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Tips to Develop Efficient Operational Risk Management

Operational risk management deals with the grass root levels of a company. Operational risks arise due to human actions, technology, processes and external factors. Most of those risks are generated inside the walls of your company and can be identified and treated even before they occur.

Efficient operational risk management can be achieved by identifying underlying operational risks running in your company. Employees are your main channel of enterprise risk management. So build good rapport with them and look out for the following behaviours:

A silent approach from the employees…

If your organization believes in one-way traffic by providing instructions and not taking feedbacks, then it is time to rebuild your work culture.

Employees should be made aware of prominent and impending risks. Since they are the ones familiar with every basic function of the company, they will be the first ones to spot a threat. Give your employees the autonomy to analyse risks and use an unrestricted gateway to reporting their speculations.

Risk managers can engage with employees on personal levels to learn the remarks and responses towards a range of functions from introducing the new process to the company’s ORM software solutions.

Have your top-level executives taken risk management seriously?

Enterprise risk management needs coordinated efforts of every entity in an organization. And operational risk management takes lead when it comes to the involvement and guidance of management.

You might have installed an ORM software, but ensure that everyone from the top-level executives to the subordinate members are included in the system. Management will motivate the employees to follow their lead and abide by the operational risk management solutions.

Training you resources

In today’s competitive business world, training is not just to evade or move ahead, but to mitigate the possibility of risks.

Employees are your assets, train them to gain individual fortitude and build team strength.

Risk Managers: What Is The Difference Between Risk Management Software VS Spread Sheets

All of us have been using spread sheets and off course we love them. Spread sheets are the ones that would help you analyses the budget of your family, create statistics on the production and the risk assessment process. Wait a second. What was that. Risk Management through Spread Sheets? I am sure some of us must be scratching our head asking how is that possible, where as others may be feeling shy looking away with a small amount of guilt churning in your stomach.

Reassured i am sure that you are not the first one to deal with spread sheets especially when it comes to risk management. Using risk management would help you learn the formulas, checking the cell links, ensuring proper formatting, and risking the human error in the certification auditing program. This is the main inspiration behind our risks management software offering one of the best solutions to the risk management process and not the spread sheets. 

 

The Use of Spreadsheet programs for a better risk management

Spreadsheet programs are considered to be the most essential part of the business and have been utilized for a variety of tasks world wide. The adaptability of these spread sheet programs have led to their use without considering the other solutions. They have been successful in offering features and attributes that have been beneficial for all the risk managers and are bounded with certain limitations.

• A One Time Risk Assessment for Small Business Organizations: When smaller business organizations with limited operations need to complete and succeed in a single risk assessment, it would be proved to be beneficial when you complete risk assessment through a spreed sheet program. And in case of the assessment that has to be repeated the task tends to become tedious resulting in the users managing spread sheets as opposed to risk management.
• No Purchase is required if a spread sheet is already owned by the business organization: Most of the business organizations have already purchased the spread sheet program utilizing the open source of the spreadsheet programs.
• Documents been already shared and transferred between the computers: When business organizations have been having an enterprise version of a spreadsheet program, risk assessments would and can be easily emailed, and placed within the collaboration software allowing you to share it through out the business organizations.
• A proper and a customizable format: Risk managers using the spread sheets program have a better option of customizing the major aspects of risk assessment starting from the calculations to the aesthetics.

Limitations of a Spreadsheet program:

• Sharing out an un protected document: While sharing out the documents related to risk assessment, you run out the risks of edits and changes being made without any sort of the document owners consent. This would lead them to an un approved version of making its publication with a record of when and what changes were made.
• Process of Calculation creation: While utilizing the spread sheets for the risk assessment program users here would have to create and do a proper research on risk calculations that need to be implemented. This could be a daunting task and a time consuming process. Also while implementing these calculations, the risks of utilizing the formulas that are not consistent enough through out their scope increases.
• Repeatability: Risk management process is usually completed many times due to several reasons be it the auditing process or the improvement process. Spreadsheet risk assessment program cannot be set up to be easily repeatable. If the person in charge of the operational risk management process creates the risk assessments and leaves the organization due to a specific reason, then the method used would not be clear unless there is any proper documentation. And in case the document is not created with this assessment then this new assessment may not have to be created.

Risk assessment process can be a complicated process unless you use the right tool at the right place. Organizations here must identify and mitigate risks before they would occur to ensure us with a reliable service maintaining the organizations reputation. Not using an automated and a centralized tool organizations are fray enough and would connect to the risk variables at hand and distinguish the organizations overarching risk position.

Best practices in Operational Risk Management

Businesses have become global and more organized in the present financial world together with the sophisticated of financial technology. Advancing technology has also invited complexity in the activities of the financial institutions and the level of risk across a firm.

Establishing best practices in Operational Risk Management includes the risks other than credit, interest rate and market risk can be substantial.

Some of the novel risks that have emerged for the financial institutions include:

Advanced technology:

Technology has to be applied to reduce the human errors arising from manual processing. However, too much dependency on technology sometimes may give rise to the system failure errors.

Data Security:

With the evolving cloud-based businesses (e-commerce), potential risks like internal and external fraud and system security issues have come up.

Proper Maintenance and Backup:

The financial institutions have evolved a leader as service providers. This calls for greater maintenance of high-grade internal controls and back-up systems.

According to the new Basel Capital Accord that was proposed in 2001 has stated Operational Risks as a distinct class of risk that of course, differs from credit risk and market risks. It is termed to be a significant contributor to any financial institution's risk profile. The regulation also suggested various approaches to assess the operational risk exposure for a financial institution. These approaches have however evolved over time and today the level of complexity under various approaches varies widely.

