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Fundamentals of risk assessment: methods and tools used to assess business risks.

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CEO of Schwenk AG & Crisis Control Solutions LLC , a leading expert in risk and crisis management for the automotive industry.

In the intricate tapestry of the modern business landscape, every thread is intertwined with an element of risk. From startups navigating the treacherous waters of market entry to conglomerates expanding their global footprint, understanding and adeptly managing these risks has become a distinguishing factor between fleeting success and enduring resilience.

As the pace of innovation surges and the global marketplace transforms, the significance of comprehensive risk assessment is only magnified. As a top expert in risk and crisis management, I've served major clients as well as numerous smaller firms in Europe and the U.S. Here's my guide for businesses.

Key Components Of Risk Assessment

Risk assessment stands as a cornerstone in strategic business decision-making, demanding a structured and meticulous approach to ensure effectiveness.

1. Identify

At the heart of this process is the task of identifying risks. This involves recognizing and describing potential pitfalls that a business might face. Recognizing these risks early ensures that businesses can allocate resources and strategize aptly without being caught unprepared.

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Best 5% interest savings accounts of september 2023, 2. quantify.

Following the identification phase, businesses need to quantify the risks, gauging both their potential impact and likelihood.

Employ tools such as statistical models, analyses of historical data and simulated scenarios as they can all provide valuable insights in this dimension. It's through this quantification that businesses can discern which threats merit immediate attention and which can be set aside for later.

3. Prioritize

Once quantified, the next logical step is to prioritize these risks. Here, businesses rank and evaluate the identified risks, determining which should be addressed first based on their significance.

Instruments like risk matrices , which juxtapose the likelihood of a risk against its impact, play a crucial role in this assessment phase. Not every risk poses an immediate threat, and thus it's essential to ensure the most significant risks are addressed immediately, streamlining resources for maximum efficacy.

4. Evaluate

Subsequent to prioritization, a comprehensive evaluation of these risks is essential. This phase requires businesses to weigh the magnitude of each risk against their inherent risk appetite.

Compare industry benchmarks, past experiences or predetermined thresholds to decide the most appropriate way to address each threat. This step is pivotal in ensuring that risk management efforts are in harmony with a company's overarching objectives and risk tolerance levels.

5. Mitigate And Manage

Mitigating and managing risks forms the next stage. Strategic decisions come into play, determining how each identified risk should be addressed. Depending on the nature and magnitude of the risk, businesses might opt to transfer the risk through mechanisms like insurance, change their business processes to avoid it entirely, put in place safeguards to diminish its effect, or even accept it outright.

Effective risk management, in this regard, becomes a dual-edged sword; while it safeguards against potential adversities, it can also pave the way for opportunities, enabling growth and improvement.

6. Monitor And Review

Risks are inherently dynamic, fluctuating with time and circumstances. Regular audits, feedback mechanisms and even third-party reviews ensure that strategies employed remain effective and that emergent risks are identified promptly.

This continuous monitoring helps businesses stay nimble, adjusting their strategies to the evolving landscape of risks, better ensuring both survival and prosperity in an uncertain world.

Methods Of Risk Assessment

1. qualitative assessments.

The qualitative assessment is predominantly based on descriptive, nonnumerical data, and it shines in scenarios where garnering accurate numerical data is challenging. One of its significant advantages is its capacity to harness the power of expertise, intuition and experience to scrutinize risks.

There are several techniques under this umbrella. For instance, SWOT analysis delves into both the internal and external elements that might influence a project or business. It identifies the strengths, weaknesses, opportunities and threats.

The expert judgment method seeks insights from those with specialized expertise. Another technique, the Delphi method , orchestrates a structured dialogue among a panel of experts. This communication continues in multiple rounds until a consensus emerges.

2. Quantitative Assessments

The quantitative assessment employs numerical data. By leveraging statistical, financial or numerical analyses, it provides a more systematic and data-centric perspective on potential risks.

Techniques in this category include the Monte Carlo simulation , which uses an algorithm that hinges on constant random sampling to deduce numerical outcomes. Decision trees provide a visual representation of decisions and their possible results. Additionally, sensitivity analysis explores how varying values of one variable can influence another.

3. Additional Assessments

Scenario analysis empowers businesses by laying out an array of potential future situations. It aids in sketching the best-case, worst-case and the most-probable scenarios, enabling firms to visualize and weigh the potential risks and rewards.

Stress testing dives deep into analyzing potential vulnerabilities in any given system. It designs models that emulate challenging, often drastic conditions. A classic example of its application is in the financial realm , where banks deploy this method to unearth potential weak points in their financial statements.

The comparative risk assessment offers a comparative perspective. By juxtaposing potential risks against a benchmark or another risk, businesses can determine which threats deserve immediate attention, especially when resources are sparse and setting priorities becomes vital.

A hybrid method epitomizes adaptability. Realizing that no single technique can capture the entirety of risks, many entities interweave both qualitative and quantitative strategies. This amalgamated approach furnishes a richer, more detailed depiction of the risk environment surrounding a business.

Navigating Risk

To make an informed decision on which assessment method to employ, decision-makers should consider the nature of the risk, available data and desired depth of analysis.

Whether leaning toward qualitative methods that harness expertise and intuition or quantitative techniques that provide data-centric insights, the key is to choose a method (or combination thereof) that aligns with the specific context and objectives of the business, ensuring both its survival and prosperity amid uncertainties.

In essence, managing risk boils down to four strategies: avoiding it, mitigating its impact, transferring it, or simply accepting it. The chosen approach depends on the nature and magnitude of the risk in question.

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A complete guide to the risk assessment process

Lucid Content

Reading time: about 7 min

Mark Zuckerberg, the founder of Facebook, once said, “The biggest risk is not taking any risk. In a world that's changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”

While this advice isn't new, we think you’ll agree that there are some risks your company doesn’t want to take: Risks that put the health and well-being of your employees in danger.

These are risks that aren’t worth taking. But it’s not always clear what actions, policies, or procedures are high-risk. 

That’s where a risk assessment comes in.

With a risk assessment, companies can identify and prepare for potential risks in order to avoid catastrophic consequences down the road and keep their personnel safe.

What is risk assessment?

During the risk assessment process, employers review and evaluate their organizations to:

• Identify processes and situations that may cause harm, particularly to people (hazard identification).
• Determine how likely it is that each hazard will occur and how severe the consequences would be (risk analysis and evaluation).
• Decide what steps the organization can take to stop these hazards from occurring or to control the risk when the hazard can't be eliminated (risk control).

It’s important to note the difference between hazards and risks. A hazard is anything that can cause harm , including work accidents, emergency situations, toxic chemicals, employee conflicts, stress, and more. A risk, on the other hand, is the chance that a hazard will cause harm . As part of your risk assessment plan, you will first identify potential hazards and then calculate the risk or likelihood of those hazards occurring.

The goal of a risk assessment will vary across industries, but overall, the goal is to help organizations prepare for and combat risk. Other goals include:

• Providing an analysis of possible threats
• Preventing injuries or illnesses
• Meeting legal requirements
• Creating awareness about hazards and risk
• Creating an accurate inventory of available assets
• Justifying the costs of managing risks
• Determining the budget to remediate risks
• Understanding the return on investment

Businesses should perform a risk assessment before introducing new processes or activities, before introducing changes to existing processes or activities (such as changing machinery), or when the company identifies a new hazard.

The steps used in risk assessment form an integral part of your organization’s health and safety management plan and ensure that your organization is prepared to handle any risk.  

Preparing for your risk assessment 

Before you start the risk management process, you should determine the scope of the assessment, necessary resources, stakeholders involved, and laws and regulations that you’ll need to follow. 

Scope: Define the processes, activities, functions, and physical locations included within your risk assessment. The scope of your assessment impacts the time and resources you will need to complete it, so it’s important to clearly outline what is included (and what isn’t) to accurately plan and budget. 

Resources : What resources will you need to conduct the risk assessment? This includes the time, personnel, and financial resources required to develop, implement, and manage the risk assessment. 

Stakeholders: Who is involved in the risk assessment? In addition to senior leaders that need to be kept in the loop, you’ll also need to organize an assessment team. Designate who will fill key roles such as risk manager, assessment team leader, risk assessors, and any subject matter experts. 

Laws and regulations: Different industries will have specific regulations and legal requirements governing risk and work hazards. For instance, the Occupational Safety and Health Administration (OSHA) sets and enforces working condition standards for most private and public sectors. Plan your assessment with these regulations in mind so you can ensure your organization is compliant. 

5 steps in the risk assessment process

Once you've planned and allocated the necessary resources, you can begin the risk assessment process.

Proceed with these five steps.

1. Identify the hazards

The first step to creating your risk assessment is determining what hazards your employees and your business face, including:

• Natural disasters (flooding, tornadoes, hurricanes, earthquakes, fire, etc.)
• Biological hazards (pandemic diseases, foodborne illnesses, etc.)
• Workplace accidents (slips and trips, transportation accidents, structural failure, mechanical breakdowns, etc.)
• Intentional acts (labor strikes, demonstrations, bomb threats, robbery, arson, etc.)
• Technological hazards (lost Internet connection, power outage, etc.)
• Chemical hazards (asbestos, cleaning fluids, etc.)
• Mental hazards (excess workload, bullying, etc.)
• Interruptions in the supply chain

Take a look around your workplace and see what processes or activities could potentially harm your organization. Include all aspects of work, including remote workers and non-routine activities such as repair and maintenance. You should also look at accident/incident reports to determine what hazards have impacted your company in the past.

Use Lucidchart to break down tasks into potential hazards and assets at risk—try our free template below.

2. Determine who might be harmed and how

As you look around your organization, think about how your employees could be harmed by business activities or external factors. For every hazard that you identify in step one, think about who will be harmed should the hazard take place.

3. Evaluate the risks and take precautions

Now that you have gathered a list of potential hazards, you need to consider how likely it is that the hazard will occur and how severe the consequences will be if that hazard occurs. This evaluation will help you determine where you should reduce the level of risk and which hazards you should prioritize first.

Later in this article, you'll learn how you can create a risk assessment chart to help you through this process.

4. Record your findings

If you have more than five employees in your office, you are required by law to write down your risk assessment process. Your plan should include the hazards you’ve found, the people they affect, and how you plan to mitigate them. The record—or the risk assessment plan—should show that you:

• Conducted a proper check of your workspace
• Determined who would be affected
• Controlled and dealt with obvious hazards
• Initiated precautions to keep risks low
• Kept your staff involved in the process

5. Review your assessment and update if necessary

Your workplace is always changing, so the risks to your organization change as well. As new equipment, processes, and people are introduced, each brings the risk of a new hazard. Continually review and update your risk assessment process to stay on top of these new hazards.

How to create a risk assessment chart

Even though you need to be aware of the risks facing your organization, you shouldn’t try to fix all of them at once—risk mitigation can get expensive and can stretch your resources. Instead, prioritize risks to focus your time and effort on preventing the most important hazards. To help you prioritize your risks, create a risk assessment chart.

The risk assessment chart is based on the principle that a risk has two primary dimensions: probability and impact, each represented on one axis of the chart. You can use these two measures to plot risks on the chart, which allows you to determine priority and resource allocation.

Be prepared for anything

By applying the risk assessment steps mentioned above, you can manage any potential risk to your business. Get prepared with your risk assessment plan—take the time to look for the hazards facing your business and figure out how to manage them.

Now it's time to create your own risk management process, here are five steps to get you started.

