The codification and validation of new risk accounting techniques is an area of ongoing academic research. The underlying premise of such techniques is that effective enterprise risk management (ERM) must operate within a standardized system of risk measurement using a common risk metric that expresses all forms of risk. Accordingly, a unit of risk measurement unique to risk accounting has been created, the ‘Risk Unit’ or ‘RU’ .Analogous to financial accounting where profits are created through the sale of products and services, risk accounting assumes that exposure to risk is similarly correlated with revenue generation. For management reporting, transactions associated with the sale of products and services are tagged with codes that uniquely identify products, customers, business lines, organizational components, legal entities, and locations. For risk reporting, these same transactions are tagged with additional codes that are used in a calculation of each transaction’s risk-weighted value, that is, its exposure to risk in RUs. Conventional ERM systems are generally assessment based and, consequently, they typically report results via an assessment metric often based on three colors: red, amber, and green. The managerial usefulness of such systems is limited for a number of reasons: first, “assessment” as opposed to “measurement” is inherently subjective and not easily audited; second, an assessment metric cannot be aggregated to support important management techniques such as trend analysis, benchmarking, and ranking, and the comparison of actual usage against operating limits. To state the obvious, you can’t aggregate and compare colors.
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