Risk Management

AuthorC. Baker
Pages647-648

Page 647

Risk management is a term that pervades a number of different areas of human interest. At the ultimate level of risk management, political leaders and government officials must assess the risk of natural disasters, terrorist attacks, and nuclear war—events that threaten human existence. For public health officials and hospital administrators, risk management entails the reduction of mortality due to disease and infection. For transportation safety engineers, risk management focuses on preventing or reducing deaths and injuries caused by accidents. Insurance companies and their customers view risk management as entailing the assessment and mitigation of various types of risks, often with the goal of reducing the costs of insuring against such risks.

For bankers and lenders, risk management involves credit analysis and techniques such as currency hedging and interest rate swaps that reduce credit and lending risks. For the business manager, risk management necessitates the assessment of future market fluctuations both on the sales and supply sides of an enterprise and creating plans to mitigate the effects of these fluctuations. In sum, risk management addresses the possibility that future events may cause adverse effects and entails an attempt to mitigate the impact of these effects.

Risk management draws upon knowledge and skills derived from various disciplines, including statistics, economics, psychology, sociology, epidemiology, biology, engineering, toxicology, systems analysis, operations research, decision theory, and international relations. Because of the wide diversity of risk management topics, this entry addresses only a small portion of the total, concentrating on risk management from the perspective of higher levels of a business enterprise. The specific risk management techniques will not be addressed, but the focus will instead be on components of risk management that are important to business enterprises. Ultimately, risk management can provide assurance to shareholders, creditors, employees, customers, and other interested parties that a business is being well managed, and it can provide important evidence about compliance with relevant laws and government regulations.

INTERNAL CONTROL

An important contribution to the field of risk management for business enterprises has been provided by the Committee of Sponsoring...

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