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and Thomas, 1990) about the definition of risk in the managementliterature where multiple definitions have been used (Baird and Thomas, 1990).
The International Federation of Accountants (1999) defined risk as uncertain futureevents that could influence the achievement of strategic, operational and financialobjectives. The IFAC report contrasted the negative view of risk as hazard with a positive
interpretation of risk as opportunity. Their report was explicitly biased towardsa perspective that favoured shareholder value in which risk management ‘establishes,calibrates and realigns the relationship between risk, growth and return’ (p. 4).Risk was also defined by the Turnbull report as any event that might affect a listedcompany’s performance, including environmental, ethical and social risks (Institute
of Chartered Accountants in England and Wales, 1999, p. 4). The guidance in the
report was based on Boards of Directors implementing ‘a risk-based approach to
establishing a sound system of internal control and reviewing its effectiveness’.
According to the report, Boards need to consider the extent to which each risk is
acceptable, the likelihood of risk materializing and the ability of the organization to
reduce the incidence and impact of the identified risk. However, reflecting the IFAC
definition, the Turnbull report acknowledged that ‘profits are, in part, the reward for
successful risk-taking in business’ so that the role of internal control was ‘to helpmanage and control risk appropriately rather than to eliminate it’ (p. 5).The often-used distinction between risk and uncertainty was derived from Knight’sRisk, uncertainty and profit. According to Knight, risk was not knowing what futureevents will happen, but having the ability to estimate the odds, while uncertainty
was not even knowing the odds (quoted in Adams, 1995).The budgeting process is a formal method by which plans are established for futuretime periods. This implies a consideration of risk and/or uncertainty. However, theassessment of risk is problematic because it can be conceptualized by reference tothe existence of internal or external events; information about those events (i.e. theirvisibility); managerial perception about events and information (i.e. how they are
perceived); and how organizations establish tacit, informal (or explicit and formal)
ways of dealing with risk.
This paper proposes a definition of risk as the consideration of (a process) and
the consequences (the outcome—both fortuitous and hazardous) of unpredictable
and uncontrollable events and perceptions about those events. A consideration
Risk in the Process of Budgeting 275
of risk as much as opportunity as of hazard is consistent with the IFAC and
Turnbull definitions of risk. This definition accepts the notion of unpredictability,
while recognizing that techniques do exist (such as probabilities and flexible budgets)
to reflect a variety of outcomes. It also recognizes some requirement to represent an
assumed knowledge of future market and competitor activity, resource dependencies,
and action–outcome relationships in the content of the budget document.
The definition adopted in this paper is consistent with the observation by Berry
et al. (1995, p. 57) that ‘what one sees in a financial plan, especially one which is
projected on a spreadsheet as single-point estimates over 10 years, might be one
where the problem