ACCOUNTING FOR AN ETHICAL ENTERPRISE RISK MANAGEMENT
Adele Caldarelli,
Università degli Studi di Napoli Federico II,
Dipartimento di Economia Aziendale. adele.caldarelli@unina.it
Clelia Fiondella,
Seconda Università di Napoli,
Dipartimento di Strategie Aziendali e Metodologie Quantitative
clelia.fiondella@unina.it
Marco Maffei,
Università degli Studi di Napoli Federico II,
Dipartimento di Economia Aziendale. marco.maffei@unina.it
Rosanna Spanò,
Università degli Studi di Catanzaro Magna Graecia,
Dipartimento DOPES.
rosanna.spano@unina.it
Claudia Zagaria,
Università degli Studi di Napoli Federico II,
Dipartimento di Economia Aziendale. claudia.zagaria@unina.it
ACCOUNTING FOR AN ETHICAL ENTERPRISE RISK MANAGEMENT
To get profit without risk,
experience without danger,
and reward without work,
is as impossible
as it is to live without being born
A.P. Gouthev
ABSTRACT
This study examines the relationship between Enterprise Risk Management (ERM) and
accounting, focusing on the role of ethical variables. For the purpose of our analysis,
we refer to the case of Banca di Credito Cooperativo di Napoli, as the most
representative mutual credit cooperative bank of the South of Italy. Drawing on Glaser
and Strauss (1967), we adopt grounded theory methodology in order to explain how
ethics influences either ERM practices or accounting practices. After the recent failures
the introduction of ethics in risk management practices could contribute to the
alignment between the objectives of the firms and their stakeholders. In addition, this
paper makes a contribution to existing literature giving evidence of the ability of a
consolidated ethical Enterprise Risk Management process to lead the accounting
practices toward the area of social accounting.
Keywords: Accounting, ERM, ethics, mutual credit cooperative banks.
INTRODUCTION
This study examines the relationship between Enterprise Risk Management (ERM) and
accounting within organizations. In particular, this paper focuses on the role of ethical
values, exploring how they influence either enterprise risk management practices and
accounting practices.
The concept of risk management is widely discussed in theory and practice. A number
of studies (Miller and Power, 1992; Blum, 1994; Basak and Shapiro, 2001) have
addressed the issues related to the definition and quantification of risks, intending
numbers and calculations as capable to estimate the unpredictable future. However, a
different strand of literature has recently underlined the need for taking into account a
hitherto “uncounted area” (Mikes, 2011), emphasizing the growth in importance of
organizational dynamics in risk management practices (Power, 2004; Gephart et al.,
2009) and considering the interactions between operational practices and ethical
boundaries within organizations. As a result, Enterprise Risk Management has emerged
as a holistic approach for identifying, measuring and managing risks (Power M., 2009;
Arena et al., 2010). Enterprise Risk Management has been developed as well as the
increasing influence of social, moral and ethical aspect (Bromwich and Bhimani, 1989,
2
1994) on accounting practices, changed over the times. As a result, accounting activities
may emphasize social, moral and ethical aspects until now obscured by the tools of risk
measurement and risk calculation (Chua, 1996; Belkaoui, 1989, Hopwood, 1974). In
this regard, Hopwood (1974), points out that “accounting is about human behaviour,
and its social and behavioural aspects are just as much an indispensable part of the
whole as the more traditional technical aspects”.
However, there is little understanding about how Enterprise Risk Management works in
action (Mikes, 2009), since few critical studies address the evolution of its
organizational embeddedness as well as its contributions to the risk management
effectiveness (Paaple and Speeklè, 2012; Arena et al., 2010; Gephart et al., 2009;
Power, 2009). At the same time, an area that has received relatively little consideration
concerns the interactions between, risk, risk management and other management
controls (Management Accounting Research, 2011); in particular, this research gives
answer to the call for more empirical research (Magnan and Markarian, 2011) on the
link between ERM and accounting.
Thus, this paper aims to respond to the following research questions:

How do ethical values influence Enterprise Risk Management practices?

