GROUP 3

RISK AND FORECASTING

The shortcomings of risk management and risk forecasting provide important lessons—

namely, that a firm’s leadership needs to make risk a priority and a key part of strategic decision

making. Forecasting is often time-consuming, notably when it comes to collecting information

from the people within your organization and checking its reliability to ensure that the group

management can use it to take the right decisions. The operations and management control teams

are caught between their daily work, the obligation to provide their forecasts on time, the risk of

error and ongoing exchanges with subsidiaries they exhaust themselves trying to take “current”

risks, such as foreign exchange risk, into account.

The issue of risk is often raised and eventually minimized due to lack of time,

information or simply because your tools don’t allow you to assess it correctly, measure it and

make better forecasts by including it as a factor as well.

Management earnings forecasts are a key voluntary disclosure method for

communicating a firm’s financial prospects to market participants. Theory predicts a link

between the quality of information used for managerial decision-making and external financial

disclosures, suggesting that the quality of information that firms use to forecast earnings and

develop financial plans should be associated with the accuracy of their externally-disclosed

earnings forecasts. We test this prediction by examining the relation between the sophistication

with which a firm incorporates risk considerations into its forecasting and planning processes

and the accuracy of its external earnings guidance.

 Consistent application of comprehensive, quantitatively-oriented risk assessments is said

to improve understanding of current and emerging risks by providing best and worst case

performance scenarios and identifying risks that fall outside of established tolerances. Enhanced

quality and consistency of key finance and risk assumptions and forecasting inputs, greater

alignment of risk-return profiles across the firm, improved quantitative understanding and

analysis of the risk drivers that contribute most to earnings exposure, and enhanced analytical

capabilities can improve a firm’s ability to assess and incorporate uncertainty in forecasts and

plans.