About Lucidchart

Lucidchart, a cloud-based intelligent diagramming application, is a core component of Lucid Software's Visual Collaboration Suite. This intuitive, cloud-based solution empowers teams to collaborate in real-time to build flowcharts, mockups, UML diagrams, customer journey maps, and more. Lucidchart propels teams forward to build the future faster. Lucid is proud to serve top businesses around the world, including customers such as Google, GE, and NBC Universal, and 99% of the Fortune 500. Lucid partners with industry leaders, including Google, Atlassian, and Microsoft. Since its founding, Lucid has received numerous awards for its products, business, and workplace culture. For more information, visit lucidchart.com.

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Risk Assessment

Risk assessment definition.

A Risk Assessment is a systematic process used to identify, evaluate, and prioritize potential risks that could negatively impact an organization’s objectives, operations, or specific projects. This process helps organizations manage and mitigate these risks before they escalate into critical issues.

What is Risk Assessment?

Risk Assessment is the structured examination of uncertain situations wherein potential threats and their potential consequences are identified. This is done to determine appropriate interventions to eliminate or control these risks and prioritize them based on their likelihood and potential impact.

A risk assessment’s ultimate objective is to ensure individuals’ safety and maintain the operational functionality and reputation of organizations. It delves into the psychology of uncertainty. Assessors don’t just identify threats; they step into the shoes of stakeholders, anticipating anxieties, understanding biases, and gauging emotional impacts. According to Daniel Kahneman’s “Thinking, Fast and Slow” , human beings often exhibit biases in risk evaluation. Integrating cognitive psychology into risk assessment helps organizations better predict human responses to potential threats.

Also, Risk Assessment is a strategic tool that evolves with the times, adapting to new technologies and unpredictable market shifts (distinguish from Risk Register ). For instance, the rise of digital transformation has ushered in cyber threats that traditional risk assessment methods couldn’t have foreseen. As per the World Economic Forum’s Global Risks Report , cyberattacks and data breaches have consistently ranked among the top global risks. This demonstrates the ever-evolving nature of threats and underscores the need for assessments to adapt and be forward-thinking.

Risk Assessment Matrix

A Risk Assessment Matrix, also known as a Probability and Severity matrix, is a visual tool used to evaluate and prioritize risks based on the likelihood of their occurrence and the potential impact or severity of their consequences. The matrix helps organizations to identify which risks need immediate attention and which ones can be monitored or accepted.

Here’s how it generally works:

• Minor (Insignificant impact)
• Low (Limited impact)
• Medium (Moderate impact)
• High (Major/Severe impact)
• Extreme (Catastrophic impact)

When you plot risks on this matrix, you can categorize them based on their position:

• High Likelihood and High Impact : These are critical risks that require immediate attention and action.
• High Likelihood and Low Impact : These risks might happen frequently, but they don’t have a significant consequence. They still need attention, but perhaps not as urgently as the above category.
• Low Likelihood and High Impact : These risks don’t occur frequently, but if they do, they can cause significant harm. Contingency plans are often developed for these types of risks.
• Low Likelihood and Low Impact : These risks can generally be accepted or monitored, as they don’t happen often and don’t have a major impact.

By visually displaying risks in this manner, the Risk Assessment Matrix allows organizations to make informed decisions on where to allocate resources and how to best manage or mitigate identified risks. The matrix serves as a foundational tool in risk management processes across various industries, from project management to health and safety to cybersecurity.

The risk assessment matrix, while a cornerstone today, it has its critics. Some experts, as highlighted in Risk Analysis Journal , argue that its over-simplification can sometimes miss nuances. Balancing traditional matrices with modern analytical tools like AI-powered risk prediction can offer a more holistic assessment.

What are the Five Principles of Risk Assessment?

• Identify Hazards : This is the initial step where potential threats or hazards, both obvious and non-obvious, are identified.
• Risk Estimation: Decide who might be harmed and how. This entails determining which individuals or groups are at risk and understanding the potential harm they could face.
• Risk Evaluation: Evaluate the risks and decide on precautions. Here, the identified risks are ranked, and suitable measures to mitigate or eliminate them are proposed.
• Risk Control: Record your findings and implement measures to mitigate the identified risks. Any professional risk assessment should be documented. This serves as a record and can also serve as a guide for implementing control measures.
• Monitoring and Review: Continuously checking and updating the assessment. Risks change over time, making it crucial to review and update the assessment periodically.

While the five principles of Risk Assessment remain foundational, there’s an emerging sixth principle — ‘ Adaptive Forecasting .’ With the rise of real-time data analytics, organizations are now continually updating risk assessments, not just as a periodic exercise. A study from Harvard Business Review indicates that adaptive risk management can lead to quicker response times in fast-paced industries like finance and technology.

Risk Assessment Examples

• Business Operations : A company might assess risks associated with a new market entry, considering factors like political instability, currency fluctuations, or potential supply chain disruptions.
• IT and Cybersecurity : Businesses may perform risk assessments on their IT infrastructure to identify vulnerabilities that could be exploited by hackers or malware.
• Health and Safety : In industries like construction or manufacturing, risk assessments are conducted to identify potential hazards like machinery malfunctions or exposure to harmful substances.
• Environmental : Companies may evaluate risks related to environmental factors, such as potential spills or emissions that could harm the environment.

Risk Assessment Template

A risk assessment template is a standardized document or software used to simplify the risk assessment process. By following a template, organizations can ensure they are thorough in their assessment, covering all potential risks and following best practices.

Risk assessment is a pivotal component in any organization’s strategic and operational planning. It’s a proactive approach to identifying, understanding, and mitigating potential threats, ensuring safety, and fostering resilience. Risk assessment is fundamental to informed decision-making, whether it’s a business considering expansion or an industry navigating operational hazards.

Related Terms

• SMART Goal Setting
• Moscow Prioritization
• Stakeholders Analysis
• Product Design
• Minimum Viable Product (MVP)
• Customer Acquisition Cost (CAC)

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Risk Assessment

A risk assessment is a process used to identify potential hazards and analyze what could happen if a disaster or hazard occurs. There are numerous hazards to consider, and each hazard could have many possible scenarios happening within or because of it.

Use the Risk Assessment Tool to complete your risk assessment. This tool will allow you to determine which hazards and risks are most likely to cause significant injuries and harm.

As you conduct the risk assessment, look for vulnerabilities or weaknesses that could make your business more susceptible to damage from a hazard. Vulnerabilities include deficiencies in building construction, process systems, security, protection systems and loss prevention programs. They contribute to the severity of damage when an incident occurs. For example, a building without a fire sprinkler system could burn to the ground while a building with a properly designed, installed and maintained fire sprinkler system would suffer limited fire damage.

The impacts from hazards can be reduced by investing in mitigation . If there is a potential for significant impacts, then creating a mitigation strategy should be a high priority.

Risk Assessment Resources

• Multi-hazard Mapping Information Platform - Federal Emergency Management Agency (FEMA)
• Flood Map Service Center - FEMA
• Earthquake Hazards information - United States Geological Survey (USGS)
• Hurricane - FEMA
• Landslide Hazards Program - USGS
• Volcano Hazards Program - USGS
• Protecting Workers from Heat Illness - Occupational Safety and Health Administration (OSHA)

Human-Caused Hazards

• Survey Your Workplace for Additional Hazards - OSHA Compliance Assistance Quick Start for General Industry
• Workplace Violence—Issues in Response - Federal Bureau of Investigation

Technological Hazards

• Risk Assessment Portal , guidance and guidelines - U.S. Environmental Protection Agency
• Computer Security Resource Center , Special Publications, National Institute of Standards and Technology, Computer Security Division
• IT Security Essential Body of Knowledge , United States Computer Emergency Readiness Team

Last Updated: 06/20/2024

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A Guide to Conducting Risk Assessment

This comprehensive guide outlines the best way to assess risks so you can make informed decisions and become more resilient against observed hazards and other uncertainties.

Why Learn the Process of Risk Assessments?

Risk assessment is a systematic approach to determining and evaluating potential threats and vulnerabilities that organizations may encounter. There is no strict standard for conducting risk assessments. Companies can customize this based on their needs. However, learning the fundamental process in conducting risk assessment is crucial in assessing identified or predicted hazards and addressing the challenges effectively. Ultimately, risk assessments, when conducted correctly, safeguards the employees, customers, and the company’s reputation.

Big or small, businesses across industries are exposed to a myriad of risks. If unmitigated, these could impair their ability to operate, decrease their revenues, and eventually lead to their collapse. Having a proper guide in conducting risk assessments helps companies achieve the following:

• Data-driven insights – Proficiently assessing risks—recognizing the threats and their potential impacts—empowers businesses to make better choices about their current and future workflows. 
• Proactive risk mitigation strategies – Having a base understanding of present or emerging risks and how to handle them facilitates quick issues resolution. 
• Business resilience – Learning how proper risk assessment is done fosters preparedness in any scenario, enabling organizations to recover even from the most dire circumstances.   

The Detailed Process of Assessing Risks 

Having a firm grasp of this methodology and systematically following the procedure facilitates a more holistic way to tackle risks. When qualified professionals (e.g., risk analysts, managers, or officers) possess a thorough mastery of the process, they can modify it in light of certain scenarios to maintain efficacy in continuously evolving environments.  

Identify the Risks

The first step in this process is to determine the hazard or threat and its potential source in the corporate environment, from internal factors (e.g., operational workflows, personnel, finance) to external ones (e.g., market trends and regulatory changes). This is crucial in understanding the extent of the danger and vulnerability of the company.

Best Practices:

• Do a full review of the internal processes, historical risks, and current control measures.
• Keep abreast of industry trends and competitors’ actions.
• Brainstorm with other department heads, using SWOT analysis to assess the company’s standing.  

Evaluate the Risks

The next step is to assess the gravity of the risk, the likelihood of its occurrence , and the individuals who will be impacted, either directly or indirectly. This phase helps managers rank the risks from the most severe to the more manageable ones so they focus on what to mitigate first and better allocate resources for the task.      

• Benchmark collected data against industry standards and competitors for better goal setting. 
• Use the risk matrix to visualize the probability and the severity of the threat.
• Employ both qualitative and quantitative analysis to acquire subjective and detailed information for go/no-go decisions. 

Implement Control Measures

In this stage, relevant personnel develops and applies the measures to reduce or, if possible, eliminate the risk. Three key strategies can be used:

• Transfer of risk – The risk can be passed on to another party through insurance or outsourcing. The use of indemnification clauses in contracts is a very good example as this assures the business that any potential loss will be covered by another party. 
• Avoidance – This means abstaining from actions or choices that expose the business to considerable danger. For instance, manufacturers could refrain from handling or storing hazardous materials since they cannot deal with them. 
• Reduction – These are measures that minimize the impact or likelihood of risks. Installation of fire alarms, sprinkler systems, and extinguishers in buildings can significantly decrease the grave effects of a blaze in case of fire emergencies. 
• Create a hierarchy of controls and inform everyone involved about these. 
• Consider high-tech solutions like IoT monitoring systems.
• Ensure employees have adequate skills and knowledge to prevent or deal with incidents through training. 

Document the Event

The entire risk assessment process must be recorded and stored for transparency and future reviews. This should include the findings, actions taken, and even photos or videos as these can provide the full context of the entire session. 

• Produce a standardized risk assessment template . A clear structure aids in a better understanding of the findings and facilitates efficient handling of subsequent evaluations. 
• Store the report in a centralized database for easy access by all stakeholders.
• Track the progress of the control measures put in place.   

