Accountability and Risk Management

Lecture 1

Prof. Dr. Brendan O’Dwyer

Lecture outline

Part 1: Course introduction and requirements

Part 2: Overview of accountability and corporate

governance

Part 3: The nature of case study research

Part 1 outline

Course introduction Course requirements

Core objectives of this course

• Develop knowledge of academic research and related practice in accountability

and risk management

• Develop knowledge of social and organizational theory in accountability and

risk management

• Develop the ability to read and critique qualitative academic accounting

research
 Course Delivery and Attendance rules
• Lecture every week

• Seminar every week

• Physical attendance at the seminars is mandatory

• You can miss one seminar without consequences

• If you miss two seminars you will need to complete a major compensatory assignment

• If you miss more than two seminars, you cannot complete the course

• Queries not in the Course Outline – please email: arm-abs@uva.nl

Lectures

1. Introduce practical background and issues related to the Week’s topic

2. Review an academic paper (the Lecture paper) addressing aspects of the

Week’s topic
Seminars
• Review and discuss two academic papers

• Student assignment groups are required to submit homework prior to each

seminar in Weeks 2 to 6
• each group will review one academic paper covered in each seminar
• the paper for review is selected by the student group
• groups are set-up in Canvas under the People folder – they will be complete at the end of this
week when student registration for the course closes

• Seminars are designed to develop knowledge and thinking required to answer

open-ended essay-style exam questions
Course assessment
1. Closed-book, computer-based written final exam of 2 hours
duration (85%)

2. Weekly group assignments from Weeks 2 to Week 6 (15%)

• Please read pages 4 and 5 of the Course Outline for Course Assessment details
Homework Assignments
• Commencing in Week 2
• Groups are assigned on Canvas – these Groups are fixed for the entire Block
• The group selects one of the two seminar academic papers to review
• The group answers four questions related to the chosen paper (see next slide)
• One group member submits the group assignment through Assignments folder in
Canvas under the relevant Assignment week
• Deadline is: 09.00 every Wednesday for full-time group; 09.00 every Friday for part-time
group

• For detailed instructions on the weekly Homework Assignment, please read page 5 of the Course
Outline
• Follow these instructions carefully
Homework assignment questions

1. In your own words, outline the key findings and/or storyline of the paper.

2. Clearly explain why the paper makes a contribution to the academic literature.

3. Clearly explain the theory and/or core concepts used to interpret/frame the
paper’s findings.

4. Clearly evaluate how the theory and concepts adopted in the paper help us to
understand the paper’s empirical findings.
Course schedule (1)

• Week 1: Introduction to accountability and risk management

• Week 2: Accountability, internal control and fraud

• Week 3: Risk management in context

Course schedule (2)

• Week 4: Accountability for sustainable business 1: Expansions in

risk management practice and disclosure

• Week 5: Accountability for sustainable business 2: The rise of

responsible investment and its implications for
organizational accountability

• Week 6: Accountability of the accounting profession

Final Examination
• See Section 10 of the Course Outline (page 17)
• See Canvas folder:

• Detailed study and revision guidance

• Mock examinations and prior year examinations
So … your ‘to do’ list
• Carefully read the Course Outline on Canvas
• Keep up with the reading, week-by-week
• Check which Assignment Group you are in on Canvas at the end of this
week - go to the People folder
• Contact your Group members
• Read the weekly Homework Assignment requirements and guidance
carefully
• See page 16 of the Course Outline
• One Group member submits the assignment via the Assignments folder in Canvas
• Make sure you use the correct folder – Full-time Group or Part-time group

• Read the Final Examination and Study/Revision guidance on Canvas

Part 2 outline
1. Accountability and corporate governance

2. Risk management and corporate governance

3. The nature of accountability

4. The nature of risk management

5. The evolution of risk management

The boundaries of corporate governance (Cadbury, 1999)

• Corporate governance is an umbrella term

• includes specific issues arising from interactions …
• among senior management, shareholders, boards of directors, and other
corporate stakeholders

• ‘Concerned with holding the balance between economic and social

goals and between individual and communal goals …

• … the aim is to align as neatly as possible the interests of individuals,

corporations and society.’ (Cadbury, 1999)
Principles underlying corporate governance in NL
• A company is:
• a long-term alliance between the 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
• employees, shareholders and other lenders, suppliers, customers, the public sector and
civil society

