Importance of Risk Assessment - Research Paper Example

Importance of Risk Assessment Risk assessment refers to the process of systematic identification, evaluation and valuation of the levels of potential risks in a situation, their comparison against standards or benchmarks and the determination of acceptable level of the risk. It further refers to the process aimed at determining the probability that a specified negative risk event will occur. Risk assessments are used by business managers and investors to determine whether to undertake a particular venture and how to mitigate an activity's potential losses (Alkuwaiti 6). This concept paper will focus on the process of risk assessment and its relative importance to an organization. Effective risk assessment is quite crucial to the success of every organization or business activity.Risk assessment requires consistently applying and defining an approach that is tailored to the organization. Any assessment activity begins with the outlay of a plan and scope considering objectives, timing, input, output and responsibility requirements (Wenyuan 21). These responsibilities are assigned to parties that can provide a meaningful perspective on relevant risks. In implementing these responsibilities, one requires input sources which are determined by the information available such as prior assessments, lessons learnt and loss data. On the other hand, output requirements are determined based on specific requirements of sponsors and stakeholders. . The execution of the assessment process is done once the planning and scoping have been determined. There are several important steps required in carrying out a risk assessment.The first step involves the identification of relevant organization objectives. Identifying relevant objectives provides a basis for ascertaining the potential risks that may have an impact on the achievement of certain objectives. It further ensures relevance of consequential risk assessment and management plan to important organization objectives. These objectives are usually defined at a number of organizational levels and it is necessary to comprehend how they are formulated. (Vose 12). Moreover, well formulated objectives are analyzed by considering the weaknesses, opportunities, threats and strengths. The second one is identification of events that may have an impact on achieving objectives is crucial in risk assessment. Therefore in this case, organizations need to develop a preliminary inventory of events that may affect achievement of its objectives. They can achieve the objectives by reviewing the external environmental factors. Additionally, reviewing external factors helps to identify the outside events that may have had an effect on the shareholder value of the organization or may affect it in the future (Hubbard 88). In reviewing external factors of an information technology, for example, may include the incidents of cyber-crime within the previous year and introduction of advanced hardware and software. On the other hand, the review of an organization’s internal processes, technology, data and people helps in the identification of further events as well as getting relevant information. Information can be obtained from internal sources of data and is very important in identifying events that may have an effect on meeting the set objectives. For instance, information can be acquired from risk assessment of an information technology organization by considering internal factors like the length and number of system failures, protection of confidential data and employee access controls. (Alkuwaiti 8) Nevertheless, determining the risk tolerance helps to ensure that objectives of an organization are achieved. Risk tolerance refers to an acceptable variation level relative to achievement of a specified objective. It considers the relative importance of set objectives and supports risk appetite. Risk appetite has to be clearly reflected and defined in risk limits and risk tolerances to assist in ensuring that objectives of an organization are achieved.(Alkuwaiti 14).For instance, because an airline considers superior on-time service as its objective, it needs to include various customer services, operational and marketing factors to establish its risk tolerance. Moreover, there is need for assessment of inherent likelihood and effects of risks to enhance the achievement of essential objectives. Assessment of events that may impede the realization of objectives should be done basing on significance of their impacts on objectives and the likelihood of occurrence. For instance, an organization that has headquarters on a river bank can seek to assess its exposure to the risk of flooding. (Hubbard, D. 8). On an integral basis it would reflect on the probability and impact of a flood by making an allowance for external data and internal data. An impact and possibility rating should at this point be assigned using defined risk rating scales. The risk rating scales are then brought together in an inherent map form to enable an analysis of risks not only on an individual level but also in relation to one another. Additionally, since risk assessments are refreshed over time, a risk map allows analysis over time (Norman & Neil, 4). Evaluation of risk portfolios and determination of risk responses is the next step that helps the management that is involves how risks identification should be addressed. Every organization should take on a definite level of risk while conducting business to enable it produce returns for its stakeholders. Finally, residual risk assessment should consider both previously identified risks and