Review the Assessment

Periodic reassessment of the identified threats and developed control measures should be done to ensure their continuous effectiveness. This is a must to adapt to changing circumstances. 

• Schedule audits based on the severity of the risk and the changes in business operations and industry trends. 
• Do urgent reviews when incidents and near-misses occur.
• Invite third-party auditors to get external perspectives.

Conduct Effective Risk Assessments with SafetyCulture

Why use safetyculture.

Businesses are always exposed to risks. Anticipating these by carrying out comprehensive assessments aid in managing risks and preventing critical problems, such as disruptions, financial losses, missed growth opportunities, and non-compliance with legal requirements. While learning how to conduct risk assessments provides companies with adequate groundwork to start the process, using digital solutions like SafetyCulture (formerly iAuditor) will bring about desired results. 

• Create a structured risk assessment workflow to guide involved teams through the entire process. 
• Eliminate tedious paperwork and save time by downloading standardized digital templates from the Public Library, which may be securely stored and quickly accessed in for future review. 
• Ensure full collaboration among teams through Heads Up by sending notifications for brainstorming or sharing findings and personal insights.
• Assign roles and delegate specific tasks to relevant personnel and send follow-ups to ensure timely completion of the job. 
• Enhance risk mitigation by tracking incidents and near-misses related to identified hazards and threats. 
• Generate comprehensive reports of findings, control measures, and progress and store these for compliance documentation. 
• Calculate risk scores for exhaustive qualitative assessments and leverage robust analytics to assist in risk prioritization.
• Establish consistency of risk assessment practices across the organization by providing training aimed to align teams on strategized methodologies.

Eunice Arcilla Caburao

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How a Risk Assessment Process Can Benefit Your Company

Without risk, there is no innovation. It is good for organizations to have a healthy risk appetite, but it should never be at the compromise of safety and mismanagement.

Imagine if OceanGate had conducted a thorough risk assessment prior to Titan ’s expedition to explore the Titanic wreckage. Had there been a risk assessment process in place, they would not have overlooked the design flaws of the submersible and the fact that it had not been adequately tested prior to launching for commercial operations; and the catastrophe that followed could have been averted. This incident explains why having a risk assessment process is extremely important.

In this blog post, we’ll unravel the essence of risk assessment, explore the difference between risks and hazards, explore crucial steps in the risk assessment process, and uncover the benefits of having an effective risk management plan.

What is the Risk Assessment Process?

Risk assessment process template, the difference between a risk and hazard, identification of hazards, risk analysis, risk evaluation, risk treatment, monitoring and review, benefits of having an aligned risk management process, real-world example, common mistakes in risk assessment process, wrapping up.

The risk assessment process is the strategy businesses use to address potential issues. It’s all about understanding what could go wrong and how it might affect the goals of the company, in a systematic way. Picture it as a detective mission to identify hazards — whether they’re money-related, day-to-day operations stuff, big-picture plans, or following the rules. By looking at how likely these hazards are and how bad they could get, businesses get a clear view of the risks they’re up against.

Risk assessment isn’t a one-time thing; it’s an ongoing process that needs regular check-ins and adjustments. Think of it as a trusty guide that helps businesses stay away from trouble and move confidently into a future that’s more secure and ready for anything.

• Ready to use
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Before delving further, let’s dispel a common misconception – the interchangeable use of ‘risk’ and ‘hazard.’ A hazard is a potential source of harm or adverse health effect, like a chemical substance or a slippery floor. On the flip side, risk is the likelihood and severity of the harm occurring from a hazard. While a hazard may exist without risk, risk cannot materialize without a hazard. Think of hazards as potential threats and risks as the probability of those threats turning into actual harm.

Risk assessment starts with identifying, analyzing, and evaluating potential risks to figure out how likely and how serious a harm would be if it came true. This includes physical, chemical, biological, and even psychological hazards. During this step, you can use the risk probability and impact matrix.

Dive into the details. With the risk matrix, you can visually organize the risks into different categories based on their likelihood and severity. This makes it easier to identify which risks need to be addressed and how urgently.

Determine whether the risks identified are acceptable or if additional control measures are necessary. Consider the context and specific circumstances surrounding each risk. The risk register template will help you list out these circumstances and identify the right course of action.

Implement strategies to control or mitigate risks. This could involve modifying processes, introducing safety measures, or even transferring the risk through insurance. It is important to identify potential risks and develop strategies to reduce them. These strategies should be tailored to the specific situation and should be regularly reviewed and updated to ensure that the risks are managed effectively.

The risk assessment process is not a one-time event. Regularly review and update your risk assessment, especially when there are significant changes in the organization, processes, or external environment. This is because risk assessment is a continuous process, and the risks and threats associated with an organization can change quickly. It is important to regularly review and analyze your risk assessment to ensure that it is still valid and up-to-date.

Proactive Decision-Making: Armed with insights from the risk assessment process, you can make informed decisions that anticipate and mitigate potential issues.

Enhanced Resilience: A robust risk management plan not only shields you from uncertainties but also enhances your ability to bounce back when faced with unexpected challenges.

Improved Resource Allocation: Identifying and prioritizing risks allows you to allocate resources efficiently, focusing on areas that pose the greatest threat to your objectives.

Regulatory Compliance: Many industries have stringent regulatory requirements. A well-defined risk management plan ensures compliance, avoiding legal pitfalls.

In the world of project management, a failure to identify and mitigate risks led to the infamous Challenger disaster in 1986. The overlooked risk of O-ring failure in cold temperatures resulted in the tragic loss of seven lives and highlighted the critical importance of thorough risk assessment.

Ignoring Low Probability-High Impact Risks: Some risks might seem unlikely but could have severe consequences. Ignoring these ‘black swan’ events can lead to catastrophic outcomes.

Lack of Stakeholder Involvement: The risk assessment process should be a collaborative effort. Failing to involve key stakeholders may result in overlooking crucial insights and perspectives.

Static Risk Assessments: Your business is dynamic, and so are its risks. A static risk assessment that doesn’t adapt to changes in the internal or external environment is a recipe for disaster.

The business environment is volatile, which is why your business needs a risk assessment process to mitigate potential risks and navigate through challenges successfully. Differentiating between hazards and risks, understanding the steps in the process, and crafting a robust risk management plan are all essential elements of ensuring a secure journey.

Ready to fortify your business against uncertainties? Start by implementing a comprehensive risk assessment process and crafting a robust risk management plan. Your secure future awaits!

In the ever-changing landscape of business, the ability to navigate risks is not just a skill; it’s a survival instinct. Equip yourself with the knowledge and tools to steer through the storm, and let the journey be as rewarding as the destination.

Join over thousands of organizations that use Creately to brainstorm, plan, analyze, and execute their projects successfully.

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Hansani has a background in journalism and marketing communications. She loves reading and writing about tech innovations. She enjoys writing poetry, travelling and photography.

Business risk assessment: what it is & why you need it

Updated 20 June 2024 • 6 min read

What is a business risk assessment? 

A business risk assessment helps you identify, analyse and prioritise risks. Businesses use risk assessments to:

minimise or eliminate risks

protect against potential threats

improve decision-making.

Risk assessment for business plan

When you’re putting together a business plan , it’s important to include a business risk assessment. Completing this section helps business owners to: 

understand what risks they face

develop strategies for minimising or eliminating those risks

allocate resources effectively to manage risks

monitor and review risks on an ongoing basis.

This means that the business owner has a documented strategy in place to handle when things can — and do — go wrong. This gives them better control over the business and its trajectory, while also giving potential investors assurance that the business is well managed and their investment is sound.  

The different types of risks businesses face

While it may be difficult to catalogue every risk a business may face, you can do a risk assessment based on types of risk. These categories may include:  

Hazard-based

These are risks from dangerous workplace situations that could cause harm to people, property or the environment. Examples include fires, floods and chemical spills.

Opportunity-based

This risk comes from choosing one opportunity over another. When you dedicate your resources to one opportunity, there’s always the chance that a better one will come along or the current one won’t go as planned. Examples include investing in a new product line or moving to a new location.

Uncertainty-based

This risk is present when the outcome of a situation is uncertain. Examples of business risks include legal action, damage from natural disasters, and the loss of important customers or suppliers.

Operational 

This type of risk comes from the day-to-day running of your business. Examples of operational risk may include equipment failure, employee error or theft.

Reputational

A risk to your business' reputation can include negative media coverage, product recalls and data breaches. 

Cyber security

Cyber security is a risk for all businesses, including small and medium-sized organisations. Any data loss, leak or compromise can cost a business severely — both financially and in reputational damage. 

How to do a business risk assessment (plus template and example)

1. identify the different types of risks for your business..

To identify the risks to your business, consider what could go wrong and why that might happen. Consider holding brainstorming sessions with your employees or reviewing past incidents to get started.

2. Assess the likelihood and potential impact of each type of risk.

You’ll want to decide the likelihood and potential impact of each type of risk. For example, the risk may be unlikely to occur through to very likely to occur. Likewise, the impact of the risk may be negligible through to severe. Doing this assessment will help you decide what to prioritise and where to allocate resources.   

3. Prioritise the risks and develop strategies for mitigating them.

Once you’ve identified and assessed your risks, you’ll need to develop strategies to mitigate them and lessen their potential negative impact. This could involve taking out adequate business insurance or putting business continuity plans in place. 

Business risk assessment template

The Australian Taxation Office (ATO) has developed a business risk assessment template that you can use for your risk assessment.

The template includes questions to help you identify and assess risks.

Business risk assessment example

If you own a small business, you might not think you need to worry about conducting risk assessments. But all businesses can face risks that could significantly affect their operations. Consider the following example:

You own a small retail business with one store. Your primary source of income is from selling products online, but you also have a small number of customers who visit your store in person.

A customer tells you they see a mouse in your store. This is a reputational risk, as it could damage your business’ reputation if word gets out. It’s also an operational risk if it leads to damaged inventory.

In this case, you'd need to assess the likelihood of that risk and the potential damage it could do to your business reputation or operations. Based on this assessment, you can decide how best to deal with the risk.

This is just one example of the innumerable risks businesses can face. Conducting a thorough business risk assessment prepares you for just about anything that comes your way.

Tips for mitigating risk in your business

Risk is part of life — it can’t always be avoided, but there are strategies you can put in place to mitigate its impacts. Consider the following: 

Have adequate insurance coverage to help mitigate the financial impact of risks such as fire, theft or liability.

Develop contingency plans so that you can continue operating if an incident, such as a natural disaster or power outage, occurs.

Implement risk management processes and procedures. This could involve anything from regular risk assessments to employee training on identifying and dealing with potential risks.

Regularly monitor and review risks and make sure you have effective mitigation strategies in place.

Maintain good relationships with suppliers and customers. This can help to minimise the impact of risks such as supply chain disruptions. Also, ask for feedback on their experience with your products or services, so you can identify potential risks before they become major problems.

Have strong internal financial controls and IT security measures.

Stay up to date on changes in laws and regulations. This will help you avoid compliance-related issues, including risks specific to your industry and general risks all businesses face.

Disclaimer: This is general advice not meant to replace professional guidance. When seeking out someone to help advise you on business decisions, find somebody with the accreditations to assist you.

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Disclaimer:  Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.

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Strategic Risk Assessment Template, Examples, & Checklist for 2022

July 29, 2020

The first step in building a risk management plan is to conduct an initial risk assessment. What sets a strategic risk assessment apart from other risk assessment methods is that it is driven by the business’s core strategies. Get up to speed on strategic risk assessment with a checklist, template, and examples below. 

What Is a Strategic Risk Assessment?

