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​A Rational Mindset

Risks, like snakes, are often viewed as threats, despite their potential benefits.

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​Remember the scene from Raiders of the Lost Ark where Indiana Jones enters the Well of the Souls, which happens to be a snake-infested pit? After throwing a torch into the pit to reveal his plight, he exclaims, "Snakes … why did it have to be snakes?"

Granted, this scene is plotted to presume the snakes are venomous, so Indiana's fear is rational. But his initial reaction reveals his bias about snakes in general — the same way some people are irrationally averse to risk.

Internal auditors have a professional duty to remain objective as they perform their work. This unbiased mindset must extend to remaining rational when it comes to communicating with audit clients about risk.

Why Did It Have to Be Risk?

Snakes are vilified as animals that hide in dark places, stealthily seeking out prey and striking when they least expect it. An objective study of snakes reveals a much more accurate view of these complex creatures. Not all snakes are aggressive, nor are they all venomous or massive constrictors capable of inflicting great harm to people, as we often see in movies or hear about in the news.

In fact, snakes can be beneficial. Take the black rat snake, which is effective at controlling harmful rodent populations. One black rat snake can eat 100 mice per acre in a year. What farmer wouldn't readily adopt at least a couple of these hunters to offset the negative impact mice have on property and equipment, not to mention the potential spread of disease?

People sometimes perceive risk with the same irrational viewpoint. Too often, when discussing risk and risk management philosophy with business professionals in the course of internal audit work, the conversation gravitates toward an unbalanced, negative attitude about risk.

One time, my audit team was conducting an audit workshop with a group of business managers. The team was explaining how our audit activities were risk-based so that we focused on things that matter most to their functions' success. The supervisor for this group of managers interrupted our discussion to admonish the group that they needed to be focused on risk to eliminate it from the company. While it was an innocent exclamation the supervisor truly believed, it was an unfortunate and unplanned distraction from our discussion that the audit team had
to clarify with the workshop participants.

The interruption turned out to be a blessing in disguise. It enabled the internal audit team to lead a healthy discussion about the opportunities that also accompany risk, while explaining that eliminating risk was not realistic nor necessarily a desirable goal.

Shifting the Risk Mindset

With all the focus organizations have devoted to enterprise risk management and updated risk management frameworks, they still get trapped in a vortex where risk is seen in a lopsidedly negative light. Internal audit should thoughtfully redirect this line of thinking when such an uninformed view of risk and risk management is expressed.

The snake analogy is a good proxy for reframing the risk discussion. The word risk often is misunderstood. Like snakes, risk can do serious harm, so people instinctively project harm to all risk. But is this rational?

In finance, risk frequently is paired with the word reward to describe offsetting outcomes related to a decision. While taking any given risk may result in a bad outcome, there also is the prospect of a good outcome. No risk, no reward, as the saying goes. This is a more rational view of risk.

Internal auditors can help organizations balance attitudes about risk by talking and acting rationally about risk. For instance, they shouldn't use risk exclusively as a "four-letter word" in discussions with other business professionals. Risk mitigation is only one potential risk response alternative. When approaching risk assessments or new audit engagements, internal auditors should talk about how informed risk-taking is essential to the organization's growth prospects.

Internal auditors should counsel clients that risk acceptance is sometimes the best risk response. This can be the case when other risk response alternatives are costly or when the risk is relatively mild. Accepting a risk while continuing to monitor it for changes that may justify a different response is a rational reaction.

In other instances, it is appropriate to exploit risk for its opportunity. In times of crisis or disruption, offsetting opportunities can present themselves in the face of emerging risks. In these instances, risk opportunities can serve as a hedge against simultaneous negative risk outcomes. When internal auditors set a good example, clients and other stakeholders are more likely to respond to risk with a more rational mindset.

Thinking Differently About Risk

Let's think about snakes and risk a little differently. A more neutral word to use for snake is reptile. Some reptiles can cause harm to people in certain circumstances such as swimming in a lake known to have large alligators or walking through terrain known for rattlesnakes. In other situations, such as rodent control, reptiles are benign or helpful.

Likewise, a less polarizing term for risk is uncertainty — specifically, about some outcome. Risk is neither bad nor good; it's just uncertainty. When auditors use the word uncertainty when discussing risk, they can have a more objective, and less polarized, discussion and avoid the biased, negative connotation. This allows auditors to unlock the real value of an intellectual discussion about risk — refocusing attention on decision-making.

Uncertainty hinders decision-making. The more uncertainty that exists about a pending decision, the more difficult it is to make a decision that will result in a favorable outcome. The better decision-makers can understand the uncertainty they are faced with in a decision, the more likely they should be able to optimize the outcome they are seeking from any given decision.

The coronavirus pandemic comes to mind. In the present, fear of the unknown is dominating the response conversation. This is a crisis that has not been experienced in most of the modern world, and government leaders are struggling to craft effective responses because of the uncertainty that exists.

In time, this threat will subside. The world is currently experiencing negative outcomes; however, positive outcomes could emerge, such as a more resilient health-care system to deal with similar threats in the future.

Risk Doesn't Have to Be Scary

When risk is obscure and lurking in the darkness, it seems more like a rattlesnake waiting to strike against an unsuspecting victim. But when risk is visible, understood, and appreciated for its potential benefit, organizations can exploit it for a beneficial outcome or control it to minimize a negative outcome. With this shift in mindset, risk becomes less of a scary monster and more of a device that uses rational decision-making to optimize risk outcomes. 

Rick Wright
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About the Author

 

 

Rick WrightRick Wright<p>Rick Wright, CIA, is director, Internal Audit and ERM, at YRC Worldwide in Overland Park, Kan.<br></p>https://iaonline.theiia.org/authors/Pages/Rick-Wright.aspx

 

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