Being able to identify and then prioritize risks is paramount to successful management of an organization.
What is Risk?
The risk is a concept that auditors and managers use to express their concerns about the probable effects of an uncertain environment. Because the future cannot be predicted with certainty, auditors and managers have to consider a range of possible events that could take place. Each of these events could have a material effect (a significant consequence) on the enterprise and its goals. The negative effects are called “risks,” and the positive effects are called “opportunities.”
Managers put assets at risk to achieve objectives. Prudent management takes risks with assets otherwise they cannot gain any objective. That is true for the private sector, the public sector, and the not-for-profit sector. The assets at risk include:
- Financial assets, such as cash and investments.
- Physical assets, such as land, buildings, and equipment.
- Human assets, including knowledge and skills.
- Intangible assets, such as reputation and information.
Uncertainty and randomness exist in nature. A risk is not something to be worried or concerned about, but something to be managed. Risk management includes risk analysis and the prudent steps that come from increased understanding and awareness of the consequences of managing in an uncertain world. As people come together to form organizations to engage in enterprise, the natural variation of behavior interacts with the uncertainty of the environment to create the most interesting natural challenge of all: management.
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