Determining Where Resources Are Most Needed The Concept of Risk

Achieving Impact in Auditing

The Concept of Risk My early audits: Park chair audit. Book of remembrance entries. Car park income.

What Is Risk? Does It Really Matter?

WHY DOES IT MATTER? “When anyone asks me how I can describe my experience of nearly forty years at sea, I merely say uneventful. Of course there have been winter gales and storms and fog and the like, but in all my experience, I have never been in an accident in any sort worth speaking about. I have seen but one vessel in distress in all my years at sea... I never saw a wreck and have never been wrecked, nor was I ever in any predicament that threatened to end in disaster of any sort” from a paper presented by EJ Smith, 1907

IT MATTERS! On 14 April 1912, HMS Titanic sank with the loss of 1500 lives..... One of which was its captain E J SMITH

But does any of this really matter NOW?

Risk Management Casualties. Barings BCCI Hoover Sumitomo Bank Enron World Com. Parmalat Andersons

Pressures Greater transparency Better governance Better ethical standards Need for early warning systems Demands for higher quality services New legislation Systems reform/project management

What Is Risk? Definition of Risk.   The threat that an event or action will adversely affect an organisations ability to achieve its business objectives and execute its strategies successfully Source :- The Economist Intelligence Unit

Business Risk Definition 2 The chance of something happening that will have an impact on business objectives Source :-Aus/NZ Risk Mgt Standard

Surprises Any organization that has encountered unwelcome surprises or unexpected losses will realize that most were preventable. Such events will almost certainly have been caused by risks that were not fully understood, or the processes to mitigate those events being inadequate.

Wrong assumptions about risk Risk is just something for finance and insurance to worry about Risk comes up on the agenda once a year Risk management is just another layer of unnecessary bureaucracy Risk management is about downside not creation of value Risk is a compliance issue

Risk Management International expectations are now that all organisations should: Identify, evaluate and manage their key risks and assess how they are controlled Ensure that all aspects of internal control and risk management are regularly reviewed on an appropriate cyclical basis Have regular board level reviews of reports on risk management and internal control

Risk Management And that: Risk management and internal control should be: Embedded in the operations of an organisation Capable of responding to the changing risks it faces Include procedures for reporting major weaknesses immediately to appropriate levels of management

Risk Management In the UK all public bodies have been told: “…it is important that authorities have arrangements in place for reviewing both the nature and severity of risks…such a review should not just be to “obvious tangible” risks such as arson,vandalism and other damage to property..risk management should be an integral part of an authority’s overall management arrangements.”

Risk Management It went on to add: “In order to be successful it is likely that the approach will be cross-departmental and inter-disciplinary and that senior management will demonstrate commitment.”

The AUS/NZ Risk Management Process Establish the context Identify risks Analyse Evaluate Treat Communicate Monitor and Review

Risk Identification and evaluation

Types of Risk Strategic Operational Reputation Information Financial People Regulatory

Strategic Risks Risks that relate to doing the wrong things

Operational Risks Risks that relate to doing the right things in the wrong way

Information Risks Risks that relate to loss or inaccuracy of data ,systems or reported information

Financial Risks Risks that relate to losing monetary resources or incurring unacceptable liabilities

People Risks The risks associated with Employees and Management

Regulatory Risk The Risks related to the regulatory environment

Reputation Risk Risks that relate to the organizations brand or image

Inherent and Residual Risk Inherent risk = Gross risk before controls/ mitigation Residual risk = Risk remaining after applying controls

Evaluation and Measurement of Risk Risk is measured in terms of consequences (or impact) and likelihood (or probability)

Consequences Likelihood Monetary (% of income or budget) Reputation Ability to recover Effect on Organisation Insignificant,Minor, Moderate,Major Catastrophic Rare (less than once in 20 years) Unlikely (once in 10-20 years) Possible (once in 10 years) Likely (once in 3 years) Almost Certain (once a year)

Questions you need to answer What are the worst things that could happen to us? How likely are they to happen? Are we taking sufficient steps to prevent them?

Risk Matrix Likelihood Impac t Most Severe Major Moderate Minor Insignificant Rare Unlikely Possible Likely Almost Certain Impac t

Measurement of Risk:- Risk Matrix 6 8 9 3 5 7 1 2 4 HIGH Impact Of Risk LOW Unlikely Likely Likelihood of Occurrence

RISK MATRIX High 15 16 18 19 1 2 4 3 17 20 21 5 6 7 8 22 23 25 9 10 11 IMPACT 12 13 14 28 26 27 24 Low LOW HIGH LIKELIHOOD

Risk Matrix Over £5 million OR Questions raised in Parliament Important risks – might potentially affect provision of key services or duties Key risk- may potentially affect provision of key services or duties Immediate action needed - serious threat to provision and/or achievement of key services or duties Monitor as necessary - less important but still could have a serious effect on the Monitor as necessary - less important but still could have a serious effect on the provision of key services or duties Key risks - may potentially affect No action necessary Monitor as necessary - ensure being properly managed Monitor as necessary - less important but still could have a serious effect on the provision of key services or duties £2million-£5 million OR Reported in National Press £500,000 - £2 Million OR Reported in Local Paper £100,000 - £500,000 OR Unacceptable levels of Complaints Under £100,000 OR Some complaints from individuals. Unlikely-Once in 10-20 years Possible- Once in 10 years Likely-Once in 3years Certain- Once a year Rare- once in 20 years

Treatment of Risks How are we going to manage the risks that we have identified down to a level that we can live with.

Measure, Manage, Monitor, Report Risk Treatment Risk Transfer Exposure Insure Outsource Determine Evaluate Recover Cost Reduce Control Loss reduction Contingency Plans BCP Measure, Manage, Monitor, Report Action Plans

RISK MAP High 15 16 18 19 1 2 4 3 17 20 21 5 6 7 8 22 23 25 9 10 11 IMPACT 12 13 14 28 26 27 24 Low LOW HIGH LIKELIHOOD

The Risk Management Process

Risk Management Framework Embrace the issue of risk Manage not tolerate Make it a top down process Ensure a positive slant Make it the pulse of your organisation

The Risk Management Cycle Risk Identification Monitoring & Review Risk Analysis Risk Control

Risk Identification Process Clarification of Strategic Business Objectives Consideration of threats to achievement Identification of key risks and opportunities Sifting and clustering of output Evaluation of risks (by impact and likelihood of occurrence) Use of Workshops

Use of Workshops

Workshop Ingredients ACCURATE FACILITATOR ASSESSMENT CHALLENGER FRAMEWORK And CONTROL RISK And CONTROL EXPERTISE PARTICIPANTS BUSINESS And PRACTICAL EXPERIENCE

Typical Agenda for a Workshop Introduction Discussion of objectives/processes Brainstorming of risks Categorisation Assessment of risks

Risk Mitigation Process Evaluation of actions in place to reduce risks Identification of risk exposures and latent opportunities Assessment of the effect of mitigation Development of focussed action plans Preparation of a Risk Register