Reputational risk refers to actions and circumstances that can cause an organization or other entity to lose credibility with stakeholders, customers, partners, or the general public. This loss of trust, if not addressed quickly and adequately, can, in turn, cause an entity severe financial damage.
1. What is reputational risk?
• Reputation refers to the opinions people have and communicate about something, so
reputational risk is the risk that people will have a negative opinion of an organization
and share that opinion with other people.
• Reputational damage can be caused by many factors such as dishonesty,
incompetence, activities that do unnecessary harm to the environment or unethical
behaviour.
• It can be caused by an individual or by the behaviour of a company as a whole.
2. Sources of reputational risk
There are a wide variety of considerations:
• Employees - the actions and behavior of staff reflect the principles of the organization
they work for.
• Management – their position implies they are more likely to reflect the core values of
the business, so any digression is more significant.
• Accounting - any company found to be operating dubious accounting practices will
lose the confidence of customers and investors.
• Fraud - if a company allows fraud to take place or doesn’t take appropriate action, this
can lead to stakeholders having concerns. The prerequisites for fraud to occur are
dishonesty, opportunity and motive.
• Bribery and corruption - if an organisation acts in an inappropriate manner by
offering or accepting bribery or any form of corruption, this will damage its reputation.
• Transfer pricing - it is of reputational importance to strike the correct balance
between using the rules and regulations of different countries to benefit shareholders
and paying a reasonable amount of tax.
• Cyber security - as online sales increase, having a reputation for a secure website is
increasingly important.
• Data protection - there is increasing legislation related to looking after personal
information, and failure to comply could lead to reputational damage.
Unethical behaviour – this is explored in more detail in the next section.
Business ethics
A management accountant should apply safeguards to eliminate the threats or reduce them to
an acceptable level such that compliance with the fundamental principles is not compromised.
• CSR, sustainability - for differentiation, to attract and retain employees, for brand
strengthening
• Miss-selling, misleading advertising
• Mistreatment of staff – e.g. discrimination, unfair dismissal
• Bribery and corruption, especially of foreign government officials
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