Risk Category and Spatial Distance Effects in Enterprise Risk Management Practice

The Securities and Exchange Commission is currently seeking comments on whether registrants should be required to discuss the probability of occurrence for each risk factor as part of Item 503(c) disclosures. We examine how risk category and spatial distance from a risk assessment target affects decision-makers' assessment of the probability that a given risk will materialize. Results from an experiment show that decision-makers who can, to a greater degree, relate to a given risk category estimate the probability of occurrence of those risks as higher, compared with participants who can relate less to this risk category. We provide evidence that lack of personal experience with strategic risk factors renders predictions about their probability of occurrence susceptible to the non-deterministic influence of spatial distance from the risk assessment target. As probability judgments are ubiquitous in managerial, audit and tax related settings, the study informs a broad range of accounting literature