(Un)useful risk disclosure: explanations from the Italian banks

Abstract

Purpose – The purpose of this paper is to better understand how mandatory risk categories are disclosed and to provide a better understanding of the reasons why risk disclosure looks less useful than it ought to be. Design/methodology/approach – We analyze how Italian banks provide risk information, by focusing on its characteristics to find out any differences between the notes to the financial statements and the public report, both prepared in compliance with the instructions of the Bank of Italy. We assess the risk-related reporting practices of 66 Italian banks, based on a content analysis of the two mandatory reports, and verify whether bank-specific factors explain any differences. Findings – Italian banks formally comply with the Bank of Italy’s instructions, but there is discretion to choose the characteristics of the information provided. Despite different risk categories to disclose in each report, disclosure is quite uniform, although banks tend to provide denser information in the notes to the financial statements and the difference in the economic signs between the two reports decreases as the level of risk increases. Practical implications – The significance of this study goes beyond the debate taking place in the academic arena, as it can be largely relevant for preparers, those responsible for setting international and national accounting standards, the Basel Committee on Banking Supervision and the domestic supervisory authorities, particularly concerning the possible introduction of requirements that are more explicit than the existing ones. Originality/value – The Italian setting is very relevant because unlike other countries, Italy adopts “interventionist enforcements”, which are regarded as a critical tool for achieving the minimum disclosure requirements. Moreover, the two sets of disclosure required by the Bank of Italy have never been investigated in a single data set.

Introducing More IFRS Principles of Disclosure – Will the Poor Disclosers Improve?

“…The second category, pertaining to specific areas, includes studies of business combination and goodwill impairment test disclosures in Europe (Glaum, Schmidt, Street, & Vogel, 2013;Mazzi et al, 2017), Australia (Bepari & Mollik, 2015;Bepari, Rahman, & Taher, 2014;Guthrie & Pang, 2013), Singapore (Carlin, Finch, & Khairi, 2010), the Netherlands and Sweden (Hartwig, 2015); studies of financial instrument disclosures in Italy (Maffei, Aria, Fiondella, Spanò, & Zagaria, 2014), Portugal (Lopes & Rodrigues, 2007), the UK (Linsley & Shrives, 2006;Woods & Marginson, 2004), the US (Lu & Mande, 2014) and in European banks (Bischof, 2009 ); studies of segment disclosures in global IAS-adopter samples, primarily European (Prather-Kinsey & Meek, 2004;Street & Nichols, 2002), 8 Germany (Franzen & Weißenberger, 2015), the US (Chen & Liao, 2015); studies of disclosure compliance in relation to financial statement presentation disclosures in the UK (Iatridis & Valahi, 2010); share-based payment and executive compensation disclosures in Australia (Bassett, Koh, & Tutticci, 2007), France (Goh, Joos, & Soonawalla, 2016) and the US (Robinson, Xue, & Yu, 2011); contingent liabilities in the US (Hennes, 2014) and intangible assets in Italy (Devalle, Rizzato, & Busso, 2016).…”

Disclosure of corporate risks and governance before, during and after the global financial crisis: case study in the UK construction industry in 2006–2009

“…Content analysis has been widely used in accounting research to measure corporate risk disclosure in annual reports (Linsley and Shrives, 2006;Abraham and Cox, 2007;Greco, 2012;Hill and Short, 2009;Maffei et al, 2014;Elzahar and Hussainey, 2012;Al-Najjar and Abed, 2014;Li, 2010). As a well-established method, content analysis is applied "for making replicable and valid inferences from texts to the contexts of their use" where reproducibility of findings plays an essential role (Krippendorff, 2004, p.18).…”

Does graphical reporting improve risk disclosure? Evidence from European banks

“…Prior research shows that the level of banks' risk disclosure has increased over time, following an increase in minimum requirements imposed (e.g., Bischof, 2009). However, risk reporting's usefulness for decisionmaking has not improved at a similar rate (Pérignon and Smith, 2010;Maffei et al, 2014). Recent studies have found risk reporting to be unclear, very general and qualitative, not sufficiently forward-oriented, noncomparable and, thus, unhelpful for the assessment of risk exposure on an on-going basis (e.g., , Woods et al, 2008aOliveira et al, 2011b;Maffei et al, 2014).…”

“…Inaccurate design can mislead the annual report's readers, with or without an accounting experience (Muiño and Trombetta, 2009;Pennington and Tuttle, 2009). The quality of risk reporting could be affected by the level of risk the bank faces (e.g., Maffei et al, 2014). …”

“…Recent research has questioned the usefulness of current risk reporting practice (e.g., Linsley and Shrives, 2005;Woods et al, 2008b;Oliveira et al, 2011a;Bischof and Daske, 2013;Maffei et al, 2014;Elshandidy et al 2015;Allini et al, 2016). Risk disclosure has been criticised for not being detailed, nor forward-looking, nor sufficient for assessing the overall risk profile (Linsley and Lawrence, 2007;Magnan and Markarian, 2011) nor relevant for the decision-making process (Beretta and Bozzolan, 2004;Pérignon and Smith, 2010).…”