Early Warning Indicators, which pinpoint the key metrics that may be predictors of a future failure, prompts Asset Managers to conduct further investigation.
The Integrity Risk Rating incorporates several metrics which are relevant to safety of Debt Finance.
The Integrity Risk Rating and associated Corporate Governance Integrity Rating takes a different, but complementary approach to risk from the other parties involved in PE transactions. By examining companies' potential vulnerability to accounting mismanagement as a result of pressures or incentives to artificially boost profits, the Integrity Risk Rating can help reduce risks.
The Integrity Risk Rating adds value to work undertaken by Investment Banks during the IPO process. The incentive for vendor shareholders to achieve a high IPO price, coupled with all advisors' interests to complete the transaction, means that aggressive accounting policies may be used to increase profits and hence valuations. The Integrity Risk Rating adds value to the Due Diligence process by highlighting areas where aggressive accounting policies may be present.
Quoted companies have a clear incentive to promote themselves to investors in a positive light. This often results in the use of non-GAAP measures to justify operational performance. If executive remuneration schemes are linked to non-statutory profit measures, there may be an incentive to adopt aggressive accounting to inflate profits. The Integrity Risk Rating and associated Corporate Governance Integrity Rating can be used by companies to implement necessary and appropriate changes.
A series of Audit failures has raised questions about audit quality, competition, and the effectiveness of the FRC in particular. The Kingman Review made a number of recommendations including that the Audit Regulator 'should develop a robust market intelligence function to identify emerging risks at an early stage', coupled with a responsibility to 'anticipate and where possible act on emerging corporate governance or audit risks'.
The Integrity Risk Rating and associated Corporate Governance Integrity Rating is rooted in the commercial realities of the market, and helps Regulators meet their objectives.