A strategic risk assessment is a systematic, continuous process for organizations to identify its strategic risks and understand how those risks are being managed across the business. “Strategic risks” are the risks that are most consequential to the organization’s ability to execute its strategy and achieve its objectives. They entail the risk exposures that can ultimately impact shareholder value or even threaten the business’s survival. 

Planning a Strategic Risk Assessment

The strategic risk assessment process should be led by management, but receive input from and be reviewed in conjunction with the Board. The outcome of this risk assessment is to achieve consensus, among Board members and management, around the top key risks facing the organization. This process aligns with COSO’s 2017 ERM framework and is based on research by Dr. Mark Frigo, Director of the Center for Strategy, Execution, and Valuation at DePaul University, and Richard Anderson, a retired Partner at PwC and a clinical professor at the Strategic Risk Management Lab at DePaul. 

Risk Assessment Checklist

Strategic Risk Assessment Template

1. understand the strategies of the organization.

The first step of the risk assessment is to develop an overview of the organization’s key strategies and business objectives. For some businesses, this data may already be well-developed and formally documented. If not, the risk assessment team can leverage examples such as The Return Driven Strategy model to understand and identify the strategies most critical to achieving the organization’s overall objectives. This is a crucial step in helping management and the Board eventually prioritize the potential risks to these strategies.  

2. Collect data and views on strategic risks from the organization

The second step is to collect information from the organization regarding its strategic risks. This can be achieved by:

• Reviewing financial reports and investor presentations
• Interviewing key executive leaders regarding what they view as strategic risks
• Surveying business leaders and other personnel with views on risks, e.g. compliance, internal audit , and external audit teams

It can be helpful to use the information gathered on strategic risks in Step 1 to frame these interviews and surveys around the business’s key strategies. It can also be useful to interview key executive leaders regarding what they view as potential emerging risks in addition to gathering their feedback on strategic risks. This is a good time to consider incorporating  risk assessment analytics  to the data you gather on strategic risks. 

3. Prepare a preliminary strategic risk profile

The next step is to utilize the results from steps 1 and 2 of the risk assessment planning to develop a preliminary profile of the organization’s strategic risks. The risk assessment team can use the Strategic Risk Management Model as a template to help assess the risks related to each of the top strategies identified. Ultimately, this profile should contain a list of the top risks to the organization’s strategy and objectives and their potential severity or ranking. How detailed this profile is, and how it will be presented, should be carefully catered to the culture of your organization. Color-coding risks and using visual heat maps may be helpful in presenting this information to management and the Board for review and discussion.

4. Validate and finalize the strategic risk profile with management and the Board

Upon presenting the preliminary strategic risk profile to leadership, the next step is for the risk assessment team to facilitate a discussion among key executives to help refine, validate, and finalize the risk profile. The ensuing cross-dialogue and conversations about risk and opportunity are among the most valuable conversations for shaping business strategy, as they unite executives across the organization to share their unique perspectives and collectively vet and prioritize the organization’s top key risks. 

5. Develop a strategic risk management action plan

This step entails leveraging the results of the previous steps to produce a strategic risk management action plan to help manage and monitor the identified strategic risks. The action plan involves developing an appropriate risk response (accept, avoid, pursue, reduce, share) to each critical risk identified in accordance with the organization’s risk appetite. The consolidated action plan should prioritize these risk responses and allocate resources across them. Best practice indicates the action plan should also include a charter that: 

• Has a formal statement on the organization’s risk appetite
• Assigns responsibilities and accountability for risk monitoring and actions among management, internal audit and compliance

6. Communicate the strategic risk profile and action plan

Once the strategic risk management action plan has been developed, it should be validated and finalized by management and the Board. Once finalized, this profile and plan must be communicated with the organization in order to help develop and build the organization’s risk culture. 

7. Implement the  enterprise risk management action plan

The value of performing a strategic risk assessment is realized when the organization implements the resulting action plan to manage and monitor its strategic risks. However, enterprise risk management should not be regarded as a one-time, annual procedure, but as a continual, ongoing process that can be built upon and strengthened. As such, these steps should be repeated as frequently as needed in response to significant external events that can affect the business, such as the 2008 financial crisis or the COVID-19 crisis. Furthermore, leveraging risk management software can help streamline and centralize the risk assessment process, creating the foundation for a mature ERM program. To learn how AuditBoard can help you manage your risk management plan from end to end, contact us by filling out the form below. 

Related Articles

What is business risk?

You know about death and taxes. What about risk? Yes, risk is just as much a part of life as the other two inevitabilities. This became all the more apparent during COVID-19, as each of us had to assess and reassess our personal risk calculations as each new wave of the pandemic— and pandemic-related disruptions —washed over us. It’s the same in business: executives and organizations have different comfort levels with risk and ways to prepare against it.

Where does business risk come from? To start with, external factors can wreak havoc on an organization’s best-laid plans. These can include things like inflation , supply chain  disruptions, geopolitical upheavals , unpredictable force majeure events like a global pandemic or climate disaster, competitors, reputational  issues, or even cyberattacks .

But sometimes, the call is coming from inside the house. Companies can be imperiled by their own executives’ decisions or by leaks of privileged information, but most damaging of all, perhaps, is the risk of missed opportunities. We’ve seen it often: when companies choose not to adopt disruptive innovation, they risk losing out to more nimble competitors.

The modern era is rife with increasingly frequent sociopolitical, economic, and climate-related shocks. In 2019 alone, for example, 40 weather disasters caused damages exceeding $1 billion each . To stay competitive, organizations should develop dynamic approaches to risk and resilience. That means predicting new threats, perceiving changes in existing threats, and developing comprehensive response plans. There’s no magic formula that can guarantee safe passage through a crisis. But in situations of threat, sometimes only a robust risk-management plan can protect an organization from interruptions to critical business processes. For more on how to assess and prepare for the inevitability of risk, read on.

Learn more about McKinsey’s Risk and Resilience  Practice.

What is risk control?

Risk controls are measures taken to identify, manage, and eliminate threats. Companies can create these controls through a range of risk management strategies and exercises. Once a risk is identified and analyzed, risk controls can be designed to reduce the potential consequences. Eliminating a risk—always the preferable solution—is one method of risk control. Loss prevention and reduction are other risk controls that accept the risk but seek to minimize the potential loss (insurance is one method of loss prevention). A final method of risk control is duplication (also called redundancy). Backup servers or generators are a common example of duplication, ensuring that if a power outage occurs no data or productivity is lost.

But in order to develop appropriate risk controls, an organization should first understand the potential threats.

What are the three components to a robust risk management strategy?

A dynamic risk management plan can be broken down into three components : detecting potential new risks and weaknesses in existing risk controls, determining the organization’s appetite for risk taking, and deciding on the appropriate risk management approach. Here’s more information about each step and how to undertake them.

1. Detecting risks and controlling weaknesses

A static approach to risk is not an option, since an organization can be caught unprepared when an unlikely event, like a pandemic, strikes. So it pays to always be proactive. To keep pace with changing environments, companies should answer the following three questions for each of the risks that are relevant to their business.

• How will a risk play out over time? Risks can be slow moving or fast moving. They can be cyclical or permanent. Companies should analyze how known risks are likely to play out and reevaluate them on a regular basis.
• Are we prepared to respond to systemic risks? Increasingly, risks have longer-term reputational or regulatory consequences, with broad implications for an industry, the economy, or society at large. A risk management strategy should incorporate all risks, including systemic ones.
• What new risks lurk in the future? Organizations should develop new methods of identifying future risks. Traditional approaches that rely on reviews and assessments of historical realities are no longer sufficient.

2. Assessing risk appetite

How can companies develop a systematic way of deciding which risks to accept and which to avoid? Companies should set appetites for risk that align with their own values, strategies, capabilities, and competitive environments—as well as those of society as a whole. To that end, here are three questions companies should consider.

• How much risk should we take on? Companies should reevaluate their risk profiles frequently according to shifting customer behaviors, digital capabilities, competitive landscapes, and global trends.
• Are there any risks we should avoid entirely? Some risks are clear: companies should not tolerate criminal activity or sexual harassment. Others are murkier. How companies respond to risks like economic turmoil and climate change depend on their particular business, industry, and levels of risk tolerance.
• Does our risk appetite adequately reflect the effectiveness of our controls? Companies are typically more comfortable taking risks for which they have strong controls in place. But the increased threat of severe risks challenges traditional assumptions about risk control effectiveness. For instance, many businesses have relied on automation to increase speed and reduce manual error. But increased data breaches and privacy concerns can increase the risk of large-scale failures. Organizations, therefore, should evolve their risk profiles accordingly.

3. Deciding on a risk management approach

Finally, organizations should decide how they will respond when a new risk is identified. This decision-making  process should be flexible and fast, actively engaging leaders from across the organization and honestly assessing what has and hasn’t worked in past scenarios. Here are three questions organizations should be able to answer.

• How should we mitigate the risks we are taking? Ultimately, people need to make these decisions and assess how their controls are working. But automated control systems should buttress human efforts. Controls guided, for example, by advanced analytics can help guard against quantifiable risks and minimize false positives.
• How would we respond if a risk event or control breakdown happens? If (or more likely, when) a threat occurs, companies should be able to switch to crisis management mode quickly, guided by an established playbook. Companies with well-rehearsed crisis management capabilities weather shocks better, as we saw with the COVID-19 pandemic.
• How can we build true resilience? Resilient companies not only better withstand threats—they emerge stronger. The most resilient firms can turn fallout from crises into a competitive advantage. True resilience stems from a diversity of skills and experience, innovation, creative problem solving, and the basic psychological safety that enables peak performance.

Change is constant. Just because a risk control plan made sense last year doesn’t mean it will next year. In addition to the above points, a good risk management strategy involves not only developing plans based on potential risk scenarios but also evaluating those plans on a regular basis.

Learn more about McKinsey’s  Risk and Resilience  Practice.

What are five actions organizations can take to build dynamic risk management?

In the past, some organizations have viewed risk management as a dull, dreary topic, uninteresting for the executive looking to create competitive advantage. But when the risk is particularly severe or sudden, a good risk strategy is about more than competitiveness—it can mean survival. Here are five actions leaders can take to establish risk management capabilities .

• Reset the aspiration for risk management.  This requires clear objectives and clarity on risk levels and appetite. Risk managers should establish dialogues with business leaders to understand how people across the business think about risk, and share possible strategies to nurture informed risk-versus-return decision making—as well as the capabilities available for implementation.
• Establish agile  risk management practices.  As the risk environment becomes more unpredictable, the need for agile risk management grows. In practice, that means putting in place cross-functional teams empowered to make quick decisions about innovating and managing risk.
• Harness the power of data and analytics.  The tools of the digital revolution  can help companies improve risk management. Data streams from traditional and nontraditional sources can broaden and deepen companies’ understandings of risk, and algorithms can boost error detection and drive more accurate predictions.
• Develop risk talent for the future.  Risk managers who are equipped to meet the challenges of the future will need new capabilities and expanded domain knowledge in model risk management , data, analytics, and technology. This will help support a true understanding of the changing risk landscape , which risk leaders can use to effectively counsel their organizations.
• Fortify risk culture.  Risk culture includes the mindsets and behavioral norms that determine an organization’s relationship with risk. A good risk culture allows an organization to respond quickly when threats emerge.

How do scenarios help business leaders understand uncertainty?

