By Geoff Trickey, Managing Director, Psychological Consultancy Ltd (PCL)
The amount of risk that people are prepared to take differs quite dramatically. Those at the apprehensive end of the scale would find the extreme risk-takers at the opposite end as beyond belief. A person’s propensity for risk-taking is one of their most defining characteristics. This is significant in employment terms because every job will also have a risk dimension – from the exactitude of text editing or precision engineering, to the physicality and dangers of explosives in quarrying, or the elements to drilling rigs of the North Sea. Marrying up the people to the role in terms of risk compatibility will determine the likelihood of failure, as well as the possibility of success. The difficulty for organizations is that a person’s risk appetite is not visible.
By its nature, risk is high on the agenda in auditing. Auditors are required to seek out risk, assess the probability it will occur and understand the potential severity of the risk. If the risk is high, a corrective action is issued; if it is low, an observation. If managed well, the organization is deemed to be compliant. Yet, risk evaluation is highly subjective; one individual’s assessment of probability and severity could differ meaningfully from another’s depending on their own risk appetite. Risk can very rarely be measured objectively; from underwriters and actuaries, to bookmakers and city traders; tightrope walkers and car drivers, there is always a hefty dose of personal judgement in any risk assessment.
Although all this makes risk a topic of labyrinthine complexity, our research suggests that, at the level of personality, individual propensity for risk is knowable and reliably measurable. It’s possible to gain insight into the way that any individual will perceive and react to risk and where the boundaries of risk aversion and risk-taking are for them. Assessing risk personality can be used to gain a better understanding of the risk dispositions of auditors; in effect, the personal bias that will have the opportunity to influence the outcomes of their risk-based audits wherever personal judgment is involved rather than objective fact.
Identifying Risk Types
Based on an extensive body of global research into risk personality, the Risk Type Compass assessment was developed. It places individuals into one of eight risk types. Their risk type reflects their temperament and natural disposition towards risk – the extent to which they are, for example, naturally adventurous and optimistic, as opposed to being cautious and anxious about uncertainty, or to what extent they plan things carefully, seek excitement or act on impulse. This is not a simple linear dimension – it reflects the true complexities of temperament and risk behavior.
Temperament is deeply rooted and will influence how much risk an individual is able to take, how much uncertainty they can cope with, and how they react when things go wrong. Perception of risk and propensity for risk-taking are inseparable. The most extreme risk-takers read uncertainty as safe until proved otherwise, while the risk-averse read uncertainty as risky until proved otherwise.
The Risk Type Compass presents a continuous spectrum of risk dispositions in which adjacent types are similar and merge into each other while facing types (e.g., wary and adventurous) have opposite characteristics.
Risk Type Definitions
- Wary: Shrewd/vigilant/controlling. Ultra sensitive about vulnerability and exposure to risk in any situation, they are zealous about eliminating uncertainty and fervently seek to establish order and control events.
- Intense: Apprehensive/risk aware/ardent. They invest enthusiastically in people and projects but are alert to the prospect of things going wrong. Feeling strongly about disappointment, they don’t make the same mistake twice.
- Prudent: Systematic/orthodox/detailed. Their primary concern is to establish clarity and order in objectives and processes. They adopt a systematic and methodical approach and seek to eliminate all ambiguity.
- Excitable: Enthusiastic/anxious/committed. Decisions are fueled by enthusiasm for exciting ideas and opportunities but tempered by sensitive risk antennae. They may wrestle over decisions but will go in deep once committed.
- Deliberate: Confident/purposeful/thorough. Calm, calculated, and sure-footed, they are not easily unnerved, but they test the ground thoroughly and like to do things “by the book”. They like to plan ahead and be well prepared.
- Carefree: Audacious/curious/unconventional. They see opportunity before risk and relish the adrenaline of the on-the-fly decision making required in fast-moving situations and at times of urgency or change.
- Composed: Calm/resilient/optimistic. Strangers to anxiety and dispassionate in their decision-making, they deal well with stress and will be a steadying and reassuring influence through challenging times.
- Adventurous: Intrepid/enterprising/undaunted. Fearless and confident, they enjoy the excitement of breaking new ground and reaching for ambitious objectives. They will be frustrated by resistance and keen to take things forward.
Risk Types of Auditors
The main risk for individuals in this sector is that an incorrect or incomplete audit has a direct impact on the audited organization. It can result in financial mismanagement, breaches in health and safety regulations or costly product recalls. The emphasis on prudence and attention to detail suggest that, for those working in audit roles, the more apprehensive, careful and cautious risk types would be most vigilant, but they may also be too rigid, rule-bound and inflexible to recognize valid differences between sectors and organizations. Every risk type has its advantages and limitations.
Our data of over 80 auditors who completed the Risk Type Compass assessment shows a very distinctive distribution. Almost 70 percent of the auditors were grouped in a cluster of three risk types. The highest proportion were designated as the deliberate risk type, with the second most common being “composed,” followed by “prudent.” There were far fewer auditors in the “intense,” “spontaneous,” and “carefree” risk types end of the spectrum. These results illustrate the strong “pull” of the calm and organized side of the compass and reveal a very distinctive professional profile.
Whatever their risk type, auditors need to be aware of their own tendencies and the systematic bias that this will introduce to their professional judgments. Self-awareness alerts them to the specific pitfalls that they will need to navigate to manage the subjective aspects of their professional practice.
Gaining a greater understanding of, and appreciation for, differences in risk type has important implications, not only for individuals but for teams and organizations. As well as helping to increase strategic self-awareness, enabling individuals to leverage their strengths and manage their weaknesses accordingly, organizations can ensure their teams have an optimum balance of risk types to maximize performance.
Geoff Trickey will be hosting a free webinar on “Assessing the Risk-Taking Nature of Auditors’”on May 3 at 4.00 p.m. AEST where he will give further insights into PCL’s research into auditors’ risk types. Click here to register.