Closing the Gap Between Risk Management and Performance

Source: AICPA CPA Insider

The following includes excerpts, reproduced with permission, from an article by Robert Torok, CA. The article also includes a detailed example and charts.

The objective of a performance management system – and its underlying management processes – is to enable managers and executives to understand what is going well, what is not, and what the future might look like, given data from the past.

Similarly, the objectives of a risk management process are to provide warning signals of impending or potential events that may impact the organization and quantify those impacts, while enabling the organization to assess the efficacy of its mitigation strategies.

But there is frequently a gap between these two processes. This is because the performance management and risk management processes are not intertwined. Therefore, risks are often assessed and managed without a complete understanding of the broader performance implications. Similarly, performance decisions are often made without regard for the risks they may inadvertently aggravate or mitigate.

In bringing these two processes together, it is clear that strong performance management systems should incorporate measures of risk and be able to predict future results if risks materialize and/or risk mitigation actions are taken.

For the complete article, read “Leveraging Performance Management to Support Risk Management.”

From AICPA CPA Insider, March 21, 2011, http://www.CPA2biz.com.