Done properly, scenario planning prompts business leaders to convert abstract hypotheses about uncertainties into narratives about realistic visions of the future. Good scenario planning can help decision makers experience new realities  in ways that are intellectual and sensory, as well as rational and emotional. Scenarios have four main features  that can help organizations navigate uncertain times.

• Scenarios expand your thinking.  By developing a range of possible outcomes, each backed with a sequence of events that could lead to them, it’s possible to broaden our thinking. This helps us become ready for the range of possibilities the future might hold—and accept the possibility that change might come more quickly than we expect.
• Scenarios uncover inevitable or likely futures.  A broad scenario-building effort can also point to powerful drivers of change, which can help to predict potential outcomes. In other words, by illuminating critical events from the past, scenario building can point to outcomes that are very likely to happen in the future.
• Scenarios protect against groupthink.  In some large corporations, employees can feel unsafe offering contrarian points of view for fear that they’ll be penalized by management. Scenarios can help companies break out of this trap by providing a “safe haven” for opinions that differ from those of senior leadership and that may run counter to established strategy.
• Scenarios allow people to challenge conventional wisdom.  In large corporations in particular, there’s frequently a strong bias toward the status quo. Scenarios are a nonthreatening way to lay out alternative futures in which assumptions underpinning today’s strategy can be challenged.

Learn more about McKinsey’s Strategy & Corporate Finance  Practice.

What’s the latest thinking on risk for financial institutions?

In late 2021, McKinsey conducted survey-based research with more than 30 chief risk officers (CROs), asking about the current banking environment, risk management practices, and priorities for the future.

According to CROs, banks in the current environment are especially exposed to accelerating market dynamics, climate change, and cybercrime . Sixty-seven percent of CROs surveyed cited the pandemic as having significant impact on employees and in the area of nonfinancial risk. Most believed that these effects would diminish in three years’ time.

Introducing McKinsey Explainers : Direct answers to complex questions

Climate change, on the other hand, is expected to become a larger issue over time. Nearly all respondents cited climate regulation as one of the five most important forces in the financial industry in the coming three years. And 75 percent were concerned about climate-related transition risk: financial and other risks arising from the transformation away from carbon-based energy systems.

And finally, cybercrime was assessed as one of the top risks by most executives, both now and in the future.

Learn more about the risk priorities of banking CROs here .

What is cyber risk?

Cyber risk is a form of business risk. More specifically, it’s the potential for business losses of all kinds  in the digital domain—financial, reputational, operational, productivity related, and regulatory related. While cyber risk originates from threats in the digital realm, it can also cause losses in the physical world, such as damage to operational equipment.

Cyber risk is not the same as a cyberthreat. Cyberthreats are the particular dangers that create the potential for cyber risk. These include privilege escalation (the exploitation of a flaw in a system for the purpose of gaining unauthorized access to resources), vulnerability exploitation (an attack that uses detected vulnerabilities to exploit the host system), or phishing. The risk impact of cyberthreats includes loss of confidentiality, integrity, and availability of digital assets, as well as fraud, financial crime, data loss, or loss of system availability.

In the past, organizations have relied on maturity-based cybersecurity approaches to manage cyber risk. These approaches focus on achieving a particular level of cybersecurity maturity by building capabilities, like establishing a security operations center or implementing multifactor authentication across the organization. A maturity-based approach can still be helpful in some situations, such as for brand-new organizations. But for most institutions, a maturity-based approach can turn into an unmanageably large project, demanding that all aspects of an organization be monitored and analyzed. The reality is that, since some applications are more vulnerable than others, organizations would do better to measure and manage only their most critical vulnerabilities.

What is a risk-based cybersecurity approach?

A risk-based approach is a distinct evolution from a maturity-based approach. For one thing, a risk-based approach identifies risk reduction as the primary goal. This means an organization prioritizes investment based on a cybersecurity program’s effectiveness in reducing risk. Also, a risk-based approach breaks down risk-reduction targets into precise implementation programs with clear alignment all the way up and down an organization. Rather than building controls everywhere, a company can focus on building controls for the worst vulnerabilities.

Here are eight actions that comprise a best practice for developing  a risk-based cybersecurity approach:

• fully embed cybersecurity in the enterprise-risk-management framework
• define the sources of enterprise value across teams, processes, and technologies
• understand the organization’s enterprise-wide vulnerabilities—among people, processes, and technology—internally and for third parties
• understand the relevant “threat actors,” their capabilities, and their intent
• link the controls in “run” activities and “change” programs to the vulnerabilities that they address and determine what new efforts are needed
• map the enterprise risks from the enterprise-risk-management framework, accounting for the threat actors and their capabilities, the enterprise vulnerabilities they seek to exploit, and the security controls of the organization’s cybersecurity run activities and change program
• plot risks against the enterprise-risk appetite; report on how cyber efforts have reduced enterprise risk
• monitor risks and cyber efforts against risk appetite, key cyber risk indicators, and key performance indicators

How can leaders make the right investments in risk management?

Ignoring high-consequence, low-likelihood risks can be catastrophic to an organization—but preparing for everything is too costly. In the case of the COVID-19 crisis, the danger of a global pandemic on this scale was foreseeable, if unexpected. Nevertheless, the vast majority of companies were unprepared: among billion-dollar companies in the United States, more than 50 filed for bankruptcy in 2020.

McKinsey has described the decisions to act on these high-consequence, low-likelihood risks as “ big bets .” The number of these risks is far too large for decision makers to make big bets on all of them. To narrow the list down, the first thing a company can do is to determine which risks could hurt the business versus the risks that could destroy the company. Decision makers should prioritize the potential threats that would cause an existential crisis  for their organization.

To identify these risks, McKinsey recommends using a two-by-two risk grid, situating the potential impact of an event on the whole company against the level of certainty about the impact. This way, risks can be measured against each other, rather than on an absolute scale.

Organizations sometimes survive existential crises. But it can’t be ignored that crises—and missed opportunities—can cause organizations to fail. By measuring the impact of high-impact, low-likelihood risks on core business, leaders can identify and mitigate risks that could imperil the company. What’s more, investing in protecting their value propositions can improve an organization’s overall resilience.

Articles referenced:

• “ Seizing the momentum to build resilience for a future of sustainable inclusive growth ,” February 23, 2023, Børge Brende and Bob Sternfels
• “ Data and analytics innovations to address emerging challenges in credit portfolio management ,” December 23, 2022, Abhishek Anand , Arvind Govindarajan , Luis Nario  and Kirtiman Pathak
• “ Risk and resilience priorities, as told by chief risk officers ,” December 8, 2022, Marc Chiapolino , Filippo Mazzetto, Thomas Poppensieker , Cécile Prinsen, and Dan Williams
• “ What matters most? Six priorities for CEOs in turbulent times ,” November 17, 2022, Homayoun Hatami  and Liz Hilton Segel
• “ Model risk management 2.0 evolves to address continued uncertainty of risk-related events ,” March 9, 2022, Pankaj Kumar, Marie-Paule Laurent, Christophe Rougeaux, and Maribel Tejada
• “ The disaster you could have stopped: Preparing for extraordinary risks ,” December 15, 2020, Fritz Nauck , Ophelia Usher, and Leigh Weiss
• “ Meeting the future: Dynamic risk management for uncertain times ,” November 17, 2020, Ritesh Jain, Fritz Nauck , Thomas Poppensieker , and Olivia White
• “ Risk, resilience, and rebalancing in global value chains ,” August 6, 2020, Susan Lund, James Manyika , Jonathan Woetzel , Edward Barriball , Mekala Krishnan , Knut Alicke , Michael Birshan , Katy George , Sven Smit , Daniel Swan , and Kyle Hutzler
• “ The risk-based approach to cybersecurity ,” October 8, 2019, Jim Boehm , Nick Curcio, Peter Merrath, Lucy Shenton, and Tobias Stähle
• “ Value and resilience through better risk management ,” October 1, 2018, Daniela Gius, Jean-Christophe Mieszala , Ernestos Panayiotou, and Thomas Poppensieker

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3. Risk assessment template and examples

You can use a risk assessment template to help you keep a simple record of:

• who might be harmed and how
• what you're already doing to control the risks
• what further action you need to take to control the risks
• who needs to carry out the action
• when the action is needed by
• Risk assessment template (Word Document Format)
• Risk assessment template (Open Document Format) (.odt)

Example risk assessments

These typical examples show how other businesses have managed risks. You can use them as a guide to think about:

• some of the hazards in your business
• the steps you need to take to manage the risks

Do not just copy an example and put your company name to it as that would not satisfy the law and would not protect your employees. You must think about the specific hazards and controls your business needs.

• Office-based business
• Local shop/newsagent
• Food preparation and service
• Motor vehicle repair shop  
• Factory maintenance work

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Carrying Out a Comprehensive Risk Assessment: A Step-by-Step Guide

A comprehensive risk assessment serves as the cornerstone of effective risk management, enabling businesses to proactively identify vulnerabilities and devise strategies to mitigate potential impacts.

In the fast-paced world of business, uncertainties are the only certainty. From technological disruptions to market shifts and unforeseen events, organizations must continually evaluate the risks they face to navigate these challenges successfully.

In this guide, we delve into the intricacies of carrying out a comprehensive risk assessment that empowers businesses to build resilience in the face of adversity.

Understanding the Essence of a Comprehensive Risk Assessment

A risk assessment is not merely a perfunctory exercise; it’s a strategic process that provides insights into an organization’s vulnerabilities and strengths. It involves identifying potential risks, evaluating their likelihood and impact, and formulating strategies to manage or mitigate them. A well-executed risk assessment offers a roadmap for businesses to prioritize resources, make informed decisions, and ultimately safeguard their sustainability.

Step 1: Establish Clear Objectives

Before embarking on a risk assessment, define clear objectives. Determine what you aim to achieve through this process – whether it’s identifying operational vulnerabilities, complying with regulatory requirements, or enhancing overall business resilience.

Step 2: Identify Risks

Begin by identifying potential risks that your organization might face. These risks can span a wide spectrum, from technological threats and supply chain disruptions to regulatory changes and natural disasters. Engage key stakeholders from various departments to ensure a comprehensive list of potential risks.

Step 3: Evaluate Risk Likelihood and Impact

Assign a likelihood and impact rating to each identified risk. Likelihood refers to the probability of the risk occurring, while impact gauges the potential consequences if the risk materializes. This step involves a careful analysis of historical data, industry trends, and expert opinions to make informed assessments.

Step 4: Prioritize Risks

Using the likelihood and impact ratings, prioritize risks. This step involves categorizing risks as high, medium, or low priority. Focus on addressing high-priority risks that pose the most significant threat to your organization’s operations, reputation, or financial stability.

Step 5: Conduct a Vulnerability Analysis

For each high-priority risk, conduct a vulnerability analysis. Identify the specific areas within your organization that are susceptible to the risk’s impacts. This analysis provides insights into weak points that need to be fortified to mitigate potential damage.

Step 6: Evaluate Existing Controls

Assess the controls and measures that are already in place to mitigate identified risks. Are these controls effective? Do they require enhancements or adjustments? Evaluate their adequacy and identify gaps that need to be addressed.

Step 7: Develop Mitigation Strategies

With a clear understanding of vulnerabilities and existing controls, develop mitigation strategies for each high-priority risk. These strategies should be tailored to the specific risk, focusing on reducing the likelihood of occurrence and minimizing potential impacts.

Step 8: Estimate Costs and Resources

Estimate the financial, time, and resource costs associated with implementing the mitigation strategies. This step helps in making informed decisions about resource allocation and determining the feasibility of each strategy.

