As-NZS 4360-2004 Risk Management

Kevin W Knight

CHAIRMANISO WORKING GROUP - RISK MANAGEMENT TERMINOLOGY

MEMBERSTANDARDS AUSTRALIA / STANDARDS NEW ZEALAND

JOINT TECHNICAL COMMITTEE OB/7 - RISK MANAGEMENT

P0 BOX 226, NUNDAH QLD 4012E-mail: [email protected]

0505

AS/NZS 4360:2004 THE AUSTRALIAN & NEW ZEALAND STANDARD ON RISK MANAGEMENT

Taking a risk: it isn’t all bad• Risk taking is positive, not implicitly negative • We take risks not to avoid harm, but to

achieve benefits and gains• Taking risks is a normal unavoidable

everyday necessity• Taking controlled, informed risks is a sensible

and everyday essential part of life• The higher the risk the higher the reward• Without risk there is no progress.

MANAGING RISK RISK• We all manage risk consciously or unconsciously

- but rarely systematically• Managing risk involves both threats and

opportunities• Managing risk requires rigorous thinking• Managing risk means forward thinking• Managing risk requires accountability in decision

making• Managing risk requires communication• Managing risk requires balanced thinking• RM provides a framework to facilitate more

effective decision making

Corporate GovernanceThe way in which an organisation is governed and controlled in order to achieve its objectives. The control environment makes an organisation reliable in achieving these objectives within an acceptable degree of risk.It is the glue which holds the organisation together in pursuit of its objectives while risk management provides the resilience.

Corporate GovernanceAs I look back on my career as an independent director, I realise that my efforts were mostly futile.Management gave us reams of information about past performance and we dutifully discussed it. We were looking at the wrong information and asking the wrong questions. We should have focussed on the future and questioned the strategy and competence of management to execute it. The board did not wake up until it was too late

Guidance for Directors - Dealing with risk in the boardroom, Canadian Institute of Chartered Accounts, 2000

Risk Management as Defined in AS/NZS 4360:2004

“THE CULTURE, PROCESSES AND STRUCTURES THAT ARE DIRECTED TOWARDS REALISING POTENTIAL

OPPORTUNITIES WHILST MANAGING ADVERSE EFFECTS.”

Structure Direction

MONITOR

&

REVIEW

COMMUNICATE

CONSULT

1. Strategic Ct

2. Identify Threats

7. Manage the Risk

ASSESS

3. Analyze 4. Assess

5. Assess/

Processes Culture Communication RisksOpportunities

COMMUNICATE

&

CONSULT

MONITOR

&

REVIEW

ESTABLISH THE CONTEXT

ANALYSE RISKS

EVALUATE RISKS

TREAT RISKS

The External ContextThe Internal ContextThe Risk Management ContextDevelop Criteria & Define the Structure

Identify optionsAssess optionsPrepare and Implement treatment optionsAnalyse & evaluate residual risk

Identify existing controlsDetermineLikelihood

DetermineConsequences

Determine Level of Risk

Compare with criteria?Set priorities

Treat Risks NOYES

What can happen, when, where, how & whyIDENTIFY RISKS

RM is everybody’s RM is everybody’s business

• RM is not just the responsibility of management

• For RM to be effective it must be implemented by every person in the organisation

• RM must become an integral part of the organisational culture

• The risk makers and risk takers must be the risk managers.

Communicate and consult - at all steps

Step 1 : Establish the Context• external context• internal context• risk management context• risk criteria (i.e. threshold levels)• define the structure

Step 2 : Identify Risks• what can happen, when, where and how• identify key processes, tasks, activities• recognise risk areas• define risks• categorise risk

Step 3 : Analyse Risks• identify controls• determine likelihood• determine consequence/impact• determine level of risk

Step 4 : Evaluate Risks• identify tolerable/unacceptable risks (referring risk rating against risk criteria)• prioritise risks for treatment

Step 5 : Treat Risks

Step 6 : Monitor and Review Risks• process• environment• organisation• strategy• stakeholders

