Risk Assessment

Posted in Internal Controls, Risk Management on March 19, 2024
Risk Assessment - Featured Image

Risk assessment is a process that involves addressing all identified risks. Risk assessment is a key tool for the risk-management process, which is performed for all types and categories of identified risks at all levels within an organization. Different categories of risks may be financial risks, environmental risks, strategic risks, operational risks, and reputational risks. 

An organization is required to perform periodic risk assessments to protect the assets, systems, and other resources of the organization. Risk assessment helps in reducing the chances of injuries, mismanagement of activities at the workplace and reduces the chance of occurrence of different types of hazards and incidents. 

Risk Assessment 1

Performing risk assessment

To perform an effective risk assessment, a series of steps are to be performed by the risk management team or risk owners. 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. 

To perform inherent and residual risk assessment, risk owners use data from various risk sources such as internal audit reports, past incidents reports, and loss databases, which are maintained in an organization. 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 work under the risk management function or department. This team works in collaboration with various departments to help them in the identification of their respective risks and perform assessments. 

In other cases, risk identifiers are the employees who own the process and related risks such as a Chief Financial Officer. Being the head of the finance department, the CFO is the main risk owner for all finance-related activities and processes. It does not mean that other finance employees do not own the finance risks, but the ultimate responsibility of taking ownership of risk identification, assessment, and management rests with the CFO of the company.   

Similarly, each departmental head, being part of the senior management, owns the responsibility for the assessment of respective departmental risks. 

Risk Assessment 2

Stakeholders Involved in Risk Assessment

The following are the key stakeholders within an organization who must be involved in the process of risk assessment activities. The level of involvement may differ, but the objective is participation in the risk assessment activities.

Chief Executive Officer (CEO)

The Chief Executive Officer (CEO), being the head of the management team, has overall responsibility to ensure 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 function 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 mitigation of identified significant risks and issues. A CEO periodically reviews the results of risk assessment for different areas and functions of the organization. 

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 his or her review and appropriate feedback. 

Senior management devises a robust mechanism to perform a risk assessment and disseminate the mechanism to the middle management for performing periodic risk-assessment activities.

Middle Management

Middle management, comprising of senior managers and managers, follow the mechanism and perform risk assessments for their relevant risks and compile risk inventory and risk-assessment results for management’s review and feedback. 

Middle management works in different departments and performs daily business and operational activities. Therefore 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. All operational level risks are known to them.

Middle management is in a better position to identify the processes and activities at the departmental and unit level, so risk assessment is best performed by the middle management.  It works in close collaboration with managers, vendors, regulators, and other stakeholders that way they possess a better knowledge of the processes and controls and build in those processes. The operational risks identification and assessment process starts from the managerial level.

Final Thoughts

Risk management is a process of addressing and identifying all risks. Risk assessment is a key tool for the risk-management process for all categories. Different categories of risks may be financial risks, environmental risks, strategic risks, operational risks, and reputational risks.