Below listed are some of the best possible practices that can be applied by any organization:

Organizations must have a thorough understanding of:

·         The place of Operational Risk Management (ORM) in the context of risk management.

·         The proper knowledge on the significant difference between Operational Risk Management and Operational Risk Measurement.

·         Best practices for the ORM.

·         Significance of operational risk in Governance, Risk and Compliance and Enterprise Risk Management frameworks.

·         The procedures and policies required to support ORM.

Often the ORM function in any financial institution forms a part of central risk function. Any organization can achieve the best possible protection against the negative impact of the potential risks and can achieve best growth opportunities with ORM.

Identifying Operational Risks to your Business

Operational Risk Management continues to be an unfamiliar word in many of the countries. They fail to realize the importance of integrating it into their day-to-day business practices. Operational

risk is somewhat different from market or credit risk by being endogenous to the ministry of finance.

Operational Risk Management (ORM) is all about the business environment, the nature and complexity of operational processes, the systems in place, level of management and governance. It also deals with the external events like the natural catastrophe.

There is no perfectly defined regulatory pressures to put or adequate measures to monitor and control these category of risks. According to Basel II defined by The Basel Committee, an ORM framework is necessary for the business operating environment appropriate to its range and nature of treasury operations.

ORM enables the managers and decision makers to develop a wide overview across the enterprise in a holistic way in order to create a properly defined risk profile. This in turn will allow the business heads and the boards to utilize the framework for further governance of the organization. Operational

risks is a more dynamic subject.

Some of the elements of operational risks includes:

• Compliance
• Credit risks
• IT risks
• Investment
• Transaction processing
• Human resources
• Liquidity
• Taxation
• Fraud

Operational risk is an intrinsic part of all financial institutions and is a mandatory practice embed in the governance since the nature of risks are changing everyday. It is a standard recommended procedure for banking products, activities, processes and systems. Therefore it has always been an inevitable part

of any bank's risk management program.

A number of banking institutions are looking forward to adopt effective operational risk governance practices. The key to a sound risk management however lies in understanding the nature and complexity of operational risks. So go ahead and identify the operational risks surrounded in your business.

Upscale Your Internal Audit

Internal Audit Programs are continuously improving to suggest ways that can help make your business do better. It is no longer the traditional approach of just indicating inefficient processes and procedures.

Organizations are under intense economic pressures to constantly upgrade processes and introduce innovation to excel in business.

In the attempt to rapidly deliver high performance, organizations are driving sustained efforts. One such area of improvement is internal audit. Audit managers has the potential to contribute by enhancing processes through integrating performance improvement audits into the audit approach.

Auditors need to focus and monitor processes regularly into 4 main areas- Compliance, Risk-Identification and Performance Improvement.

They need to bridge the gap and establish effective communication with the stakeholders who include Audit Committee, Governance and Nominating Committee, Risk Committee and Management.

3 Challenges Faced By Organizations:

Empowering the Internal Audit Committee & Prioritizing Areas to Focus:

An expert panel of auditors with the correct skills nurtured by the Organization is a true asset to it. The company must always attempt to broaden the asset capacity to address performance. The new reforms of complying with SOX legislation have limited many audit functions. This has resulted in the auditors doubting their operational and business process knowledge.

Creating Value:

The internal auditor skills must give return on investment for the organization. The Internal Audit group must provide intangible value that must address issues that was overlooked for a long time.

Companies must not rely solely on manual accounting solutions. Automated softwares and internal audit solutions are the most effective protection against the devastating errors.

Limitations to Accept Internal Auditors:

Many management groups might not readily accept internal auditors to thread into every area of business. It is therefore vital for the auditors to maintain good relation with the management in order to skillfully step into various departments of the business.

Thus new-age internal auditors have the capacity to adapt themselves to value-oriented activity aimed towards enhancing the performance of the company and at the same time keeping up its values. It points out key vulnerable areas of the business so as to avoid the risks drive excellence every day.

Risk Management Practices Evolves In 2014 for Financial Institutions

A successful organization is the one who is always ready to take appropriate risks strategically and wisely. The reformed range of rules for the financial institutions has enhanced the global capital and liquidity rules in order to achieve a pliable banking sector.

Research done by eminent banking supervisory authorities shows 10 reputed global banking institutes will fail to achieve the risk data aggregation and risk reporting time limit of 2016. It is always advised to the internal auditors to follow correct the risks in the business.

Another analysis done on C-level executives from more than 430 global companies in the field of  banking & capital markets, insurance, energy & utilities, health, and public service industries says that the Enterprise Risk Management is top concern for all of them in 2014 than before. The reason for this is the evolved nature of the risks that includes Strategic risks, operational risks, credit risks, and market risks.

Role of Internal Auditors:

Internal audit plays a significant role in the implementation of Enterprise Risk Management (ERM) for an organization. Some of them have been elaborated below:

Explaining the board and management on the importance of ERM:

The internal auditors can educate the senior management on the importance of internal audit as well as ERM and their implications on the organization. Through a standard risk management framework, he can explain the various component of ERM. This will help the organization to develop focused audit plans following the declaration of audit results.

Promote the Risk Assessment:

Risk assessment is a vital step that can keep on track of the progress of  ERM. An Internal Auditor can efficiently facilitate the risk assessment process and provide appropriate risk response.

Evaluate the Risk Management Process:

The risk assessment process ought to be evaluated considering Objective Setting, Event Identification, Risk Assessment and Risk response Components. Even the effectiveness of evaluation needs to be monitored.

Taking the above role of internal auditors into account, it can be considered that the new set of rules defined by Basel III will definitely stimulate the implementation strategy for ERM in all corporates. That will be followed by adopting enhanced corporate governance practices by all organizations thereby improving the risk compliance culture.