Step 9: Implement and Monitor

Put your mitigation strategies into action. Assign responsibilities to relevant stakeholders and establish a timeline for implementation. Regularly monitor the progress and effectiveness of the strategies, making adjustments as needed.

Step 10: Review and Update Your Comprehensive Risk Assessment

A comprehensive risk assessment is not a one-time endeavor. Regularly review and update the assessment to account for changing business environments, emerging threats, and the effectiveness of implemented strategies.

Key Considerations for a Successful Risk Assessment

• Holistic Approach: A successful risk assessment considers a broad spectrum of risks, including those related to technology, finance, operations, regulatory compliance, and more.
• Stakeholder Engagement: Involve key stakeholders from various departments to ensure diverse perspectives and comprehensive risk identification.
• Data-Driven Analysis: Base risk assessments on accurate data, historical trends, industry insights, and expert opinions for a well-informed evaluation.
• Scenario Planning: Consider various scenarios and potential outcomes of identified risks. This helps in devising versatile mitigation strategies that adapt to changing circumstances.
• Proactive Mindset: Approach risk assessment as a proactive endeavor, focused on preventing and mitigating risks before they escalate into crises.
• Continuous Improvement: Regularly review and update risk assessments to account for evolving threats and changing business dynamics. Continuous improvement ensures relevance and effectiveness.

Conclusion: Forging Resilience Through A Comprehensive Risk Assessment

In a business landscape characterized by volatility, a comprehensive risk assessment is not just a necessity but a strategic imperative. By systematically identifying, evaluating, and mitigating potential risks, organizations can lay the groundwork for resilience and agility. A well-executed risk assessment empowers businesses to make informed decisions, allocate resources wisely, and build a foundation that withstands the tests of time. As the adage goes, fortune favors the prepared – and in today’s dynamic business world, that preparation begins with a comprehensive risk assessment that charts the path to a more resilient future.

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What Is Risk Assessment?

Understanding risk assessment, risk assessments for investments, risk assessments for lending, risk assessments for business.

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Risk Assessment Definition, Methods, Qualitative Vs. Quantitative

Risk assessment is a general term used across many industries to determine the likelihood of loss on an asset, loan, or investment. Assessing risk is essential for determining how worthwhile a specific investment is and the best process(es) to mitigate risk. It presents the upside reward compared to the risk profile . Risk assessment is important in order to determine the rate of return an investor would need to earn to deem an investment worth the potential risk.

Key Takeaways

• Risk assessment is the process of analyzing potential events that may result in the loss of an asset, loan, or investment.
• Companies, governments, and investors conduct risk assessments before embarking on a new project, business, or investment.
• Quantitative risk analysis uses mathematical models and simulations to assign numerical values to risk.
• Qualitative risk analysis relies on a person's subjective judgment to build a theoretical model of risk for a given scenario.
• While a stock's past volatility does not guarantee future returns, in general, an investment with high volatility indicates a riskier investment.

Risk assessment enables corporations, governments, and investors to assess the probability that an adverse event might negatively impact a business, economy, project, or investment. Risk analysis provides different approaches investors can use to assess the risk of a potential investment opportunity. Two types of risk analysis an investor can apply when evaluating an investment are quantitative analysis and qualitative analysis.

Quantitative Analysis

A quantitative analysis of risk focuses on building risk models and simulations that enable the user to assign numerical values to risk. An example of quantitative risk analysis would be a Monte Carlo simulation . This method—which can be used in a variety of fields such as finance, engineering, and science—runs a number of variables through a mathematical model to discover the different possible outcomes.

Qualitative Analysis

A qualitative analysis of risk is an analytical method that does not rely on numerical or mathematical analysis. Instead, it uses a person's subjective judgment and experience to build a theoretical model of risk for a given scenario. A qualitative analysis of a company might include an assessment of the company's management, the relationship it has with its vendors, and the public's perception of the company.

Investors frequently use qualitative and quantitative analysis in conjunction with one another to provide a clearer picture of a company's potential as an investment.

Other Risk Assessment Methods

Another example of a formal risk assessment technique includes conditional value at risk (CVaR) , which portfolio managers use to reduce the likelihood of incurring large losses. Mortgage lenders use loan-to-value ratios to evaluate the risk of lending funds. Lenders also use credit analysis to determine the creditworthiness of the borrower.

Both institutional and individual investments have expected amounts of risk. This is especially true of non-guaranteed investments, such as stocks, bonds, mutual funds , and exchange-traded funds (ETFs) . 

Standard deviation is a measure applied to the annual rate of return of an investment to measure the investment's volatility . In most cases, an investment with high volatility indicates a riskier investment. When deciding between several stocks, investors will often compare the standard deviation of each stock before making an investment decision.

However, it's important to note that a stock's past volatility (or lack thereof) does not predict future returns. Investments that previously experienced low volatility can experience sharp fluctuations, particularly during rapidly changing market conditions.

Lenders for personal loans, lines of credit , and mortgages also conduct risk assessments, known as credit checks. For example, it is common that lenders will not approve borrowers who have credit scores below 600 because lower scores are indicative of poor credit practices. A lender's credit analysis of a borrower may consider other factors, such as available assets, collateral , income, or cash on hand.

Business risks are vast and vary across industries. Such risks include new competitors entering the market; employee theft; data breaches; product recalls; operational, strategic and financial risks; and natural disaster risks.

Every business should have a risk management process in place to assess its current risk levels and enforce procedures to mitigate the worst possible risks. An effective risk management strategy seeks to find a balance between protecting the company from potential risks without hindering growth. Investors prefer to invest in companies that have a history of good risk management.

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6 Essential Elements of a Business Risk Assessment

As the adage goes, “An ounce of prevention is worth a pound of cure.” Unfortunately, far too many people fail to embrace this truth and never prepare for the unknown. 

We’ve discovered 6 essential elements for conducting a business risk assessment that protects your company. Being prepared will always give your business the upper hand over your competitors — especially when something occurs that no one expects.

1. Identify Risks

You can’t prepare for risks if you don’t know what they are. The specific situations you might face will be unique to your business, but you can group the general risks into two buckets: internal and external.

• Compliance – The safety of your physical building and operational processes
• Financial – Your internal accounting and fiscal health
• Human – The choices made by your employees
• Technological – The software and hardware supporting your work
• Economic – The external market forces acting upon you
• Government – Any local, state, national, and international laws 
• Location – The impact of weather, climate, traffic, and more 
• Competition – The influence of similar businesses on your activity

As you can assume, you can have more control over internal risks than external ones, but you still must account for both in any business impact analysis you conduct.

2. Evaluate and Rank The Potential of the Risks

Welcome to the most technical, data-intensive, and context-specific component of the assessment process. Only you and your key stakeholders can determine the critical business risks that deserve the most attention and planning. You must account for the following possible impacts with each risk:

• Physical infrastructure
• Technology stack
• Clients and customers
• Your clients’ customers
• Debt-to-income ratio

Additionally, cost-benefit analysis would be helpful as it can shed light on the severity of potential risks on a spectrum. You must judge the level of attention and effort each group receives depending upon the situation across various scenarios. It’s tedious but essential to the long-term health of your business.

3. Develop Your Risk Document

Once your evaluation and ranking are complete, you should then combine both your qualitative and quantitative data into a single view. We recommend the following setup:

• Arrange by risk type
• Order risks from most to least likely
• Prepare a response to each risk
• Include team members if needed

These risk assessments should serve as the basis for all future actions, reactions, and decisions your company takes whenever faced with dangerous circumstances.

4. Determine the Controls for Risks

Since a reliable recovery strategy should focus on prevention, it’s time for the next step: mitigating the likelihood of each risk happening. You have more significant influence over operational risks like slippery rugs and steep stairs than external scenarios like natural disasters and stock market collapses. Nevertheless, your senior leadership should develop detailed actions that help your business avoid the risks they have identified.

5. Assign Risk Managers

After you determine the most effective means of reducing risks, you should designate the key employees responsible for all risk management processes. We recommend that such persons be senior managers and above, as they will need to ensure compliance with your risk directives. It also makes sense for that person to be in charge of the area more relevant to their job duties. The marketing manager shouldn’t take care of credit cards and other aspects of line-item budgeting. 

6. Review Your Risks

Even the most prudent business plan often omits this step. Regardless of whether your business experienced zero risk-related events in the last year, you should revisit your risk document annually. This process should include measures such as:

• Assess the events of the previous year
• Determine if any risks have increased
• Determine if any risks have decreased
• Evaluate the controls for all risks
• Assign new risk managers as needed

In short, planning one time won’t help you in the long term if you don’t make the necessary updates and account for any changes to your circumstances.

Prepare for the Future with a Business Risk Assessment

No one wants to face any of the risks you entered into your risk document, but your company will be better served by preparing for the worst-case scenario. You need excellent management strategies that prevent risk and ensure your business can swiftly recover if something happens.

If you’re ready to engage in effective business continuity planning, talk to EAG Inc. today! Our experts stand prepared to counsel your leadership so they can develop risk assessment tools that will protect your most essential resources.

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8 Risk Identification Strategies to Protect Your Business From Harm

You can’t mitigate a risk you don’t know about. Here are eight ways to identify your organization’s potential risks so you can better prepare to manage them.

• 8 Risk Identification Strategies

Take Your Risk Identification to the Next Level

What to do once you identify your risks.

Identifying these risks early and accurately is critical to implementing risk management strategies to protect your business. But coming up with a list of potential risks to your organization can be intimidating, especially when the stakes are high.

This post explores eight risk identification strategies that can help you stay ahead of potential threats. It also offers resources for how to proceed so you can ensure your business is aware and well-prepared for whatever comes your way.

What Is Risk Identification?

Risk identification is the process of detecting, projecting, and documenting potential threats that could result in harm to your people or facilities or a disruption of your business operations. It is a part of the larger process of risk assessment under the umbrella of risk management. The primary goal of risk identification is to help anticipate issues before they occur in order for your team to establish risk mitigation strategies to limit and prevent negative impacts.

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What makes risk identification so important.

Risk identification is the foundation of effective risk management. After all, in order to prevent, prepare for, and respond to a risk, you need to know what exactly what it is and how it might impact your business. This is why Scott Davidson , CEO and Founder of Code 4—an operations management and emergency services provider based in Austin, Texas—prioritizes risk identification in his mitigation efforts. Risk awareness is a key part of how he ensures safety and security during mass events.

“Even the most thoughtfully planned, well-funded, and longstanding events have a scarcity of resources. We’re limited in bandwidth, time, and, more than ever, the personnel available to mitigate these risks. It means that our job is to really triage and to be futurists, tasked with predicting the future based on our expertise, our experience, and the patterns and trends that we’re observing ,” Scott explains on The Employee Safety Podcast . “We have to identify what risks are worthy and meaningful to mitigate against and knowingly leave some unmitigated. And that’s, as you can imagine, quite a challenge.”

The core benefit of comprehensive risk identification is that it sets the stage for all subsequent risk management work, ensuring that you are aware of potential threats before they can cause significant harm. With an accurate list of risks, you’ll be able to make better decisions, optimize your resource allocation, and overall create a more resilient organization.

8 Strategies for More Comprehensive Risk Identification

Identifying all potential risks can be a challenge for any business. No matter how large or small your organization is, you will need to account for a wide variety of internal factors and monitor ongoing events in the world to account for external threats. General brainstorming and using risk analysis frameworks such as a SWOT analysis or a root cause analysis can be incredibly helpful.