How does an ethical Enterprise Risk Management influence accounting
practices?
Since recent financial crisis has shown the failure of traditional large banks (Tarantola,
2011), revealing substantial weakness in risk management practices (Paape and Spekle,
2012) as well as shortcomings in accounting related to the unrevealed underliying
riskiness (Magnan and Markarian, 2011), our analysis mainly refers to the Banking
Sector. In particular, we focus on the Italian Banking Sector due to the fact that Italian
banks are under the supervisory authority of Bank of Italy, who has sat up additional
and specific rules for risk management and accounting in addition to those fixed on a
European level (Maffei, 2010). Due to the prudent regulatory framework issued by the
supervisory authority, according to Draghi (2010), the crisis has had only an indirect
effect on Italian banks. Also, as a number of contributions (Power, 2009; Chua, 2007)
have revealed that the ethical variables could represent an unexplored and potentially
interesting field of study to deepen understanding on ERM, this research particularly
refers to the Italian mutual credit cooperative banks. Indeed, according to San Jose et al.
(2011), such banks can be defined ethical banks, since they are managed according to
the principles of social and economic profitability.
This research is supported by holistic case study (Jeppsen and Loft, 2011) of Banca di
Credito Cooperativo di Napoli because of its economical and social role, as the most
representative mutual credit cooperative bank in the South of Italy. This choice is
coherent to the need for more empirical research about the issues the social and economic
issues of underdeveloped areas. Drawing on Glaser and Strauss (1967), we adopt
grounded theory methodology (Parker and Roffey, 1997), described as “a method that
uses a systematic set of procedures to inductively derive a grounded theory about the
3
phenomenon” (Strauss and Corbin, 1990), in order to examine the link between an
ethical enterprise risk management and accounting within organization.
The reminder of the paper is structured as follows. Section 2 assesses prior researches.
Section 3 describes the methodology of the study and the research design. Section 4
analysises the the case of the Banca di Credito Cooperativo di Napoli. Section 5
provides theorethical reflections and discusses the implication of the analysis. The last
section concludes the study and shows some hypotethical further developments.
PRIOR RESEARCHES
Despite the widespread use of variability measures as risk proxies, the concept of risk
and the effectiveness of existing risk management practices still remains questionable
(Aaker and Jacobson, 1990; Baird and Thomas, 1990; Collins and Ruefli, 1992).
Literature has commonly described risk as the unpredictability of economic and
financial results (Miller and Power, 1992; Sitkin and Pablo, 1992), mainly related to the
variation of corporate performance that could not be forecast ex ante (March and
Shapira, 1987; Miller and Power, 1992). Since the calculus of risks has enabled firms to
calculate the unpredictable future, risk management has often been intended as risk
quantification, to render an increasing number of risk types susceptible to
quantification, measurement and control (Jorion, 1997; Dowd, 1998; Duffie and Pan,
1997).
However, a second strand of literature (Bhimani, 2009; Millo and MacKenzie, 2009;
Power, 2009, Arena et al., 2010) has strongly emphasized the subjective and intersubjective features (Kleindorfer and Saad, 2005) of risk. As a consequence of such
market evidences and also due to the increasing turbulence and complexity in the
competitive environment, the concept of risk is conceived as a new and much broader
perspective of unpredictability, called uncertainty, (Pagach and Warr, 2010; Gordon et
al., 2009; Hoyt and Liebenberg, 2009; Beasley et al., 2005), including also
environmental and organizational aspects (Mikes, 2011; Arena et al., 2010; Gephart et
al., 2009; Miller, 2008) that influence the overall corporate performance (including
economic and financial results). As a result, this concept of risk, although includes
economic and financial aspects, is strictly related to some cultural, social and
environmental items that cannot be measured by numbers (Kleindorfer and Saad, 2005).
In addition, the growing importance of the influence exerted by the emergence of
organized stakeholder groups, who put the spotlight on environmental or social issues,
cannot be underestimated and has lead to an increasing attention to the risk management
practices. Therefore, those social, cultural and ethical features, previously subsumed to
the hegemonic weight of a scientific approach (Power, 2009), have now become more
visible. Accordingly, they are in need of an appropriate assessment, and require an
overall management.
