The famous 1935 Escher lithograph shown in Figure 1 below
of the ‗ Hand With Reflecting Sphere‘ is an intriguing view
that Morgan (1988) uses to illustrate a fundamental
epistemological point with modern Accounting‘s (futile)
attempt to portray its discipline as a reality construct
(highlighted by the artist Escher viewing his own created
image through a crystal ball). Morgan‘s argument is that
accountants typically construct reality in a very limited,
enclosed and one-sided view and he therefore debunks the
profession‘s supposed ―objectivity‖ as some mythical
concept and even arguing that accounting should be
approached as a form of ―dialogue‖ allowing accountants to
construct, ―read‖ and probe situations from a multitude of
viewpoints and perspectives. To put this concept in simpler
terms: the map is never the same as the territory!I would like to advance the same argument (with perhaps even
greater gusto) concerning the ‗art-and-science‘ of risk
measurement (covering at the very least credit, market and
operational risks). Risk practitioners may like to attain true
measures of financial risk (with subsequent control) but after
observing the series of major financial calamities that have
occurred over the last few decades , you have to conclude that
there has been only limited risk management control evident 2.
You can see the cyclical nature of these risk-triggering events
in Figure 2 below, indicating a so-called vicious cycle of risk at
work (as per Kupper 1999). It can prove to be quite hard to
break out of this systemic cycle, once initiated, assuming of
course that management even realises that such a pr ocess is
going on whilst they are busy peering into their own Escher-
like ‗crystal balls‘ (the modern equivalent would be electronic
dashboard reporting devices).Historically one can observe many ―scientific‖ attempts at
forming possible boundary solutions that might help in
breaking the cycle above. More recently, under the Basel II
framework 3, it becomes possible to use a rather crude internal-
rating based measure of an obligors‘ likelihood of experiencing
an expected loss over some arbitrarily defined period. Risk
practitioners will still need to understand these ‗pseudo-
scientific‘ measurement aspects (the Basel II risk framework is
a good example―especially concerning the conflict with the
accounting ―view‖ in the International Financial Report ing
Standards for loss provisioning). However, they should also
realise that any such derived measures can only ever form
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