But identifying all risk factors can be hard on your own. Here are eight risk identification methods to make sure you have all your bases covered and can identify the most likely and important risks to your organization:

1. Review past risk incidents

Examining past risk events can provide valuable insights into potential future risks. By analyzing previous risk identification examples, both within your company and across the industry, you can assess patterns and trends that may indicate vulnerabilities or new risks. Documenting these incidents and their impacts can help in recognizing similar threats in the future and developing preventative measures.

2. Interview industry experts

Engaging with industry experts can provide an external perspective on potential risks. These experts bring a wealth of knowledge and experience, offering insights that may not be apparent within your organization. Regular consultations with consultants, analysts, and other professionals can keep your risk management strategy current with the latest industry developments.

3. Meet with company stakeholders

Stakeholders, including senior management, board members, and key department heads, deeply understand the company’s operations and strategic goals. Their input is crucial in identifying risks that could impact the organization’s mission and objectives. Regular meetings with stakeholders ensure that risk identification and analysis are aligned with the company’s priorities and business environment.

4. Consult with diverse department heads

Different departments within your organization face unique challenges and risks. Brainstorming with department heads from various functions, such as finance, IT, operations, and marketing, can uncover risks that may be specific to certain areas. This cross-functional collaboration ensures a more comprehensive understanding of the risks across the entire organization.

5. Ask the broader employee base

Employees at all levels of the organization can provide valuable insights into potential risks. Frontline employees, in particular, are often the first to notice emerging issues. Encouraging open communication and feedback from the wider employee base can uncover risks that might otherwise go unnoticed. Surveys, suggestion boxes, and regular meetings with team members can facilitate this process.

6. Use generative AI tools

You can enhance the risk identification process by using generative AI tools to analyze vast amounts of data to detect patterns and anomalies that may indicate potential risks. These tools can provide predictive insights and help you stay ahead of emerging threats. You can also use AI to help create risk identification templates or checklists to improve process automation.

7. Run exercises or drills

Regular tabletop exercises or drills can help identify gaps in your risk management plan. These simulations test the organization’s response to various scenarios, revealing weaknesses and areas for improvement. By running these exercises, you can refine your risk identification processes and ensure your team is prepared for real-world events.

8. Invest in threat monitoring

Investing in risk intelligence tools and services can provide real-time insights into potential risks. These tools continuously scan for indicators of threats, such as cyberattacks, market volatility, or geopolitical events. Real-time threat monitoring ensures you can identify and respond to risks as they emerge, minimizing their impact on your organization.

Identifying risks large and small

These risk identification strategies are fantastic tools for creating lists of potential risks for both extensive enterprise risk management and minor project management scales. While the types of risks might be different between operational and project planning, the process can benefit both. To manage risk at any level, you need to assess internal and external threats, involve stakeholders in key decision-making, and create contingency plans for possible risks.

While risk identification is the foundation of actionable risk management, it’s just the start. Once you’ve sourced your business risks from the strategies above, here are two ways to better understand those risks so you can more effectively manage them.

Understanding risk impact and likelihood

To act on a potential risk, you need a deeper understanding of its potential impact on your organization and its likelihood of occurring. A risk’s impact could range from minor operational disruptions to significant financial losses or reputational damage, and the likelihood might vary from a guaranteed frequent occurrence to a very unlikely possibility.

You can figure out these factors in tandem with risk identification and use many of the same strategies, such as interviewing managers or looking through historical data. Understanding these two dimensions lets you prioritize your risks effectively, focusing resources on the highest-impact and/or highest-likelihood threats first.

Fitting risks into a greater context

Risks do not exist in isolation. They interact with each other, your organization, and the broader business environment. Understanding these interconnections can help you anticipate how one risk might trigger or exacerbate others, leading to a cascade of issues. This dynamic risk perspective allows for developing more comprehensive risk mitigation strategies that address multiple threats simultaneously.

Additionally, aligning risk identification with your organization’s strategic objectives ensures that risk management efforts support your broader business goals and business resiliency .

Now that you have your list of risks and you’ve analyzed how they impact your organization, their likelihood, and their larger context, it’s time to get to work managing those risks. Here are a few resources for tackling risk management:

Continuous Assessment and Identification

Effective risk identification is an ongoing process that requires continuous work to improve. As the risks you face grow in complexity and scale, you must build a comprehensive risk management framework that identifies risks and equips your organization to mitigate and manage them effectively. These proactive steps will improve your overall risk management process and protect your business from harm to ensure long-term success.

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How to Assess Risk

In operations, financial reporting and compliance, risks need to be identified and analyzed. Assessing risk enables you better achieve your group's goals by helping you determine how pitfalls should be managed.

Who is Responsible?

Managers must determine the level of operations, financial and compliance risk they are willing to assume. Assessing risk enables managers to proactively reduce unwanted surprises.

How to Identify Risk

A risk is anything that could jeopardize the achievement of an objective. It's important that risks be comprehensively identified for each objective at the department level and at the activity or process level. Both external and internal risk factors must be considered. Usually, several risks can be identified for each objective. 

To identify risks, consider:

• What could go wrong?
• How could we fail?
• What must go right for us to succeed?
• Where are we vulnerable?
• Which assets do we need to protect?
• Do we have liquid assets or assets with alternative uses?
• How could someone steal from the department?
• How could someone disrupt our operations?
• How do we know whether we are achieving our objectives?
• On what information do we most rely?
• On what do we spend the most money?
• How do we bill and collect our revenue?
• Which decisions require the most judgment?
• Which activities are most complex?
• Which activities are regulated?
• What is our greatest legal exposure?

High-Risk Transactions

These are transactions that deserve a thoughtful risk review. Here are some examples:

• Assets with alternative uses
• Cash receipts
• Confidential information
• Consultant payments and other payments for services
• Equipment delivered directly to department
• Equipment moved off location
• Grants (meeting terms, not overspending)
• Intellectual property
• Payments to non-vendors
• Payroll (rates, changes, terminations)
• Purchase exemptions (Sole Source)
• Scholarships
• Software licensing issues
• Travel expenditures

Risk Analysis

After risks have been identified, an analysis should be performed to set priorities:

• Assess the likelihood (or frequency) of the risk occurring.
• Estimate the potential impact if the risk were to occur. Consider both quantitative and qualitative costs.
• Determine how the risk should be managed; decide what actions are necessary.

Prioritizing helps departments focus their attention on managing significant risks such as risks with reasonable likelihoods of occurrence and large potential impacts.

Risk Assessment Tips

• Make sure the department has a mission statement and written goals and objectives.
• Assess risks at the departmental level.
• Assess risks at the activity (or process) level.
• Complete a Business Controls Worksheet for each significant activity (or process) in the department; prioritize those activities (or processes) that are most critical to the success of the department and those activities (or processes) that could be improved the most.
• Make sure that all risks identified at the department level are addressed on the Business Controls Worksheet.
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How to Run a Cybersecurity Risk Assessment in 5 Steps

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Though cybersecurity is on every executive’s checklist today, most struggle with growing compliance burdens, keeping the costs moderate and bringing team alignment.

A cybersecurity assessment is the key to combating the rising threat environment, and it’s prudent to secure systems before a breach cripples your business.

Read this guide, written by Avya Chaudhary for TechRepublic Premium, to learn how to perform a cybersecurity assessment within a five-point framework.

Featured text from the download:

STEP 4: DEVELOP A RISK ANALYSIS REGISTER

The risk analysis report is an important bridge between executives, developers and security teams. It translates complex technical jargon into actionable insights for informed security decisions. But the living document doesn’t just bring alignment between the middle and top tier of an organization — it can also be a financial lifesaver.

A well-defined risk analysis report could have prevented the Equifax data breach of 2017. The company reportedly failed to patch a critical vulnerability for months, exposing the data of 147 million customers. Creating and updating a risk analysis report regularly would have likely identified this vulnerability as “High Risk” and saved Equifax from the immense reputational damage and spending $425 million in the aftermath.

Boost your cybersecurity knowledge with our in-depth nine-page PDF guide. This is available for download at just $9. Alternatively, enjoy complimentary access with a Premium annual subscription. Click here to find out more.

TIME SAVED: Crafting this content required 18 hours of dedicated writing, editing and research.

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Fraud risk assessment – an effective anti-fraud tool for SMEs

By Yaw Appiah LARTEY, Nii Asafoatse ABBEY & Ewurakua ABRAHAM

Small and medium enterprises (smes) are vital for economic growth, especially in developing countries, but are particularly vulnerable to fraud., a report by the association of certified fraud examiners (acfe) 2024 highlights that smaller budgets and revenue make smes more vulnerable to the impact of fraud compared to larger organisations [1] ., small businesses are at higher risk of fraud due to their limited resources, relatively informal processes and lack of anti-fraud technology. to protect themselves, businesses can conduct a fraud risk assessment (fra), as recommended by the chartered institute of management accountants (cima) [2] and the committee of sponsoring organisations (coso) [3] . this assessment helps identify and manage fraud risks efficiently, even with limited resources., this article will discuss how fra can help small businesses in ghana combat fraud. future articles will cover additional components needed for a comprehensive fraud risk management programme for smes. let’s start by defining fraud and its impact on smes..

Understanding fraud and its impact on SMEs

Fraud is a deliberate act of deception for personal or financial gain that harms others. three main elements trigger fraud: pressure, opportunity and rationalisation. opportunity arises from weaknesses in processes or systems that can be exploited for financial gain. pressure can be driven by factors like greed, addiction, debt or financial stress. rationalisation involves justifying fraud through reasons like “i’m doing it for my family”, “everyone does it” or “i deserve it”., smes face various types of fraud, including payroll fraud (such as timesheet manipulation and unauthorised wage increases), data breaches due to limited it resources, use of fake currency, supply of fake or wrong products, incomplete supply of goods, cyber fraud and billing fake items. many smes do not prioritise fraud risk assessment due to cost and lack of awareness among owners. while the financial losses from fraud can be significant for smes, the non-financial impacts can be equally devastating and have long-lasting consequences. these include:, reputational damage : fraud can erode trust with customers and stakeholders, leading to a loss of business and loyalty., distraction from core business : dealing with fraud can divert time and energy away from focusing on business growth and development., difficulty attracting new customers : negative information about fraud can deter potential customers from engaging with the company., how businesses benefit from an effective fra, conducting a thorough fraud risk assessment is essential for a robust fraud risk management programme as it encourages a business to take a proactive approach to managing fraud. the assessment should cover key areas relevant to the organisation’s size, complexity, industry and objectives. regular updates to the risk assessment are necessary to stay abreast with evolving fraud risks and vulnerabilities specific to the organisation..

Corporate sustainability due diligence

Fostering sustainable and responsible corporate behaviour for a just transition towards a sustainable economy.

On 23 February 2022, the European Commission adopted a proposal for a Directive on corporate sustainability due diligence. On 24 May 2024 the Council of the European Union approved the political agreement, thereby completing the adoption process. The aim of this Directive is to foster sustainable and responsible corporate behaviour in companies’ operations and across their global value chains. The new rules will ensure that companies in scope identify and address adverse human rights and environmental impacts of their actions inside and outside Europe.

What are the benefits of these new rules?

• Better protection of human rights, including labour rights.
• Healthier environment for present and future generations, including climate change migration.
• Increased trust in businesses.
• More transparency enabling informed choices.
• Better access to justice for victims. 

• Harmonised legal framework in the EU, creating legal certainty and level playing field.
• Greater customer trust and employees’ commitment.
• Better awareness of companies’ negative human rights and environmental impacts, less liability risks.
• Better risk management, more resilience and increased competitiveness.
• Increased attractiveness for talent, sustainability-oriented investors and public procurers.
• Increased incentives for innovation.
• Better access to finance.

