Accounting for RISK

09:33 PM
peterbnyc@gmail.com
www.truevaluemetrics.org
MULTI DIMENSION IMPACT ACCOUNTING (MDIA)
Accounting for
RISK
@truevaluemetric

09:33 PM
Conventional accounting has a priority focus on the
profit performance of the organization more than
anything else.
Accounting for risk is not well handled in conventional
accounting and the related reporting is inadequate.
In part, this has come about because of the growth
or rules based accounting that have enabled dilution
of many key accounting principles.
Much of the problem of risk has been handled by use
of legal strategies … something that avoids risk while
doing nothing to manage and diminish risk.
C:TVMwebsiteWebsiteTrueValueMetricsOrgTVM-papersMDIA-DiagramsMDIA-Pres-B-Accounting-for-RISK-140529.odp
Accounting for RISK

09:33 PM
Conventional accounting has a priority focus on the
profit performance of the organization more than
anything else.
Accounting for risk is not well handled in conventional
accounting and the related reporting is inadequate.
In part, this has come about because of the growth
or rules based accounting that have enabled dilution
of many key accounting principles.
Much of the problem of risk has been handled by use
of legal strategies … something that avoids risk while
doing nothing to manage and diminish risk.
THIS IS A TRAIN-WRECK WAITING TO HAPPEN
Accounting for RISK

09:33 PM
MDIA does not ignore externalities, and in
many ways risk is an externality.
MDIA brings ALL externalities into account.
MDIA values the future in a way that helps to
make the long terms future as important as
the immediate future.
MDIA specifically values opportunities and
risks in the future so that they are part of the
present accounting for 'state'.
Accounting for RISK

09:33 PM
In the months and years before the BP oil spill in the
Gulf of Mexico, the corporate story was that deep drilling
was safe and no accident like this could happen.
There is no question … an accident like this should
not happen. Good engineering makes the likelihood
of a catastrophic event extremely unlikely.
The reality, however, is that the corporate business
model has profit at its center, and there is always
pressure to reduce costs, do things more quickly
and make more profit.
This increase the risk … and in some cases an event
like this explosion and subsequent oil spill is the result.
The cost to BP for taking risks has proved to be in the
range of $20 billion. This is big, even for a company
the size of BP.
The case of the BP oil spill

09:33 PM
A rather modest cost saving of around $400,000 at GM
many years ago has cost GM some $1.3 billion in the
first quarter of 2014.
There are many lessons in this. Perhaps the most
important is that reputation really matters.
Clearly safety is important, and saving a few
pennies in the car cost that results in the safety
being compromised is not good strategy.
Though the 'real' cost associated with the death
of 13 people may be in the range of $50 million, an
impact of on GM of around $1.3 billion is an order
of magnitude bigger.
This is about the value of reputation. Reputation
takes a long time to build. It is lost very quickly.
The case of the GM ignition switch recalls

09:33 PM
Scientists who have studied climate for years are
expressing deep concern about the changes that
are in progress.
The implication of this work is significant. It must
be anticipated that there will be big changes, but
it is less clear exactly what these changes will be.
Some of the potential changes in the weather
patterns will likely result in significant disruption
in many areas of the global economy … including
the very essential food chain.
Sea level change will put at risk many low lying
coastal areas around the world. Many areas will
have to be abandoned. Huge and expensive new
shoreline infrastructure will have to be built.
The risk inherent in Climate Change

09:33 PM
The discovery of antibiotics … initially penicillin, has
been a game changer in human health.
Antibiotics have improved health outcomes in a very
substantial way, but there are indications that more
and more bacteria are showing resistance to
antibiotics in the general medical setting.
Antibiotics are increasingly being used in the human
food chain. What this means is that antibiotics are
finding their way into almost everything we eat, with
consequences that are likely to be problematic.
If widespread resistance to antibiotics becomes the
norm, the cost in terms of human health will be huge.
A quick calculation suggests that this might be in
the range of some hundreds of trillions of dollars …
a big number by any standards.
That is hundreds of trillions of dollars!
The risk arising from Antibiotics in Meat

09:33 PM
The tobacco industry is a classic case of profit
driving the business with nothing else mattering
very much.
Scientists linked tobacco to cancer and other
ailments a very long time ago. The tobacco
industry did everything in its power to discredit
these findings and continued to sell its products
for maximum profit.
Some countries are constraining the practices
of the tobacco companies … but the imperative
for profit is still the controlling metric.
Tobacco companies continue their practices of
aggressive advertising in developing countries,
and in the these process increase their profits
while doing lifelong harm to the health of their
customers.
The risk associated with Tobacco

09:33 PM
The risk associated with fracking should not be
exaggerated, not should they be ignored.
Like many engineering processes, fracking can
be done safely with no negative consequences.
Fracking can also be done in a sloppy manner
and result in very damaging impacts that can
be very expensive.
Many companies working in the fracking segment
of the oil and gas industry are small companies
with very limited financial resources.
If any of these companies has an 'event', they
do not have either the financial resources nor
adequate insurance cover to pay for the damage
done.
The risk associated with Fracking

09:33 PM
The risk associated with unemployment, underemployment
and underpaid employment is substantial.
None of the widely used business and economic statistics
take a risk like this into consideration at all … but it is a
very considerable risk that should be handled.
According to conventional accounting and prevailing
business models, decisions that make more profit are
good, no matter what the consequences for society at
large.
At some point, high unemployment, underemployment
and underpaid employment will result in social instability.
This can be catastrophic. It has happened in the past and
could happen again.
The risk will be reduced when the basic business model
is driven by metrics that include the people and planet
dimensions rather than having just the singular focus on
profit.
The risk associated with Unemployment

09:33 PM
There are several changes that are needed.
(1) An estimate of the scale of the risk needs to be
made. If an event happens, what is it going to cost to
make things right.
(2) A second number is to estimate the likelihood of
the event happening, and the time frame for such an
event to be repeated.
A financial pool that is big enough to handle the cost
estimated in section 1 has to be available.
Every entity involved with the operations that might
give rise to the event must pay into the pool, on a
basis that fairly reflects their role.
This is the basic concept of insurance of risk.
What needs to change?

09:33 PM
There must never be situations where the risks of
any activity are carried by society while the profits
arising from the activity accrue to the owners of
the activity.
Where the cost of a risk event is going to be very
large, it is critical that the risk pool is also very large.
Periodic contribution to the risk pool may be quite
small if the frequency of a risk event is low.
The size of the risk pool must be big enough to
handle the event if the event happens.
This does not seem to the the way the modern
insurance community behaves, not those in
charge of policy and oversight.
What needs to change?

09:33 PM
There are issues with the 'for profit' insurance
business model.
A well structured insurance business does not
need to be financed by investors. It is the funds
of the risk takers that are funds needed for the
operations.
The stakeholders are simply the public and those
that would otherwise be responsible for the costs
of events that must be paid for.
Not 'for profit' insurance

09:33 PM
In order for reporting to be complete, there must
be a clear expression of the scale of the risk in
any activity.
There must also be an expression of the likely
frequency of an event.
There must be a report of the size of the insurance
pool available to meet claims.
Lastly there may be reporting of the amount of the
periodic payments into the pool.
MDIA accounting for Risk

09:33 PM
May 2014
QUESTIONS? FEEDBACK?
peterbnyc@gmail.com
www.truevaluemetrics.org
@truevaluemetric

Accounting for RISK

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