Accept/Retain• based on judgement or documented procedures/policy

Avoid• consider discontinuing or avoiding activity• consult• risk treatment preferable to risk aversion

Reduce consequence• Business Continuity Plans• contractual arrangements• public relations

Share• insurance• outsourcing

Reduce likelihood• controls• process improvement• training & education• policies and communication• audit and compliance

Communication & Consultation in the risk management process

COMMUNICATE & CONSULTCOMMUNICATE & CONSULT

• ANY TWO-WAY DIALOGUE BETWEEN STAKEHOLDERS

• DEVELOP COMMUNICATION STRATERGY AT THE CONTEXT STAGE

• ENSURE STAKEHOLDERS PERCEPTATION OF RISK IS ADDRESSED

ACCOUNTABILITY

SUPERVISIONGOVERNANCE

STRATEGICSTRATEGICMANAGEMENTMANAGEMENT

MANAGEMENTEXECUTIVE

MANAGEMENTDECISION & CONTROL

OPERATIONAL MANAGEMENT

Potential greaterfuture role of riskmanagement

Traditional and currentrisk managementapplication

Risk Management’s Role in Corporate Governance

Adding Value

Preserving Value

Taking Risks

Managing Risk

STRATEGIC FRAMEWORK FOR MANAGING RISKS

CommunicationConsultation

RiskRisk

Business Processes

Business Strategies

COMMUNICATE

&

CONSULT

MONITOR

&

REVIEW


ANALYSE RISKS

EVALUATE RISKS

TREAT RISKS


Tolerate Risks NO

YES

IDENTIFY RISKS

ESTABLISH ESTABLISH THE THE CONTEXT• Objectives and environment• Relevant Legislation• Stakeholder identification & analysis• Government Policy• Corporate Policy• Management Structures• Community Expectations• Criteria• Consequence criteria.

Adapted from Johnson & Scholes, 1993, p.61

An Organisation’s

Paradigm

Symbols

PowerStructures

OrganisationalStructures

ControlSystems

Rituals &Routines

Stories(business

experiences)

Organisation risk personality or propensity

Risktolerance

rangeAversion Excessive

appetiteDenial

Dislike

Disinclination

Indecision

Irresponsible

Impulsive

Strategicmanagement

decision

Corporate culture

ORGANISATIONAL ORGANISATIONAL RISK CRITERIA CRITERIA

Board of DirectorsApproves policy

Approves risk limitsApproves risk tolerance

Provides oversight

Risk Management CommitteeMonitor - Coordinate - Teach

Measure - BenchmarkReport to Board

Enforce

Line ManagersIdentify risk

Propose risk limitsControlReport

ExecutiveManagement

Establishes policyEstablishes risk limits

Establishes risk tolerancesReports to Board

Enforces

COMMUNICATE

&

CONSULT

MONITOR

&

REVIEW


ANALYSE RISKS

EVALUATE RISKS

TREAT RISKS

Treat Risks NOYES

What can happen, when, where,how & why

IDENTIFY RISKS

Risk IdentificationA risk is associated with• A source• An event or incident• A consequence, outcome or impact• A cause (what & why)• Controls and their level of effectiveness

and application• When & where could a risk occur.

Identification of Sources of Risk

• personnel/human behaviour • management activities and controls• economic circumstances• natural and unnatural events• political circumstances• technology/technical issues• commercial and legal relationships• public/professional/product liability• the activity itself.

Risk Management Methods

HB436:2004 Risk Management GuidelinesA Companion to AS/NZS 4360:2004

Comprehensive identification using a well-structured systematic process is critical, because a risk not identified at this stage may be excluded

from further analysis.

More Significantly

A well-structured process leads to quality collection of data, as strongly emphasized by AS/NZS 4360:2004.

