In this chapter, we have examined the factors lead- ing to the growing interest in corporate enterprise risk management. Enterprise risk management applies the traditional risk management process across four areas of risk: hazard risk, financial risk, operational risk, and strategic risk. ERM efforts encompass both pure and hazard risk, as well as diversifiable and non-diversifiable risk. The ERM concept recognizes that traditional behavioral
tendencies toward risk aversion may be appropri- ate when dealing with pure risk, but they may not be appropriate across the wider spectrum of risks included within the ERM framework. With only minimal adjustments, however, the traditional risk management process has been adapted to fit the broad range of risk encompassed within the enter- prise risk management framework.
Review
1. Describe how the scope of risks encompassed in enterprise risk management differs from those of traditional corporate risk management.
2. E xplain why interest in risk management has increased dramatically in the United States in recent years.
3. H ow did the corporate scandal at Enron prompt the accounting profession to take a leading role in the call for improvements in corporate risk management?
4. Describe the difference between pure and specula- tive risks. Provide an example of each.
5. Describe the process of risk diversification, noting the two conditions that must exist for diversification to be effective.
