What is the primary risk associated with an organization adopting a decentralized structure?

A decentralized structure distributes decision-making authority across different business units,

divisions, or geographical locations. While decentralization provides flexibility and autonomy, the

primary risk is inconsistency in decision-making, as different units may develop their own policies,

processes, and priorities that are not aligned with the organization's strategic goals.

Analysis of Answer Choices:

(A) Inability to adapt.

Incorrect. Decentralization typically enhances adaptability, as individual units can quickly respond to

local market conditions, customer needs, and emerging risks without waiting for corporate approval.

(B) Greater costs of control function.

Partially correct but not the primary risk. While decentralization may increase oversight costs (e.g.,

more auditors and compliance personnel), the primary issue is lack of uniform decision-making

rather than costs alone.

(C) Inconsistency in decision making. ✅

Correct. When decision-making authority is spread across various units, inconsistencies arise in areas

such as risk management, compliance, operational procedures, and resource allocation. This can lead

to conflicts, inefficiencies, and misalignment with corporate strategy.

IIA Standard 2120 – Risk Management emphasizes the need for consistent risk oversight in all

business units.

IIA GTAG "Auditing the Control Environment" warns that inconsistent policies weaken internal

controls and governance.

(D) Lack of resilience.

Incorrect. A decentralized structure often improves resilience because decision-making is spread out,

reducing dependency on a central authority. This allows units to function independently if one area

experiences disruption.

IIA Reference:

IIA Standard 2120 – Risk Management

IIA GTAG – "Auditing the Control Environment"

COSO Framework – Internal Control Principles

Thus, the correct answer is C, as decentralization introduces decision-making inconsistencies,

affecting governance and strategic alignment.