COMMUNICATE

&

CONSULT

MONITOR

&

REVIEW


ANALYSE RISKS

EVALUATE RISKS

TREAT RISKS




Treat Risk NOYES

IDENTIFY RISKS

Risk Analysis

• Purpose– Separate minor risks from major– Provide data to assist in evaluation and treatment

• Preliminary Analysis– Excluded Risks where possible should be listed

Where possible confidence limits placed on estimates

Best available information sources used

Examples of Qualitative Analysis

• Checklists and Questionnaires• SWOT Analysis• Physical Inspections• Analysis Based on Records of the

Operation• Flowcharts • Event trees.

TRANSFORMATION PROCESSINPUTS OUTPUTS

Intrinsic/ExtrinsicRewards

Resources(Skills & Experience)

OrganisationalEnvironment(Internal/External)

Power(Authority,Knowledge,Delegations)

I m p a c t s

Influences attitudes,approach and process Influences

efficiency

Influences attitudes and approach

Affects Affects

Affects

Affects

Resources(Financial)

Affects

Stakeholders(External/Internal)

Influences

CulturalWeb

Source: HD 240:2000

S.W.O.T. ANALYSIS

Examples of Quantitative Analysis

• Computer Modelling• Fault Tree Analysis• Hazard Indices• Statistical Analysis.

Examples of Likelihood Tables

1Rare

2Unlikely

3Possible

4Likely

5Almost Certain

Likelihood Ex. 1

1Almost Never

2Low Potential

3Potential

4Common

Likelihood Ex. 2

1Low Frequency

2Moderately Frequent

3High Frequency

Likelihood Ex. 3

It Is up to each organisation to define the parameters that allow users to assess likelihood

Examples of Consequence Tables

1Insignificant

2Minor

3Moderate

4Major

5Catastrophic

Consequence Ex. 1

1Negligible

2Medium

3Severe

4Critical

Consequence Ex. 2

1Insignificant

2Moderate

3Significant

Consequence Ex. 3

It Is up to each organisation to define the severity of impact that allow users to assess consequence

Examples of Risk Rating Tables

1Very Low

2Low

3Tolerable

4High

5Very High

Risk Rating Ex. 1

1Low

2Moderate

3Significant

4Extreme

Risk Rating Ex. 2

1Low

2Medium

3High

Risk Rating Ex. 3

It Is up to each organisation to define the terminology for risk rating levels, and how this is set in the risk rating

matrix.

Example Of A Risk Rating Matrix

AS/NZS4360 – 2004 emphasises that organisations tailor the criteria that drives assessment and analysis to suit the nature and business environment of their

operations.