Also, it has recently been paid attention to risk management organizational practices
(Arena et al., 2010). Moving away from the traditional silo approach, a disaggregated
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method which manages each risk class in separate units, firms tend toward a holistic
risk management system, called Enterprise Risk Management (ERM), to manage each
of the risk classes as part of the organization’s overall (Miccolis and Shah, 2000;
Cumming and Hirtle, 2001; Lam, 2001; Meulbroek, 2002). ERM enables firms to
benefit from an integrated approach in managing risks as strategic opportunities
(Liebenberg and Hoyt, 2003), overcoming the inefficiencies related to the lack of
coordination between the various risk management departments. It aims to support
managers in making day-to-day decisions (Arena et al., 2010; Power, 2009) and, on the
other hand, it provides a more objective basis for resources allocation, in order to
improve both, the capital efficiency and the return on equity.
It is worth noting that risk management process is strictly related to accounting practices
within organization. Accountants are involved with building up information systems
based on such quantitative tools and in processing the information provided by
enterprise risk management system (Wahlstrom, 2009). Moreover, as accounting also
carries out an external function providing economic and financial information in
guiding the choices of financial operators (Maffei, 2010), the calculative techniques of
accounting, resulting by financial rules and from political laws, represent a tool for
creation of legitimacy and trust within the processes of risk taking.
However, recent financial crisis has revealed the perverse consequences of risk
management systems as well as shortcoming in accounting. Quantification and
measurement of risks, despite are able to support ratio analysis for credit rating and
investment and solvency analysis (Miller and Power, 1992), make visible and valuable
only one part of a more complex whole.
On the other hand, the idea of accounting seen as the basis for a shared language to
support decision-making and its attitude to make complex phenomena as easy to read
and to understand by informed users also represents the failure of accounting in se.
Since it was unable to account for uncertainty (Magnan and Markarian, 2011),
accounting exhibited shortcomings in its structural foundation and in its application,
revealing that it does not function as a mirror that reflects an underlying economic
reality (Power, 2009) since the coherence of any trust in numbers still persists (Busco et
al, 2006).
As the accounting is the language of business, in order to be useful in providing and
understanding of economic reality (Scott, 1931), accounting should be considered from
a much broader perspectives than merely technical standard. However, this is not
suggest that accounting in not closely inherent to, and based on, economics, because it
certainly deals mostly with economic phenomena, but it deals with such phenomena
from a different point of view. A number of studies (Bromwich and Bhimani, 1989,
1994; Young, 2006) have described accounting as a system of thought designed by
humans to assist human decision-making and influence (human) behaviour (Gaffikin,
2008). Moreover, the calls for a radical and critical analysis of the role of accounting as
a social phenomenon (Tinker et al., 1991) have been matched by more detailed
reporting. Therefore social, political and economics consequences of accounting
practices, until now obscured by the tools of measurement and calculation (Chua, 1996;
Belkaoui, 1980, Hopwood, 1974), have been taken into account more seriously. Social
5
and environmental accountants have called for the inclusion in accounting of
information that will capture some of the “external” effects of business activity and “by
doing so, encourage behaviour which will ameliorate the consequences of western
economic life” (Gray et al. 1996).
3. RESEARCH METHOD AND DESIGN
This research is supported by holistic single-case study (Jeppsen and Loft, 2011; Ahrens
and Chapman, 2007). Single examples from cases can be of general interest (Silverman,
1993) and still remain grounded in their specific context. Case study approach is
particularly useful for exploratory research where an inductive approach can be adopted,
using theory to explain empirical observations (Berry et al. 1991, Otley and Berry,
1994). Furthermore, research also explicitly complies with recent calls for adopting this
type of investigation in management accounting (Chenhall and Euske, 2007; Chua,
2007; Curtis and Turley, 2007; Robson et al., 2007). We consider the case of Banca di
Credito Cooperativo di Napoli (BCC) because of its economical and social role, as the
largest and most representative mutual credit cooperative bank of the South of Italy.
