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?

“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 WHY DOES IT MATTER?

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

But does any of this really matter NOW?

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

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 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 International expectations are now that all organisations should:

Risk Management 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 And that: Risk management and internal control should be:

Risk Management “…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.” In the UK all public bodies have been told:

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 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?

Most Severe Major Moderate Minor Insignifican t RareUnlikely PossibleLikelyAlmost Certain Likelihood ImpactImpact Risk Matrix

Measurement of Risk:- Risk Matrix HIGH Impact Of Risk LOW Unlikely Likelihood of Occurrence Likely

RISK MATRIX High Low IMPACT HIGHLOW LIKELIHOOD

Risk Matrix 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 provision of key services or duties 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 provision of key services or duties 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 Over £5 million OR Questions raised in Parliament £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. Rare- once in 20 years Unlikely - Once in years Possible- Once in 10 years Likely- Once in 3years Certain- Once a year

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

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

RISK MAP High Low IMPACT HIGHLOW 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 Risk Analysis Risk Control Monitoring & Review

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

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

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