the related mechanisms of risk responses (Alkuwaiti 13). In other words, it analyzes the effectiveness and adequacy of internal checks and balances providing reasonable assurance that the impact and likelihood of an adverse event are carried down to an acceptable standard. After all these steps, the organization can now bring together its individual risk ratings into a portfolio view. Bringing individual risks together enables the identification of interconnections and interdependencies between risks and the effect of responses of risks on other multiple risks. Identifying the interconnections will be crucial in ascertaining steps and actions necessary to identify actions necessary to revise its risk responses (Coleman, 4). Consequently, action plans must be assigned to parties that have the ability and authority to effect change. The authority should carry out a systematic implementation of the action plans to result in reduced risk exposures on the risk map of the organization. Institutionalizing a practical risk assessment program in organizations is important in supporting their business activities and provides several benefits. First, and perhaps most importantly, risk assessment programs help ensure that the greatest risks that could affect organization processes are identified and addressed on an ongoing basis. (Etti, Harrington and Nichaus 19). As a matter of fact, such programs help ensure that the expertise and best judgments of organization personnel are tapped to formulate reasonable steps for mitigating or preventing situations that could impede the organization from accomplishing its mission. Secondly, risk assessments help personnel in an organization understand risks to business operations in a better way, avoid risky practices such as disclosing passwords and other sensitive information and be alert for suspicious events (Rausand 16). This understanding grows, in part, from better and improved communication between system support staff, security specialists and business managers.It not only allows organizations to prevent and avoid risks but also provides greater and more meaningful clarity around risks they face. Equipped with this perspective and insight, organizations become better positioned to take the correct risks and manage them appropriately. In the long run, organizations that strategize to capitalize on longer term opportunities are more likely to meet and surpass their objectives. Thirdly, risk assessments provide a viable mechanism for achieving consensus on the dangerous risks and the appropriate steps for mitigation. The processes used in risk assessments encourage discussion and require differences to be resolved. This, in turn, makes it more probable that organization managers understand the need for agreed upon controls. They feel that the controls were in line with the unit’s organization goals and support their effective implementation. Controls that are selected in this manner can be effectively and easily adopted than controls that are imposed by personnel outside of the organization unit (Coleman 7). Finally, a formal risk assessment program provides a competent means for communicating assessment findings. It also recommends actions to organization department managers as well as to senior corporate officials (Rausand 15). Moreover, the risk assessment process usually forms the foundation of an Effective Risk Management program within an organization. Systematic and consistent risk assessments empower management to focus its attention on the most important risks. Risk assessments also provide the platform for making better informed decisions on risks. Organizations, for instance, can measure the relative performance across various objectives to minimize the occurrence, losses and impacts of events. There are many ways of managing risks. They are usually grouped into four main categories. First, risk can be managed by accepting its consequences and managing it. Another strategy in managing risk is by transferring it to another party. This can be done through insuring against it like fire or a slip and fall accident. In an organization, closing down a certain high risk area can help avoid a risk. Finally, an organization can reduce the negative effects of a risk, for example, by installing fire sprinklers or having a data back-up plan (Wenyuan 21). In conclusion, risk assessment is important in enhancing an organization’s stability. It encourages organizations to undertake activities that are sustainable and safe. This process provides decision makers and organizations with relevant information that enables them prevent, avoid, accept or reduce the impacts that are associated with particular risks. Ultimately, it leads to the formation of effective risk management plans. Works cited Alkuwaiti, A. J. Study Guide for the PMI Risk Management Professional. United Arab Emirates, UAE: uae. 2009. 6-14. Print. Coleman, T. S. A Practical Guide to Risk Management. London :CFA Institute. 2011. 4-7. Print. Etti G., Harrington, S, E. &Niehaus. G. Risk Assessment.Chicago: Chicago press. 2006. 19. Print. Hubbard, D. W. The Failure of Risk Management: Why It's Broken and How to Fix It. New York, NY: Wiley 2009. 88. Print. Norman, F. & Neil, M. Risk Assessment and Decision Analysis with Bayesian Networks. New York, NY: CRC Press. 2012. 4. Print. Rausand, M. Risk Assessment: Theory, Methods, and Applications. New York, NY: Wiley. 2011. 16. Print. Vose, D. Risk Analysis: A Quantitative Guide. New York, NY: Wiley. 2008. 12. Print. Wenyuan, L. Risk Assessment of Power Systems: Models, Methods, and Applications. New York, NY: Wiley-IEE press. 2014. 21 Read More