This is an underdeveloped area that needs not only for financial investments but also for
initiatives in areas of activities such as health, education and employment in order to
support its economic development.
Drawing on and Strauss (1967), we adopt grounded theory methodology (Parker and
Roffey, 1997) in order to examine the link between an ethical enterprise risk
management and accounting, so as to support strategic planning within organization.
Analysis of the data is itself an emergent process and we will seek to gradually develop
an empathy with the data, to understand what they tell or the participants’ realities and
the process under which they unfold. Grounded theory research begins by focusing on
an area of study and gathers data from a variety of sources, including interviews and
field observations. Once gathered, the data are analysed using coding and theoretical
sampling procedures. Our initial research problem defined at the outset of the study is
formulated in quite broad terms identifying the phenomenon to be studied. It is designed
to focus our research efforts on the interaction between ERM practices and accounting
practices. In particular, the research questions refer to an investigation of the role of
ethics in risk management practices and explore how they reflect on accounting
practices. It becomes progressively more narrowed during the research process as new
concepts and their relationships are discovered. Moreover, the exploratory nature of our
research makes it difficult to derive hypotheses about the dynamics of enterprise risk
management practice in light of ethical values from the extant literature. Therefore, the
research is undertaken without prior theories or variables because they are likely to
impede the discovery of the relevant variables and the relationships among them. It is
this free discovery where “the data are telling the story which is at the heart of grounded
theory development” (Slagmulder, 1997). Since this kind of studies is not yet well
documented in literature, we should not base our research on a prior theory at the outset
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of our field research (Glaser and Strauss, 1967). However, this choice is consistent with
the need for checking in detail if the company implements an ethical enterprise risk
management and its relationship with accounting practices in order to support strategic
choices. The analysis of the case study is based on both, external and internal
environment of the BCC di Napoli. Hence, we consider internal sources (interviews to
the managers and internal documents, not usually made available to the public) and
external sources (all reports published by the company, newspaper, financial statements,
other public coverage of the company). First, we rely on a series of in-depth, taperecorded interviews with multiple individuals with different perspectives as our primary
source of information. We met with Chairman, CFO, risk manager and with the top
management team as well as with credit staff that have been closely involved in
particular investment projects and have thus interacted in defining risk management
practices. The length of the interviews varies from one to two and a half hours.
Collecting data has occurred from multiple respondents because no single individual in
the organization had a complete knowledge about how risk management practices
influencing accounting practices. The contribution of multiple respondents also has
other benefits. On the one hand, it guards against idiosyncratic views being treated as
representative of the entire organization. On the other hand, it reduces the effect of ex
post rationalizations or distorted reconstructions of events. A semi-structured
questionnaire is used to guide the process of our study. Semi-structured interviews are
considered preferable to structured ones because the theory is continuously developing
and therefore, the data collection has to be designed to allow this flexibility (Strauss and
Corbin, 1990). The set of questions is structured around a number of key topics that
have to be discussed during the interview, rather than representing literal questions to be
asked during the field interviews. To increase the reliability of our case study, as a
support of the data collected through the interviews, we have also referred to
documentary evidences (Yin, 1974). These documents included a complete set of the
procedures of BCC, comprising, summaries of risk management procedures, strategic
plans, and other related matters. Public information on the company was used as an
additional source of information. Interpreting and organizing the diverse and complex
body of data gathered during our research was a challenging task, which had to be
undertaken in a rigorous way. Therefore, to ensure that the grounded theory building
process was systematic and rigorous, a set of coding procedures (Strauss and Corbin,
1990) was used to guide the data analysis and the development of an inductively derived
grounded theory. Following the protocol of Strauss and Corbin (1990), we started with
open coding at the paragraph level. We determined the subcategories and identified the
more general category to which they belong. After we identified a preliminary set of
categories and subcategories for all cases, we have revised them in a highly iterative
process until we have identified the minimum number possible that provided significant
insight into the content of the cases. Once the five categories were thus identified (i.e.