• the management board and the supervisory board have overall responsibility
for weighing up these interests
• with a view to ensuring the continuity of the enterprise, while the company endeavours
to create long-term shareholder value
Accountability and corporate governance
• Financial scandals have driven evolutions in corporate governance

• Codes and Principles abound

• key focus is on improving transparency, internal control,
• and
• accountability for stakeholder groups

• Corporate (organizational) governance is therefore partly aimed at

improving corporate (organizational) accountability
Risk management and corporate governance
• Purpose of corporate governance:
• to facilitate effective, entrepreneurial, and prudent management that can deliver the
long-term success of the company

• The board of directors (management board) are, inter alia, responsible for:
• determining the nature and extent of the significant risks it is willing to take in achieving its
strategic objectives
• and
• the maintenance of sound risk management and internal control systems

• In other words, risk management is a core component of corporate governance

Risk management and corporate governance
• Responses to financial scandals continually emphasise the role of risk
management in corporate governance

• Corporate governance failures partly blamed on:

• Failures in risk management systems
• Lack of information about risk exposures reaching boards
• Lack of broad monitoring of risk management
• Lack of disclosure of risks and their management
• Lack of embedding of risk management in strategic decision making
The nature of accountability
21

Accountability and corporate governance

• Accountability
• fluid concept at the heart of corporate (organizational)
governance

• The giving and demanding of reasons for conduct

• Identifying what one is responsible for and then providing information

about that responsibility to those who have rights to that information
Accountability and corporate governance

• “[A]t the heart of accountability is a social acknowledgement and

insistence that one’s actions make a difference both to self and others”
(Roberts 1991, p.365)

• Two dimensions:

• Being held to account Holding to account

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Accountability dimensions

• Why? → Motivation/drivers

• To whom? → Forms of accountability

• For what/How? → Mechanisms/Initiatives

Hierarchical Accountability

• Hierarchical Accountability
• Short term functional orientation
• Resource use, immediate quantifiable impacts
• External focus – oversight and control
• Prioritises upward, short-term accountability to powerful patrons
like shareholders
Holistic Accountability

• Holistic accountability
• Augments hierarchical accountability
• Accountability for broader, sustainable impacts
• Embraces accountability to broad sets of stakeholders

• Accountability demands are broadening – see Weeks 4 and 5

The nature of risk management
Risk management (1)
• Risk management:
• encompasses the identification of risk factors that form part of the life of a business
• the analysis of risk factors that form part of the life of a business, and
• the response to risk factors that form part of the life of a business

• Effective risk management:

• attempts to control, as much as possible, future outcomes by acting
proactively rather than reactively

• offers the potential to reduce both the possibility of a risk occurring and its
potential impact.
Risk management (2)
• Risk management:

• a process that allows individual risk events and overall risk to be understood and
managed proactively

• optimises success by minimising threats and maximising opportunities and

outcomes

• This definition avoids a mitigation mindset by embracing opportunities

Risks to be managed?

1. Preventable risks

2. Strategy risks

3. External risks
Preventable risks
• Preventable risks
• internal risks
• controllable and ought to be eliminated or avoided

• Examples:
• the risks from breakdowns in routine operational processes
• the risks from employees’ and managers’ unauthorized, illegal, unethical,
incorrect, or inappropriate actions

• Adopt a compliance, rules-based approach to risk management

Strategy risks
• Strategy risks
• not inherently undesirable
• a company voluntarily accepts some risk in order to generate superior returns from
its strategy
• banks take on credit risk
• companies engage in R&D

• Strategy risks cannot be managed with compliance, rules-based controls

• Adopt a risk-management system

• designed to reduce the probability that the assumed risks actually materialize
• improve the company’s ability to manage or contain the risk events should they occur
• Risk review boards (independent experts); risk management groups (facilitators); embedded experts
External risks
• External risks
• arise from events outside the company beyond its influence or control
• natural and political disasters
• major macroeconomic shifts
• climate change
• pandemics

• Cannot prevent such events from occurring

• => Managing the uncontrollable

• Hence, risk management must focus on the identification (they tend to be obvious in hindsight) and
mitigation of the impact of external risks

• Stress testing, scenario analysis, war-gaming

 Risk
management
summary

• Expanded on in the Week 3 lecture

Evolution of Risk Management – The Silo approach
Evolution of Risk management – Limitations of the Silo
Approach
Eliminating silos: embracing Enterprise Risk Management (ERM)

