High price of avoiding risk

IT is odd to think that these days, when the control of risk is such a preoccupation with everybody, it barely existed in accounting literature before the collapse of Barings and the reputational damage done to Shell by Brent Spar in 1995.

The intervening not-quite 10 years have witnessed a huge change in culture with risk control now seen by companies as a way of cutting insurance costs, by regulators as a way of assessing which firms or activities might spell trouble and by governments in response to any unforeseen crisis, like the Shipman or Soham murders.

Superficially, this might be seen as a good thing - no one likes avoidable accidents. But it has a dark side that was mapped out brilliantly last week by Professor Michael Power in the PD Leake lecture for the Institute of Chartered Accountants.

He said that a system which set out to control the risks in society has been subverted so its primary focus now is to avoid risks to the practitioners.

In auditing, the systems designed to control the primary risk that the client's figures might be wrong are now more used to control the secondary risk to the auditor's reputation which would come from being involved with a company producing crooked accounts.

The result is that instead of being preoccupied with the risks to the corporate economy, the auditing profession is preoccupied with risks to itself.

This is not a problem confined to auditors, of course. It affects doctors, lawyers, financial advisers, teachers, actuaries - every professional and much of Government. It is driving a lot of the work within professional firms on quality control, practice management and client selection - the last being the polite term for deciding whether a potential client appears honest and safe.

Yet while it is perfectly rational and prudent for an individual or a professional to do all he or she can to minimise risk to themselves, and seek to be able legitimately to avoid blame later on, the collective effect of everyone doing it is disastrous for society. We are fast getting to the stage where people do not want to solve problems but simply to cover their own backs.

This is particularly evident with Government, and indeed goes a long way towards explaining the emphasis this Government has placed on spin.

We should be very concerned about a society where the professional bodies, the universities, the hospitals and Government agencies spend an increasing proportion of their scarce resources on defending themselves.

Power sees this as particularly disastrous for the professions because their purpose is to use their judgment.

A contract exists, he says, between society and expert occupations where in return for monopoly rights over areas of work, risky but necessary judgments are made for the greater good.

Traditionally, it has been accepted that some of these judgments will turn out to be wrong, but it is also taken that they were given in good faith. However, as the financial services industry knows too well these days, judgments that turn out to have been mistaken fuel demands for compensation.

The inherent disaster in this, in Power's view, is that all individuals at some point in their lives need at a crucial time and without hesitation to trust professional judgment, whether it is that of a tax adviser, a doctor or anyone else. That need is frustrated when those same professionals, including politicians, appear preoccupied to a greater extent with their own risk.

The question as ever is what to do about it because this has become a political and societal problem. All the talk about risk control has paradoxically given people a false comfort that things will not go wrong - but of course they do.

The expectations gap has created a climate where it is impossible to talk openly of failure either before or after the event, and it seems equally impossible to have failure without blame. What can be done about it is a matter of debate but Power has done a service by pointing out that we cannot go on like this.

Double take

IT was amusing to see a Press release from Schroders that said the fund manager was urging pension fund trustees to make their investments work harder by using products that diversify risk and increase return.

One of Schroders' top people, Richard Horlick, said at a recent conference that the company hoped to boost its profits by persuading clients that they should invest less in the low-margin balanced funds for which Schroders is famous and much more in its fund of hedge funds products on which it could levy significantly higher charges. Do we think the two events are connected?