Assessing Organistion’s Inherent Risk

What is inherent risk? Why do I need to know my organisation’s inherent risk level? How do I calculate my organisation’s inherent risk exposure?

This article provides you with answers to the above questions.

What

Inherent risk provides a baseline understanding of the level of risk present before any controls are implemented. It helps organisations gauge the natural risk level they are exposed to in a particular environment or activity.

How

Identify the risks – Consider the environment, activity, or process you are assessing. Identify the risk typologies applicable to your business. This can include operational, financial, compliance, strategic, or other types of risks.

Assess the likelihood – Determine how likely each identified risk is to occur. This could be based on historical data, industry standards, or expert judgment. Assess the factors that might increase or decrease the likelihood of the risk occurring.

Evaluate the impact – Determine the potential consequences if the risk materialises. Consider financial loss, reputational damage, operational disruption, etc.

Combine likelihood and impact – Combine the likelihood and impact to assess the overall inherent risk. This can be done using a risk matrix, where risks are plotted based on their likelihood and impact to produce a risk rating, e.g., high, medium, or low.

This process helps to understand the inherent risk level before any controls or risk management strategies are applied. Hence, inherent risk should be subjective to the extent possible and supported by data and facts.

Why

Knowing the inherent risk allows decision-makers to make informed choices about where to focus resources and attention. By accurately assessing inherent risk, your organisation can design and implement controls appropriate to the level of risk. An accurate assessment helps prioritize which risks need immediate attention and which are less critical, given that resources such as time, money, and personnel are often limited. An accurate inherent risk assessment helps allocate these resources effectively, ensuring that high-risk areas receive adequate attention while avoiding over-investment in low-risk areas.

Thus, understanding inherent risk helps balance the cost of implementing controls against the potential impact of risks.

In summary, accurately assessing inherent risk is fundamental to effective risk management. It enables organizations to make informed decisions regarding risks, allocate resources wisely, comply with regulations, and protect their long-term success and reputation.

We at Ingenia Consultants Pte. Ltd. provide initial and ongoing support to our clients to set up practical enterprise-wide risk management frameworks proportional to the size and scale of their operations. This ensures timely identification and mitigation of risks per the organization’s risk appetite.

For any further information, please contact:
Vijay Bharadwaj
Director
Ingenia Consultants Pte. Ltd.
vijay.bharadwaj@ingenia-consultants.com