Analyzing the Role of Risk Awareness in Enterprise Risk Management

Abstract

ABSTRACT This study examines the relationship between five enterprise risk management (ERM) components and their influence on the effectiveness of ERM. The study particularly focuses on the role of risk awareness as an ERM component within the interplay of other formal ERM components. The five ERM components result from a factor analysis applied on a list of risk management (RM) practices in nonfinancial firms. Based on survey data from 118 companies, I find evidence supporting an indirect effect of risk awareness on RM effectiveness. My analyses support that the use of RM tools strengthens the relationship between risk awareness and RM effectiveness, but I only find inconclusive evidence supporting a direct association between risk awareness and RM effectiveness. As antecedents of risk awareness, I find support for both organizational environment and reporting processes. Moreover, risk awareness carries the effects of organizational environment and reporting processes to RM effectiveness. This study shows empirically that risk awareness is a vital cultural component in a firm's ERM system. It thus contributes to existing research in management accounting and control by providing insights into the role of risk awareness as a concept related to other ERM components.