Ethical Values, Regulatory Requirements, Internal Governance, Effectiveness of risk
management practices, and Culture of Accounting system), we have selected those
factors that influence risk management practices. Once the categories and subcategories
are identified, we shift from axial coding to selective coding. Here the objective is to
7
code the case data into causal conditions, phenomena, contexts, intervening conditions,
action/interaction strategies, and consequences (Strauss and Corbin, 1990). During the
theory development process we have identified relevant subcategories to the emerging
theory, but not captured by the categories previously selected. To bring these
subcategories into the theory, we returned to the cases for an additional round of open
coding. Using an iterative process, we recoded the relevant subcategories in the
remaining categories and incorporate them into the theory using both axial and selective
coding. After the first exploratory field research, we shifted to explanatory research.
First, we want to identify new aspects of the theory that have not been captured in
previous cases. In addition, it is useful to examine how ethical values does influence
practices and how this influence is reflected on accounting practices. When the open
coding of the explanatory cases is completed, we again switch to axial coding. Table 1
provides an overview of all the relevant categories and subcategories contained in the
theory.
Table 1. Coding scheme for all relevant categories and subcategories
4. THE CASE OF BANCA DI CREDITO COOPERATIVO DI NAPOLI
BCC di Napoli is defined by Chief Risk Officer (CRO) as “an autonomous association
of persons united voluntarily to meet, through a jointly owned and democratically
controlled enterprise, the economic, social and cultural need of the city of Naples.
Despite we support our society by the granting of loans, our goal is to encourage the
creation of economic, social and environmental value for the local entities, for families
and for the society overall.
The strong integration with BCC and the Neapolitan area represents the key element of
BCC's activities. It is based on the relationships between managers and clients. For this
reason, an important role is played by moral behavior of the managers because it
increases the trust established depositors and managers. The main ethical principles that
guide BCC in performing its economical and social activities are the following: Affinity
– associated with the concept of positive criteria in investment, joint shareholder
responsibility and asset quality – is based on asset placement that matches the interests
of depositors and savers and concerns the responsibility of financial entities in decisions
regarding the final destination of deposited funds. Responsibility – linked to the concept
8
of the absence of negative criteria for investments and to CSR – is about those involved
being accountable for the social and economical consequences of their behaviour.
Integrity - related to the concept of financial exclusion - is the responsibility to prevent
that there will be organisations, micro companies, black economy or groups excluded
from the financing system, either because of a lack of resources (poverty), their
geographical situation or because they belong to a certain social or ethnic group.
The on-going commitment to ethical behaviour by the managers contributes positively to
economic development of BCC as well as to the growth of legitimacy in Neapolitan
territory. BCC presents these ethical standards, in a code of professional ethics aiming
for both self-regulation and also the profession’s commitment to the public. The code of
conduct has been developed and enforced by top-management of businesses and the
code does not restricted to the shareholders. It includes the views of the employees in
order to improve sharing, participation and commitment of all stakeholders to bcc’s
vision. While ethical variables have a relevant role in BCC, the implication of regulatory
requirements should not be underestimated. Due to the central role played in the
economic system related to its core business, BCC is subject to specific requirements
with reference to the techniques used to identify, measure, manage, control and monitor
risks.
