Risk in the process of budgeting

Risk in financial management has become a central pre-occupation of corporate governance (International Federation of Accountants, 1999; Institute of Chartered Accountants in England and Wales, 1999) however little is known about how organizations construe risk in the financial management process. This paper describes four exploratory and comparative case studies that were carried out with the aim of understanding the relationship between risk and how managers perceived and managed risk in the budgeting process. The case analysis results suggest that organizational participants socially construct risk. Four domains of risk were identified: financial, operational, political and personal. These domains of risk influenced the content and process of budgeting that were categorized as Risk Modelled, Risk Considered or Risk Excluded. In particular, by excluding some risks and considering others, the budget process was seen to be different to, and needed to be interpreted separately from, the content of the budget in which there was little evidence of risk modelling or the use of probabilities. The research also showed how risk is transferred within and between organizations and how managers may contain risk. While these were exploratory case studies it was evident that risk and how it was construed, understood and managed in the financial management process was a central concern of managers and that further research is necessary to extend this knowledge