• Better protection of human rights and the environment.
• Sustainable investment, capacity building and support for value chain companies.
• Improved sustainability-related practices.
• Increased take-up of international standards.
• Improved living conditions for people.

What are the obligations for companies?

This Directive establishes a  corporate due diligence duty . The core elements of this duty are identifying and addressing potential and actual adverse human rights and environmental impacts in the company’s own operations, their subsidiaries and, where related to their value chain(s), those of their business partners. In addition, the Directive sets out an obligation for large companies to adopt and put into effect, through best efforts, a transition plan for climate change mitigation aligned with the 2050 climate neutrality objective of the Paris Agreement as well as intermediate targets under the European Climate Law.

Which companies will the new EU rules apply to?

Large EU limited liability companies & partnerships :  

+/- 6,000 companies  - >1000 employees and >EUR 450 million turnover (net) worldwide.

Large non–EU companies: 

+/- 900 companies  - > EUR 450 million turnover (net) in EU .

The Directive contains provisions to facilitate compliance and limit the burden on companies, both in scope and in the value chain.

Micro companies and SMEs are not covered by the proposed rules. However, the Directive provides supporting and protective measures for SMEs, which could be indirectly affected as business partners in value chains.

What are the estimated costs of the new rules for companies?

Businesses will have to bear :

• The costs of establishing and operating the due diligence process.
• Transition costs, including expenditure and investments to adapt a company’s own operations and value chains to comply with the due diligence obligation, if needed. 

How will the new rules be enforced?

The rules on  corporate sustainability due diligence  will be enforced through:

• Administrative supervision : Member States will designate an authority to supervise and enforce the rules, including through injunctive orders and effective, proportionate and dissuasive penalties (in particular fines). At European level, the Commission will set up a European Network of Supervisory Authorities that will bring together representatives of the national bodies to ensure a coordinated approach.
• Civil liability : Member States will ensure that victims get compensation for damages resulting from an intentional or negligent failure to carry out due diligence.

Why does the EU need to foster sustainable corporate behaviour?

The Directive will contribute to the just transition to a sustainable economy, in which businesses play a key role.

A broad range of stakeholder groups, including civil society representatives, EU citizens, businesses as well as business associations, have been calling for mandatory due diligence rules. 70% of the businesses who responded to the public consultation sent a clear message:  EU action on corporate sustainability due diligence is needed .

A third of companies recognised the need to act and are taking measures to address adverse effects of their actions on human rights or the environment, but progress is slow and uneven. The increasing complexity and global nature of value chains makes it challenging for companies to get reliable information on business partners’ operations. The fragmentation of national rules on corporate, sustainability-related due diligence obligations further slows down the take-up of good practices. Stand-alone measures by some Member States are not enough to help companies exploit their full potential and act sustainably.

EU rules will provide a uniform legal framework and ensure a level playing field for companies across the EU Single Market. Such rules will also foster international competitiveness, increase innovation and ensure legal certainty for companies addressing sustainability impacts. The Directive will steer businesses towards responsible behaviour and could become a new global standard with regard to mandatory environmental and human rights due diligence. 

What are the next steps?

The Directive will enter into force 20 days after its publication in the Official Journal of the European Union. Member States will have two years to transpose the Directive into national law and communicate the relevant texts to the Commission. One year later, the rules will start to apply to companies, with a gradual phase-in between 3 and 5 years after entry into force. 

A set of guidelines to be issued by the Commission will help companies to conduct due diligence.

Related links

Sustainable corporate governance consultation

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• THE SUPERVISION BLOG

A key step in assessing SSM banks’ digitalisation journey and related risks

11 July 2024

By Elizabeth McCaul

Assessing how banks implement their digitalisation activities and manage the related risks has been one of the ECB’s supervisory priorities in recent years. We have now completed a key milestone for defining assessment criteria and in gathering sound practices. The Supervision Blog looks at this important step.

As the world has gotten increasingly digital in recent years, one of our supervisory priorities has been to assess risks related to banks’ digitalisation activities. After gathering market intelligence, carrying out a comprehensive survey of all significant institutions in 2022, conducting on-site inspections throughout 2022-23 and finally performing a recent targeted review of 21 banks in autumn 2023, we have now reached a key milestone by publishing a report that defines assessment criteria and sound practices for digitalisation. This work taken together allows us to take stock of banks’ sound practices and identify important aspects for a sustainable, well-governed and risk-aware steering of banks’ digitalisation. We will build on this initial stocktake in the coming years via new supervisory activities to deepen our understanding of the risks related to banks’ applications of digital technologies.

Key assessment criteria

Focusing on the recent targeted reviews, the main objective was to assess how banks shape, steer and implement their digitalisation strategies, focusing closely on risk identification and mitigation.

Our assessment criteria (as summarised in Grid 1) were based on the regulations and principles under the Capital Requirements Directive and the relevant European Banking Authority (EBA) guidelines, particularly regarding our regular annual health check of banks − the Supervisory Review and Evaluation Process (SREP) – as well as on outsourcing and internal governance. We applied those requirements to risks concerning digitalisation and the use of innovative technologies, including the strategic risk of not keeping pace in a fast-changing competitive environment. An in-depth comparison of banks’ practices allowed us to define a more granular view of how these assessment criteria can be interpreted for digitalisation.

Our report describes these assessment criteria in further detail and outlines some sound practices in the digital context we observed. These assessment criteria and sound practices will also be fine-tuned as we continue assessing risks related to digitalisation.

Main observations and collection of sound practices

We found that the banks demonstrating sound practices assess both the opportunities and risks related to their digital strategy, based on a granular assessment of their business environment. A substantiated evaluation of the strategic and business risks is equally important for those banks which consciously decide to limit digitalisation. The most advanced digital strategies are ones embedded in business or IT strategies, translated into digital initiatives driven by business use cases and technological developments which are then consistently evaluated for efficacy during the execution phase. We found that most banks have already used digital solutions to transform their back and front office operations, and that those that have made the most progress are now focusing on incremental digital improvements.

However, many banks have not defined sufficiently granular key performance indicators (KPIs), including those assessing the impact of their digital strategies on profit and loss. This means they cannot determine the effectiveness of their strategies and whether they have met their objectives. A key success factor is establishing KPIs throughout the execution phase to assess the on-going impact of digital strategies; this allows for better visibility into the progress made on achieving strategic objectives of digitalisation initiatives.

A clearly defined digital strategy is one that can be properly steered and implemented, and rolled out consistently across the organisation. However, for many banks this is often not yet the case. Strong organisational awareness , whereby banks embrace a digital culture and attract top talent, can help to implement a group-wide digital strategy and to foster digital proficiency. Digital expertise at the level of the management body also needs to be enhanced to ensure the proper steering and risk monitoring of digital initiatives.

One of the sound practices observed are banks’ supervisory board members who engage in proactive and information-based discussions to enable to adequately define a digitalisation strategy and oversee its execution. Many of the banks we reviewed still have a lot of room for improvement in this area. On the other hand, when setting a digital strategy, it is also important to involve the independent internal control functions from the outset, which in most banks is already the case.

Another sound practice is conducting a holistic assessment of the digital strategy’s impact on the bank’s overall risk profile, which also helps to create a comprehensive picture of the risks related to digitalisation. Scenarios, models (including behavioural models) and peculiarities of the bank’s risk assessment and risk management frameworks also merit special attention.

While many banks assess IT-related risks, or operational risks more broadly, they also give weight to considering outsourcing requirements and risks specifically related to critical dependencies and third-party relationships, procedures or software (including beyond their outsourcing frameworks). Also, since digitalisation can present broad-based implications for future financial performance, banks should be able to gauge any changes to their financial risk exposure which their digital strategy could trigger. Finally, the more far-reaching and technologically advanced the digital choices banks make, the greater the need for effective data governance that covers all data streams and strong information sharing and issue escalation to a management body that is well equipped to understand, steer and manage risks based on the reports.

Going forward, we will expand the focus of our supervisory work to include reviewing the use of specific technologies more broadly. These include the deployment of AI and related business use cases. We will also continue to sharpen our focus on the impact of banks’ digitalisation strategies, including the risks and benefits of evolving opportunities and risk drivers of banks’ digitalisation efforts. We will also strive to better understand the linkage between banks’ efforts to evaluate digitalisation strategies and their decisions to make and measure investments. Again, this is important both for decisions to pursue digitalisation strategies and for those not to pursue them. Decisions in either direction can have positive or negative implications.

To date, we have identified some key AI use cases and related risk drivers from a strategic and operational standpoint. The risk drivers outlined below will be developed further as we collect additional relevant information. We also aim to expand this overview, for example with the benefit of further insights on the potential impact on financial risks. Lastly, clustering banks according to sound practices and the use of innovative technologies will help us tailor our supervisory work to the different stages of their digitalisation journey, as well as the diversity of approaches and the related risks within peer institution cohorts.

Examples of the risk drivers that banks face on their digitalisation journeys

Source: ECB.

Clustering analysis by digitalisation risk profile

Our journey does not therefore end here: we will continue to engage closely with the banking industry to ensure that risks stemming from the rapidly evolving digitalisation landscape are properly managed.

Grid 1 ­– Key assessment criteria for a sound steering of digitalisation around business model, governance and risk management

Business model.

• Understanding the impact of digital trends on the business environment in which institutions operate in the short, medium and long term, in order to be able to make informed commercial and strategic decisions.
• Based on an informed perspective, deciding on the need to formulate a clear and well-articulated digital strategy, and defining strategic objectives that are to be achieved by means of digitalisation and innovation.
• Having in place adequate financial and non-financial execution capabilities for a proper implementation of the digital strategy as defined.
• Developing a comprehensive framework of financial and non-financial key performance indicators (KPIs) for monitoring the implementation and execution of the digital strategy and for reassessing it in the event that targets are missed.
• Having a clear allocation of responsibilities related to digital topics in the management body, whether individual allocation to those with a management function/executives, and/or senior managers reporting to the executive management, or a dedicated centralised steering/coordination body, enabling adequate coordination of digital initiatives at group level.
• Setting up adequate processes covering all subsidiaries and business lines: defining the business areas ultimately responsible for reporting on digitalisation initiatives and setting up top-down steering and monitoring processes and proper bottom-up reporting processes.
• Having a management body with a supervisory function/non-executive role that constructively challenges the management body in its management function/executive level role and provides effective oversight of the digitalisation strategy and related risks.
• Assigning internal control functions a strong role in the digitalisation process, new product approval process (NPAP) and ongoing business operations, while ensuring their independence.
• Embedding digitalisation in the risk culture (e.g. tone from the top, incentives, risk accountability and a culture of challenge), both top-down and bottom-up, including the communication on strategy and risks, thereby creating awareness and fostering knowledge.
• Ensuring insight and monitoring of critical dependencies, interdependencies and third-party relationships, and not only of outsourcing, on an ongoing basis.

Risk management

• Carrying out a detailed impact review on traditional and non-traditional dimensions of risk during the process of digital strategy-setting and the NPAP as well as during the execution of the digital strategy.
• Having in place a data governance process to support data-driven digitalisation activities.
• Assessing and updating all dimensions of the risk map, reviewing the suitability of existing risk models in view of digitalisation and adapting them as necessary.
• Reviewing the risk appetite framework (RAF), the risk management framework (RMF) and the key risk indicators (KRIs) defined ex ante and adapting them if needed in view of digitalisation initiatives.

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