First, BCC is under the supervisory authority of Bank of Italy, which regulates its
purpose and defines its governance system. According to the Testo Unico Bancario,
BCC conducts its business primarily for the shareholders (art. 35 T.U.B.). Therefore, the
activities of BCC di Napoli are designed to encourage members and local communities
in the operations and banking services, continuing the improvement of the moral,
cultural and economic development and promoting cooperation, education and
retirement savings and social cohesion, sustainable and responsible growth of the
territory in which it operates. Members (shareholders) must be at least 200 and the value
of their participation should not exceed the nominal value of 50.000 €. In addition, each
of the members has in the general assembly, independently of the number of shares (the
one-head one-vote system). Moreover, in order to emphasize the strong relationship
with the local territory, it is important to highlight each of the members of BCC has to
prove the residential, the registered office or the continuous activity in the local
community of reference for the bank itself. Moreover, according to the prescriptions of
the law (art. 37 T.U.B.), BCC devotes the 70% of profits to the legal reserve, allocate
another portion to the Mutual Fund for the Development of the Cooperation, and usually
the remaining part is to be used for mutuality or charity purposes. Therefore, the
distribution of benefits between shareholders is only residual in BCC. BCC should aim
to the achievement of economic profitability that implies only a good management of
the bank to guarantee the economic sustainability. On the other hand, BCC’s activity is
also oriented to the achievement of social profitability, understood as the funding of
economic activities with social value added and expressed as marginal external benefit
that is added to marginal private benefit and as the unconditional absence of investment
in speculative projects or undertakings that develop products or services related to
9
"negative area" (i.e. pollution, pornography, tax evasion, drug, mafia). Our activity
refers to projects that, through their objectives (ecology, employment, renewable
energy) or the people they target (those who cannot obtain a loan from the traditional
bank) create only positive value for the social environment of our area of interest
(Chairman). Therefore, Banca di Credito Cooperativo di Napoli directs its banking
activities toward an internal mutuality, an economic and social value creation for the
client-member and toward the pursuit of economic, social and environmental
advantages for the local community, aimed to achieving the cultural and moral
development, as well as the cooperation and the cohesion, called external mutuality.
Moreover, BCC also fulfils a purpose related to the systematic mutuality, in favour of
the other cooperative banks, to enhance the cooperation and the creation of a network
between cooperative banks. Furthermore, Banca di Credito Cooperativo di Napoli is
required by law to identify the categories of risk and adoption of risk measurement
provided for Basel II, in order to stat the appropriate minimum capital requirements,
(regulatory capital). Although BCC does not have to make a profit, BCC has to manage
and reduce their risk in order to secure future investments. BCC manage its risk through
the application of practices and procedures in order to identify, to analyse and to assess
risks, determining the degree of exposure to risk that BCC should accommodate, and
taking appropriate steps to avoid litigation, loss of reputation and inquiry. Moreover, in
order to manage its risks, BCC is compliant with the framework defined at the European
level by COSO ERM. Beyond the regulatory requirements, it should be emphasized that
risk management in BCC refers not only to both a rigorous risk classification and a
numerical measurement, but it also considers the controllers’ experience and intuition,
expanding the “softer instrumentations” into the domain of non – measureable strategic
uncertainties. Moreover, risk management process in BCC is strongly supported by the
ethics; indeed, risk assessment of the investments concerns not only (or not exclusively)
the increase in income for the bank, but also the economical, social and environmental
benefits for the community of Naples
The good governance of BCC ensures that ethical values, codes, roles and
responsibilities are implemented in a clear risk management structure. In this regard, the
Chairman of BCC says: "The governance structure is, most of the time, a feature that
creates additional value to our activities”. Audit committee focuses on the challenge of
overall risk profile and on the definition of the framework. The internal auditor focuses
on assurance of the effective risk management and maintains its objectivity consistent
with the establishment. The Chief Risk Officer (CRO) coordinates enterprise risk
management process. The responsibilities of the ERM function are split between
“advisory role”, relating to facilitation of the process and recommendation, and
approval (management role) with priority in the area of facilitation and
recommendation.
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THEORETICAL REFLECTIONS: A GROUNDED THEORY
In this section we will use the language of the theory to structure evidence in order to
validate the theory about the role of ethics in influencing both, the enterprise risk
management practices and accounting practices.
As it has been underlined the danger of ERM lapsing into “rule based compliance”
(Power, 2009; Scapens 2009), not only it is difficult to define its effectiveness but also a
growing diffusion of ERM system itself could represent a source of risk (Power, 2004).