COMMUNICATE

&

CONSULT

MONITOR

&

REVIEW


ANALYSE RISKS

EVALUATE RISKS

TREAT RISKS

Compare against criteria?Set priorities

Treat risks NOYES

IDENTIFY RISKS

Risk Evaluation

Comparing levels of risk found in analysis with previously established criteria

Consider• Objectives of project and opportunities

• Tolerability of risks to others

• Whether a risk needs treatment

• Deciding whether risk can be accepted

• Whether an activity should be undertaken

• Priorities for treatment

AVOIDRISKS

REDUCELIKELIHOOD

REDUCE

ACCEPTABLEOR

TOLERABLELEVEL OF RISK

REDUCE CONSEQUENCES

ALMOST CERTAIN

LIKELY

MODERATE

UNLIKELY

RARE

0 INSIGNIFICANT MINOR MAJOR CRITICAL EXTREME

SEVERITY/IMPACT/CONSEQUENCES

FREQ

UENC

Y/LI

KELI

HOOD

Risk TolerabilityRISK TOLERABILITY

Risk Tolerability

AVOIDRISKS

REDUCELIKELIHOOD

REDUCE

TOLERABLELEVEL OF RISK

REDUCECONSEQUENCES

CERTAIN 1

ALMOST CERTAIN

LIKELY

POSSIBLE

UNLIKELY

0 $1,000MILD


FREQ

UENC

Y/LI

KELI

HOOD

NOT POSSIBLE$100,000

MODERATE$1M

SEVERE$100M

DISASTEROUS TOTAL

RISK TOLERABILITY

Risk Tolerability

AVOIDRISKS

REDUCELIKELIHOOD

REDUCE

TOLERABLELEVEL

OF RISK

REDUCE CONSEQUENCES


FREQ

UENC

Y/LI

KELI

HOOD

CERTAIN 1

ALMOST CERTAIN

LIKELY

POSSIBLE

UNLIKELY

0 $1,000MILD

NOT POSSIBLE$100,000

MODERATE$1M

SEVERE$100M

DISASTEROUS TOTAL

RISK TOLERABILITY

Risk magnitude Intolerable Region

Risk cannot be justified except in extraordinarycircumstances

Tolerable only if risk reduction is impracticable or if its cost is greatlydisproportionate to the improvement gained

Broadly acceptable region “de minimus” risk

Necessary to maintain assurancethat the risk remains at this level

AsLowAsReasonablyPracticable

Tolerable if cost of reductionwould exceed the improvementsgained

LEVEL OF

RISK

COMMUNICATE

&

CONSULT

MONITOR

&

REVIEW


ANALYSE RISKS

EVALUATE RISKS

TREAT RISKS

Identify options; Assess options;Prepare and Implement treatment options; Analyse & evaluate residual risk

Treat risksNOYES

IDENTIFY RISKS

COST OF REDUCING RISK ($)

LEVE

L O

F R

ISK

(RIS

K V

ALU

E)

}

} }

}}

SATISFACTORY

MOST COST EFFECTIVE

ACCEPTED PRACTICE

ABSOLUTE MINIMUM

BEST ACHIEVABLE

THE TRADE-OFF BETWEEN LEVEL OF RISK AND COST OF REDUCING RISK B.F.Hough 1985

OVERALL

LEVEL

OF

RISK CUMULATIVE COST OF RISK REDUCTION MEASURES

COST OF RISK REDUCTION MEASURES

IMPLEMENT

USEJUDGEMENT UNECONOMIC

Risk Treatment• reduce

– likelihood– consequences

• business continuity management• sharing in full or in part (this creates a new risk)

• avoid (but not because of aversion)

• retain residual (but not by default)

REDUCE LIKELIHOOD

Risk prevention• compliance programmes• inspection & process controls• security devices, alarms and

processes• preventive maintenance• training & education.

REDUCE REDUCE CONSEQUENCES

Risk reduction• medical & first aid procedures• off site data & information storage• fraud control planning• fire suppression.

Business Continuity Management

• emergency evacuation plans• off site data & information storage• business contingency plans• business relocation plans• business resumption plans• review, reassess and revise plans.

SHARING RISKContractual transfer of legal

responsibility• sub contracting of hazardous processes• exclusion clauses• outsourcing• partnerships & joint venturesInsurance

AVOIDReduce probability of loss to zero• cease activity• closure of facility• sell business.

RETAIN RESIDUAL RISKS

Losses funded from general operating expenses

• vital to record all incidents• ensure retention is not due to

failure to identify.

Treatment Options• Consider• Opportunities created by risk• Cost of implementation vs benefits • Extent of risk reduction vs benefits• Criteria of acceptability• Rare but severe risks• Risk perception and communication.

In general Costs of managing risk commensurate with benefits Adverse impacts As Low As Reasonably Achievable

Treatment PlansDocument how options implemented

Responsibilities

Schedules

Expected outcomes

Budgeting

Performance measures

Review processes

COMMUNICATE

&

CONSULT

MONITOR&REVIEW


ANALYSE RISKS

EVALUATE RISKS

TREAT RISKS


Identify optionsAssess optionsPrepare and Implement treatment optionsAnalyse & evaluate residual risk




Compare with criteria?Set priorities

Treat Risks NOYES

What can happen, when, where, how & whyIDENTIFY RISKS

AS/NZS 4360:2004Extending The Process

• The role of assurance activity, not just as a risk control, but as part of ‘Monitor and Review’ should be developed.

• This should go further than just audit.

Other interested stakeholders can also benefit from the risk process, such as quality assurance, safety &

environment management. The latest update is facilitating linkages between different stakeholders.

