Risk assessment is a process that involves addressing all identified risks. Risk assessment is a key tool for the risk management process, performed for all types and categories of identified risks at all organizational levels. Different categories of risks may be financial risks, environmental risks, strategic risks, operational risks, reputational risks, etc.
An organization is required to perform periodic risk assessments to protect the assets, systems, and other resources of the organization. Risk assessment helps reduce the chances of injuries and mismanagement of activities at the workplace and reduces the chance of occurrence of different types of hazards and incidents.
Risk Assessment Concepts and Key Considerations
A series of steps are to be performed by the risk management team or risk owners to perform an effective risk assessment. Risk assessment involves performing an inherent and residual risk assessment of identified risks, where impact and likelihood assessments are performed to identify key and significant risks.
Risk owners use data from various risk sources, such as internal audit reports, past incident reports, and loss databases, which are maintained in an organization to perform inherent and residual risk assessments. Assessment of impact and likelihood of risks is performed, to the extent possible, based on available information or factual data.
Risk assessment is performed for various processes and sub-processes such as finance, financial reporting, taxation, budgeting, etc. To perform such process and sub-process level risk assessment, the organizations develop a risk assessment and management team, which works under the risk management function or department. This team collaborates with various departments to help them identify their respective risks and perform assessments.
In other cases, risk identifiers are the employees who own the process and related risks. A Chief Financial Officer, the head of the finance department, is the main risk owner for all finance-related activities and processes. It does not mean that other finance employees do not own the financial risks, but the ultimate responsibility of taking ownership of risk identification, assessment, and management rest with the Chief Financial Officer of the company.
Similarly, each departmental head, as part of the senior management, is responsible for assessing respective departmental risks.
Stakeholders Involved in Risk Assessment
The following are the key organizational stakeholders who must be involved in risk assessment activities. The level of involvement may differ, but the objective is participation in the risk assessment activities.
- The first key organizational stakeholder is the Chief Executive Officer.
The Chief Executive Officer or CEO, the management team’s head, is responsible for ensuring that a dedicated risk management function is established, which is responsible for performing risk management activities. Such risk management activities include performing risk assessment procedures. The CEO delegates the responsibility for establishing risk management functions to the management team.
The CEO of an organization is supposed to review all the significant risks and issues identified by management and provide feedback and support to the management for the mitigation of identified significant risks and issues. The CEO periodically reviews the risk assessment results for different areas and functions of the organization.
- The second key organizational stakeholder is the Senior Management.
Senior management is the highest level of management within an organization, comprised of departmental heads, and is required to identify and assess overall and departmental-level risks periodically. All departmental-level key risks and risk assessment results are reported to the CEO by the management team for their review and appropriate feedback. Senior management devises a robust mechanism to perform a risk assessment and disseminates the mechanism to the middle management for periodic risk assessment activities.
- Lastly, the third key organizational stakeholder is Senior Managers or Managers.
Middle management, comprising senior managers and managers, follows the mechanism and performs risk assessments for their relevant risks and compiles risk inventory and risk assessment results for management’s review and feedback.
As middle management works in different departments and performs daily business and operational activities, it is responsible for ensuring that risk assessments are performed for every process and activity of the department. Middle management also supervises the lower-level staff; therefore, all operational-level risks are known to them. Middle management is better positioned to identify the processes and activities at the departmental and unit level; therefore, middle management best performs risk assessment.
It works in close collaboration with managers of other departments, vendors, regulators, and other stakeholders; therefore, they possess a better knowledge of the processes and controls built into those processes. Therefore, the operational risk identification and assessment process starts from the managerial level.
Risk assessment is the process of identifying, analyzing, and evaluating potential risks that could affect an organization or individual, and taking steps to mitigate or avoid those risks. By understanding these concepts and considerations, organizations and individuals can effectively identify, assess, and manage potential risks to minimize their impact and protect their assets.