In this regard, a number of studies (Cowton and Thompson, 1999; Francis and
Armstrong, 2003; Scholtens, 2006) emphasize the great importance of the mangers’
moral behaviour and highlight the role played by ethical principles as the value-driver of
business activity (Caldarelli et al., 2011). Indeed, the fact that ethics start where the law
ends and because it is concerned with those actions not explicitly covered by law,
defined as “voluntary actions”, gives assurance on prevention unethical behaviour,
which may or may not be illegal. Therefore, the presence and the diffusion of ethical
values within organization contribute to create and to increase confidence and trust
between (financial and not financial) institutions and their stakeholder.
In BCC, the purpose of risk management is twofold and refers to management of
resources and management of stakeholder. The former is related to the adoption of an
alternative and new guarantee arrangement within the process of granting found. In
order to give priority to the social performance, BCC does not consider only the real or
traditional guarantee based on patrimonial collateral but also a number of other elements
such as the activities carried out in and for the local community, the recognised socially
responsible behaviour in the conduct of the professional and managerial activities, the
seriousness of the productive investment proposed, as well as a strong fiduciary element
related to the acknowledge reputation of the entrepreneur, who lives and operates in the
community. Moreover, an ethical enterprise risk management gives assurance on
internal auditor’s independence, and supports organizations in avoiding risk of fraud.
Indeed, the “one hand - one vote” system, although implies the absence of takeover
threats, due to the presence of ownership is not disputable, on the other hand could
result in a lack of control by shareholders, due to decreased property interests.
The ethics in risk management practices contributes to the improvement of BCC’s
economic and financial results. Unlike the traditional national and international banks,
that show a significant decreasing in income in their financial statements, BCC makes
large profits not via the achievement of high financial spreads but through the creation
of services for the community, supporting the economical and social development for
the local territories. BCC leverages the crisis as the opportunity of growth, as well as a
chance of success. Leaving the well-having perspective, BCC conducts its business
through the way of well-being, In this regard, the Chairman of BCC says: “not finance
for finance, but finance for development”
In addition, the relevance of ethics within risk management practices is also reflected on
the culture of the accounting system, leading its practices toward the area of social
accounting. The awareness of the social role gained from BCC and the need for
satisfying the cognitive expectations of the social environment, make a significant
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contribution to the spread of different forms of social reporting. BCC provides the local
community with the “Bilancio Sociale e di Missione del Credito Cooperativo”, a social
reporting that describes the economic, social and environmental results of its activities,
underlines the consequences for local territories. In this way, BCC try to maximize the
interests of the majority of the stakeholders in accordance with the ideology and the
principles of the bank. Indeed, it should be noted that the quality of BCC’s social
performance reflects the quality of stakeholder management and that as the stakeholders
and BCC make profits when commitment to ethical principles guide decisions.
However, the choice of a voluntary social and environmental disclosure is not only
related to the goal of financial results. Beyond the benefits related to the increasing of
trust within the local community of reference, BCC decides to provide its stakeholders
with an overall set of information due to a more ethical reason. It is related to the need
for accountability, as a moral duty in respect of shareholder/stakeholder’s the interests.
An ethical enterprise risk management supported by accounting practices might lead
towards a reflexive mutual cooperation between the organization and its stakeholders.
On the one hand, an ethical enterprise risk management represents a tool of support ex
ante for the definition of strategic planning. Risk management contributes to guide the
investment decisions toward both the economic profitability and the social profitability,
enabling the firms to increase the social well-being through the achieving of positive
economic results for the organization. On the other hand, ethics in risk management
practices is also reflected on accounting, which support ex post strategic choices. From
this point of view, accounting represents the language of ethical outcomes. Accounting
is not only related to the organization’s best interest and it aims not only to provide
stakeholders with measures of economic, social and environmental activities in order to
increase the organization’s legitimacy or to be a part of a social statement process.
However, the production of voluntary social and environmental disclosure is concerned
with more ethical motivations. Accountability represents a moral duty. Stakeholders
have rights to the account, and organizations are called to provide the account of the
economical, social and environmental effects of their actions in order to satisfy the
rights to information.
In this way, an ethical connotation of both enterprise risk management practices and
accounting practices, guides the enterprise's strategy toward the creation of value for
itself, for the environment and for those involved as well as socially recognised
stakeholders.
