The decision to outsource risk management activities

This study uses transaction cost economics (TCE) to identify factors influencing Australian Securities Exchange (ASX) companies’ decision to internally generate or outsource activities required to manage risk. Limited research has been conducted applying TCE in a risk management context with most in the accounting discipline concentrating on internal audit. Increasing our understanding of risk management practices benefits organisations, accounting professionals and regulators concerned with governance practice. Using a unique data set obtained from a survey sample of 271 listed ASX companies in 2009 combined with archival data hypotheses are operationalised and analysed using multivariate and logistic regression. Broadly in line with the TCE propositions expenditure on research and development, staff turnover in risk management relative to other service functions, environmental uncertainty measured in terms of technological change and transaction frequency are associated with less outsourcing of risk management activities. Uncertainty due to environmental diversity measured by the number of subsidiaries and recent restructures, acquisitions or mergers is associated with more outsourcing of risk management activities. Behavioural uncertainty related to new staff is also associated with more outsourcing. Contrary to the theoretical predictions of TCE, volatile sales are associated with more outsourcing and competition and overseas sales are associated with less outsourcing of risk management activities. Training and contract duration, hypothesised as indicators of asset specificity, are associated with more outsourcing.