sustainable business ............................................................................ 46
5.1 The nature of Responsible Investment ................................................................................ 46
5.2.1 Relevant ESG issues ...................................................................................................... 46
5.2.2 WEF Global Risks Landscape......................................................................................... 47
5.2.3 Timeline of the evolution of Responsible Investment ................................................ 47
5.2.4 Situating responsible investment in the spectrum of social and financial investing . 49
5.2.5 Drivers of growth in Responsible Investment ............................................................. 49
5.2.6 Regulation ..................................................................................................................... 50
5.3 Fiduciary duties of investors ................................................................................................ 52
5.3.1 Ignore ESG factors? ....................................................................................................... 52
5.3.2 Embrace ESG factors? ................................................................................................... 52
5.3.3 Claimed misconceptions about responsible investment ............................................ 52
5.3.4 Accountants and Responsible Investment................................................................... 52
5.4 Clune & O’Dwyer (2020) ....................................................................................................... 53
5.4.1 Background & Motivation ............................................................................................ 53
5.4.2 Research Question ........................................................................................................ 53
5.4.2 VBDO ............................................................................................................................. 53
5.4.3 Case Narrative – The FED era ....................................................................................... 54
5.4.4 Case Narrative – The SED era ....................................................................................... 55
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, 5.4.5 Theorizing the Case narrative....................................................................................... 55
5.5 Recap ..................................................................................................................................... 57
Chapter 6. Accountability in accounting professions .......................................................................... 58
6.1 Accountability of the accounting profession and its member firms ................................... 58
6.1.1 UK Case.......................................................................................................................... 58
6.1.2 UK Trend........................................................................................................................ 58
6.1.3 Netherlands Case .......................................................................................................... 59
6.2 Lecture Paper: “Accountability of the accounting profession in action” ........................... 59
6.2.1 Theoretical Framework ................................................................................................ 59
6.2.2 Results (Phases) ............................................................................................................ 60
6.2.3 Summary ....................................................................................................................... 62
6.3 Summary This week .............................................................................................................. 62
Chapter 7. Final words for the exam .................................................................................................... 63
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,Chapter 1. Introduction to the course
1.1 Introduction to Corporate Governance
Corporate governance is an umbrella term as it includes specific issues from interactions, which
could be from senior management, shareholders, etc. Corporate Governance is concerned with
holding the balance between economic and social goals and between individuals and communal
goals. The aim is to align as neatly as possible the interest of individuals, corporations, and society.
1.1.1 Principles towards Corporate Governance in The Netherlands.
A company is a long-term alliance between various parties involved in the company. The
stakeholders are the groups and individuals who, directly or indirectly, influence – or are influenced
by – the attainment of the company’s objectives. This is relevant towards week 3.
The management board and the supervisory board have overall responsibility for weighing up his
interest. Responsible to ensure continuity and create long-term shareholder values.
1.1.2 Accountability and Corporate Governance
Codes came because of the financial scandals. Codes and principles abound key focus on improving
transparency, internal control, and accountability for stakeholder groups. Corporate Governance is
partly aimed at improving corporate accountability. Broad corporate governance is all about
improving corporate accountability.
1.1.3 Risk Management and Corporate Governance
The purpose of corporate governance is to facilitate effective, entrepreneurial, and prudent
management that can deliver the long-term success of the company. The board of directors are
responsible for determining the nature and extent of the significant risks it is willing to take in
achieving its strategic objectives. Also, maintain sound risk management and internal control
systems.
Risk Management is therefore a core component of corporate governance.
Note: Scandals, generally emphasize the role of risk management. Failures are partly blamed on:
1. Failures in risk management systems.
2. Lack of information about risk exposures reaching boards.
3. Lack of broad monitoring of risk management
4. Lack of disclosure of risks and their management
5. Lack of embedding of risk management in strategic decision making.
1.2 Introduction to Accountability
This is a fluid concept at the heart of corporate governance. Is it about giving and demanding reasons
for conduct? So, identifying what one is responsible for and then providing information about that
responsibility to those who have rights to that information.
Accountability is the acknowledgment that an action has an impact on you and on others. So, we are
being held to account <------------------> Holding to account
But why do we need accountability? What are the motivation/drivers?
To whom?
Lastly, for what or how?
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, 1.2.1 Hierarchical Accountability
This focuses on short-term functional orientation. Resource use, immediate quantifiable impacts. In
addition, external focus, which looks at oversight and control. It prioritizes upward, short-term
accountability to powerful patrons like shareholders.
1.2.2 Holistic Accountability
This augments hierarchical accountability. This looks for broader, sustainable impacts. In addition, it
embraces accountability to broad sets of stakeholders.
1.3 Introduction to Risk Management
This is about the identification of risk factors that form part of a life of a business. Then, you analyze
it and respond to it.
Effective risk management attempts to control, as much as possible, the future outcomes by acting
proactively rather than reactively. You might be able to reduce the possibility and/or the impact of a
certain risk.
Individual risk events and overall risks must be understood and managed proactively. We also have
an overall risk assessment where you look at the risks of the organization. You want to optimize the
success by minimizing threats and maximizing opportunities and outcomes. Risks are not always bad
as these could be opportunities, which could be worth it. The definition avoids a mitigation mindset
by embracing opportunities.
1.3.1 Preventable Risks
These are internal risks, which should be controllable and ought to be eliminated or avoided. An
example could be: “The risks from a breakdown in routine operational processes” and “The risks from
employees’ and managers’ unauthorized, illegal, unethical incorrect or inappropriate actions.”
This is what you want to do because of compliance (Rule-Based Approach)
1.3.2 Strategy Risks
These are not inherently undesirable. This is because you could generate superior returns. A
common example is banks, which take on credit risks, and firms that invest in R&D.
Strategy risks cannot be managed by compliance. It is necessary to adopt a risk-management system,
where you determine the risk appetite. This system wants to reduce the probability that the assumed
risks actually materialize. You look at the probability of the risk actually materializing. To improve the
company’s ability to manage or contain the risk events should they occur. This means what actions
can be taken to prevent or manage risks.
1.3.3 External Risks
These arise externally and are beyond control. These could be natural/political disasters, etc. These
can’t be prevented. However, these can be identified and you could mitigate the impact of these
external risks. This can be done by stress testing, scenario analysis, and wargaming.
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