MONITOR & REVIEW• RM is a journey not a destination• What may be of minor significance

today may be the disaster of tomorrow

• Review is an integral part of the risk management process

AS/NZS 4360:2004Role Of Assurance Activity

Recording the Risk Management Process

• demonstrates process conducted properly

• provides a record of risks• provides decision makers with plan for

approval and implementation• provides accountability tool• facilitates monitoring and review• provides an audit trail• enables sharing and communication of

information.

Establishing Effective Risk Management

• Board & Management commitment• Risk management planning• Culture change• Accountability & authority• Customise to organisational paradigm• Ensure adequate resources• Board monitoring and review of risk

management effectiveness

POLICY DEVELOPMENT

• NO MORE THAN ONE PAGE• MUST BE SIMPLE, ACHIEVABLE,

UNDERSTANDABLE & AUDITABLE• THE RISK MAKERS AND THE RISK

TAKERS MUST BE THE RISK MANAGERS• SERVES AS A PLATFORM FOR

ORGANISATIONAL GUIDELINES

RISK MANAGEMENT FRAMEWORKRisk Management ProcessesThe framework will be implemented by each business unit in

accordance with the policy by:

• Maintaining documented business risk profiles using analytical techniques to identify, evaluate, and manage risks in compliance with AS/NZS 4360:2004

• Communication of risk management issues, where appropriate, to all relevant stakeholders

“The culture, processes and structures that are directed towards realising potential opportunities

whilst managing adverse effects.”

Processes

MONITOR

&

REVIEW

COMMUNICATE

CONSULT

1. Strategic Ct

2. Identify Threats

7. Manage the Risk

ASSESS


5. Assess/

RISK MANAGEMENT FRAMEWORK

Risk Management Structure & Responsibility

The Board approves the corporate risk management policy and framework.

The Board Risk Management Committee reviews the effectiveness of the policy.

All managers and staff are accountable for managing risk.

The Risk Management “Champion” is responsible for facilitating the risk management program and reporting to the Board Risk Management Committee.

“The culture, processes and structures that are directed towards realising potential opportunities

whilst managing adverse effects.”

Structure Direction

“STRATEGIC MANAGEMENT OF RISK”

“Managing risk is a way of confidentlytaking the right risks

and then managing the outcomes for success”

RisksOpportunities

Processes

Risk Management and the Strategic Planning Cycle

Review& Change

MonitorPerformance

• Performance• Capability• External Environment

Execution/Integration

• Manage Tactics• Manage Tasks• Manage Risks

Planning

• Future State/ End Vision• SWOT, Opportunities and Risks• Strategy & Tactics

• Strategic Learning• Strategic Alignment• Strategic Intelligence

Jan

MaySep

Review performance

Conduct risk profiling

Strategic planning

Determine risk treatment actions

Budget and business planning

Implement and monitor treatment actions

The Operational Risk Management Cycle

RISK MANAGEMENT BENEFITS • Fewer surprises• Exploitation of opportunities• Improved planning, performance and

effectiveness• Economy and efficiency• Improved stakeholder relationships• Improved information for decision making• Enhanced reputation• Director protection• Accountability, assurance and governance• Personal wellbeing.

RISK MANAGEMENT OUTCOMES RM leads to• more informed decision making• business continuity planning• minimising disruptions• better utilisation of resources• strengthening of the culture of

continuous improvement• best practice• a quality organisation

YOU DO NOT HAVE TO DO IT!!

SURVIVAL IS NOT

COMPULSORY

The greatest risk of all

is to take no risk at all!

RisksOpportunities

Structure Direction

MONITOR

&

REVIEW

COMMUNICATE

CONSULT

1. Strategic Ct

2. Identify Threats

7. Manage the Risk

ASSESS


5. Assess/

Processes Culture Communication

In pursuit of performanceA raceA journey ………. Building Value

The Journey Continues

AS/NZS 4360:2004 and its accompanying Handbook provide generic guidance on how to embed risk management, and introduces the concept of “positive” risk to help you on

the way.

As-NZS 4360-2004 Risk Management

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