CONCLUSIONS
This research aims to provide an exploration of the link between Enterprise Risk
Management practices and accounting practices within the banking sector, focusing on
the role of ethics. Recent literature (Signori and Rusconi, 2009; Caldarelli et al., 2011;
Costa and Rasmus, 2012) has strongly emphasized the fundamental role played by
ethical requirement for the management of an entity. All the ethical restrictions are
necessary to reconcile the entity’s interests (or utility) with those of society and are not
12
detrimental for the purposes of the entity, but rather they are factors favoring
consolidation and lasting prosperity.
On the basis of previous considerations, it is possible to answer the fist research
question: How do ethical values influence Enterprise Risk Management practices?
The role of ethics in risk management strategy starts with commitment from the top
management for an ethical culture; it is a result of the appropriate policies, the code of
conduct, the procedures and the systems in place to reward ethical conduct and to
censure unethical actions. However, ethical risk management does not only correspond
to the compliance of such codes and procedures defined by top management. In
particular, an ethical risk management strategy is also strictly related to both the
integrity and ethical values of the managers/shareholder. Ethics influence risk
management strategy in creating the organizational infrastructure that promotes ethical
conduct of business. Ethics support risk assessment oriented (or not exclusively) to
increase not only business income, but also the economical, social and environmental
benefits for the community of reference. On the other hand, ethics also represent a
support in manage those risks associated with the lack of moral behaviour, giving
assurance on internal auditor’s independence, and supporting organizations in avoiding
the fraud risk. Therefore, an ethical risk management does contribute to build and to
increase social capital through the good relationship with the local firms, families and
community in general. Moreover, the value of relationships increases both the
legitimacy of the company in its area of interest and the power of trust established
between clients and managers of organization; on the other hand, an ethical risk
management leads to a positive relationship between stakeholder management and
shareholder value. As a result, an effective stakeholder management leads to improve
financial performance.
This study also highlights how an ethical enterprise risk management in reflected on
accounting practices, at this stage there is the need to answer the second research
question: How does an ethical Enterprise Risk Management influence accounting
practices? An ethical ERM influences the culture of accounting system. The culture of
accounting is related to the concept of accounting as a tool of trust and to the definition
of social accounting. Assuming that organizations desire to communicate truthfully in
the interest of long-term relationships, they have to provide creditors, employees, and
global community, for reportable measures of social and environmental activities that
firms has engaged. Therefore, accounting also considers not only economic and
financial results, but also social and environmental value created by the firm. Indeed,
the accountants turned attention not only to traditional and economic measurement and
accounting system does not only serve business and commercial interests. The
accountants have a different and more important role; indeed accountants become
“trustees” for the society because they support stakeholders in acquiring information not
only about the information in positive projects that represent the focus of social or
ethical investments funds, but also about the ethical management of firm’s financial
activities. Therefore, especially after the recent scandals in corporate governance and
the biggest financial crisis, corporate social responsibility and accountability could play
an important role in order to increase trust and confidence within relationships between
13
firms and clients.
What we want to underline is that, for the purposes of our analysis, we have examined
the Italian Mutual Credit Cooperative Banks that, according to San Jose (2009), they
can properly defined ethical banks. However, this paper gives evidence of the
importance of an ethical the risk management process not only for those firms that are
strongly rooted in the their local territories, but in general for the banking industry.
Moreover, this study contributes to the literature because the grounded theory developed
will assist in guiding future action of financial and non financial firms in which the
observed phenomenon may occur. However, several future remarks could be still
considered.
This paper focuses on mutual credit cooperative banks, as ethical banks. However, an
interesting future development for this research could be the exploration of the role of
ethics in the relationship between risk management practices and accounting in a
different country setting. Additional question that remains to be considered is about the
extent to which risk management practices can be ethically oriented and the extent to
which they must fulfil certain economic constraints. Another notable approach might
refer to the investigation of how ethics works in action within such relationship in a
different kind of company with a relevant social role (i.e. audit company).
14
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