An audit finding from the past year may indicate a risk is highly likely/probable, while one from five years ago with no repeat findings may indicate an unlikely or remote risk. A guideline for probability might include frequency of audit findings. Have one scale for assessing likelihood (ex: “high,” “moderate,” and “low”) and one for severity (ex: “catastrophic,” “significant,” “moderate,” “minor,” and “insignificant”) along with requirements for applying them. So how do you show your work? You need guidelines and scales. The more likely or severe an event, the greater the risk. For example, a cyber breach seems a very likely occurrence when there’s no firewalls, anti-virus software, or intrusion detection software to prevent it. Likelihood is how probable it is that an event will occur. For example, a cyberbreach could have a catastrophic impact. The impact is an estimate of the harm that could be caused by an event. A risk assessment should evaluate both likelihood and impact. Notice there’s a theme (which I took the liberty of highlighting for emphasis). The result of risk measurement leads to the prioritization of potential risks based on severity and likelihood of occurrence. Risk measurement - A process to determine the likelihood of an adverse event or threat occurring and the potential impact of such an event on the institution.The risk assessment includes an analysis of threats based on the impact to the institution, its customers, and financial markets, rather than the nature of the threat. Risk assessment - A prioritization of potential business disruptions based on severity and likelihood of occurrence.Risk analysis - The process of identifying risks, determining their probability and impact, and identifying areas needing safeguards.The FFIEC IT Examination Handbook glossary shows us exactly what we need to evaluate: Risk assessments aren’t nearly as subjective as they may appear on the surface. That’s why they make the same request as your eighth-grade math teacher: Show your work. If you don’t put in the work to systematically evaluate risk, you’re creating even more risk.ĭeep down you know this and so do examiners. It’s an essential tool for mitigating risk and assessing controls. Assessing risk is not a check the box activity. Guessing at risk assessments is a dangerous practice. But you don’t need a phony fortune-telling toy to know that “outlook not so good” for this practice. Many bankers make a gut call, acting as the institution’s de facto Magic 8 Ball. He holds a Doctor of Philosophy in counseling psychology from New York University.Assessing risk can feel like a subjective task. His articles have appeared in such journals as “Psychotherapy” and “Journal of Humanistic Psychology.” Koltko-Rivera is a Fellow of the American Psychological Association. Bright Hub: Risk Management Probability and Impact Matrix: Free Template for Downloadīased in New York City, Mark Koltko-Rivera has been writing psychology-related articles since 1987.Project Management Knowledge: Building a Qualitative Risk Analysis Matrix.
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