• Focus of Week 3 lecture and seminar

Enterprise Risk Management - embedded in business frameworks
• Heineken’s systems of risk
management and internal control
• Based on the COSO Enterprise Risk
Management and Internal Control
Reference model (see Weeks 2 and 3)
• Forms a fundamental part of the
Heineken Business Framework.
Part 2 summary
1. Accountability and corporate governance

2. Risk management and corporate governance

3. The nature of accountability

4. The nature of risk management

5. The evolution of risk management

Part 3 outline

1. The nature of case study research

2. Five misunderstandings about case study research

Case studies …

• The academic papers we study on this course are primarily different

forms of case study

• Case studies focus on:

• bounded and particular organizations, events or phenomena, and
• scrutinize the activities and experiences of those involved
• as well as
• the context in which these activities and experiences occur
Case study characteristics

• Case study research starts from the same compelling feature:

• the desire to derive a(n) (up-)close or otherwise in-depth understanding of a single
or small number of “cases”, set in their real-world contexts

• The closeness aims to produce a deep understanding:

• an insightful appreciation of the “case(s)”
• resulting in new learning about real-world behavior and its meaning
Methods of Case Study Research

• Involvement of the researcher

• Outsider, visitor, facilitator, participant, actor

• Forms of evidence
• Questionnaires, interviews, observing actions and meetings, outcomes of actions,
correspondence (email), documents

• Modes of analysis
• Single case
• Comparative cases
• Longitudinal cases
Case study categories
• Discovery studies
• Little prior theory exists, basis for starting with theory development

• Theory refinement studies

• Applying existing theory to cases
• Illustration: take an existing theory and show that it helps in understanding what
is going on
• Specification: take an existing theory and adjust it/ develop it based on the case
results

• Theory refutation studies

• Show through a case study that a theory is flawed – refute the theory
Five misunderstandings about case study
research

Flyvbjerg (2006)
45

Misunderstanding 1
• General (context-independent) knowledge is more valuable than
concrete, practical (context-dependent) knowledge

• Flyvbjerg’s (2006) revision:

• Predictive theories and universals cannot be found in the study of human

affairs – ‘noisy, fallible and biased knowledge prevails’

• Concrete, context-dependent knowledge is, therefore, more valuable than the

vain search for predictive theories and universals - ‘nuanced views of reality’
Misunderstanding 2
• One cannot generalize on the basis of an individual case, therefore the
case study cannot contribute to scientific development

• Flyvbjerg’s (2006) revision:

• One can often generalize on the basis of a single case
• cases as ‘Black Swans’ – falsification
• Physics of Newton; Galileo challenging Aristotle’s law of gravity
• ‘most discoveries have arisen from intense observations’

• The case study may be central to scientific development via generalization as a supplement or
alternative to other methods …but

• formal generalization is overvalued as a source of scientific development

• ‘Science’ = gaining and accumulating knowledge – formal generalization is only one way

• “the force of example” is underestimated

47

Misunderstanding 3
• The case study is most useful for generating hypotheses …
• that is, in the first stage of a total research process, whereas other methods are more suitable for
hypotheses testing and theory building

• Flyvbjerg’s (2006) revision:

• The case study is useful for both generating and testing of hypotheses
• selecting extreme (‘more valid’) and critical cases

• but

• it is not limited to these research activities alone

48

Misunderstanding 4

• The case study contains a bias towards verification, that is, a tendency to
confirm the researcher’s preconceived notions.

• Flyvbjerg’s (2006) revision:

• The case study contains no greater bias toward verification of the researcher’s preconceived
notions than other methods of inquiry …

• on the contrary …

• experience indicates that the case study contains a greater bias toward falsification of
preconceived notions than toward verification.
Misunderstanding 5
• It is often difficult to summarize and develop general propositions and theories on
the basis of specific case studies

• Flyvbjerg’s (2006) revision:

• Summarizing case studies is often difficult, especially as concerns case process

• It is less correct as regards case outcomes

• Problems in summarizing case studies:

• due more often to the properties of the reality studied than to the case study as a research method.

• Often it is not desirable to summarize and generalize case studies

• Good studies should be read as narratives in their entirety

The final word to Kuhn (1987)…

‘… a discipline without a large number of thoroughly executed

case studies is a discipline without systematic production of
exemplars’

… a discipline without exemplars is an ineffective one.’

Keep the five misunderstandings in
mind when reading the course
papers
Part 3 summary

1. The nature of case study research

2. Five misunderstandings about case study research