Operational risk is the potential for loss or negative outcomes resulting from inadequate or failed internal processes, systems, people, or external events within an organization. It is a type of risk that organizations face while conducting their daily business operations. Operational risk is inherent in all industries, and it can have financial, legal, and reputational consequences.
Some examples of operational risk include:
- Human errors: Mistakes made by employees, such as incorrect data entry or miscommunication.
- System failures: Technology or infrastructure breakdowns, like a computer crash or power outage.
- Fraud: Intentional wrongdoing by employees, customers, or third parties, such as embezzlement or theft.
- Regulatory non-compliance: Failure to adhere to laws, regulations, or industry standards, which can lead to fines, penalties, or legal actions.
- Natural disasters: External events like floods, earthquakes, or hurricanes that can disrupt operations or damage property.
- Vendor or supplier issues: Problems with third-party relationships, such as supply chain disruptions or contract disputes.
How can Organization manage operational-risk ?
Organizations can manage operational risk by implementing robust risk management frameworks, which include identifying, assessing, monitoring, and mitigating potential risks. This may involve developing and enforcing policies and procedures, investing in employee training, implementing strong internal controls, and employing technology solutions for risk monitoring and reporting.
- Identify risks: Conduct a thorough analysis of the organization’s operations to identify potential risks. This may include reviewing business processes, systems, people, and external factors that could lead to operational failures or losses.
- Assess risks: Evaluate the identified risks based on their likelihood and potential impact. This can help prioritize the most significant risks and allocate resources accordingly.
- Develop policies and procedures: Establish clear policies and procedures to guide employees and reduce the likelihood of errors, fraud, or non-compliance. These policies should be aligned with the organization’s goals, objectives, and risk appetite.
- Implement controls: Put in place internal controls to detect and prevent operational risks. These controls may include segregation of duties, approval processes, access controls, and regular reviews of key performance indicators (KPIs).
- Train employees: Provide ongoing training and education to ensure that employees are aware of the organization’s policies, procedures, and controls. This can help reduce human errors and promote a strong risk culture.
- Monitor and review: Regularly monitor and review the effectiveness of the risk management framework. This may involve tracking risk indicators, conducting audits, and reviewing risk reports. Use the findings to identify areas for improvement and update policies and procedures as needed.
- Establish contingency plans: Develop plans for responding to and recovering from operational disruptions, such as system failures or natural disasters. This can help minimize the impact of these events on the organization’s operations and reputation.
- Communicate risk information: Ensure that relevant risk information is communicated to stakeholders, including employees, management, and the board of directors. This can help promote transparency and accountability within the organization.
- Leverage technology: Utilize technology solutions to automate processes, enhance monitoring, and support decision-making. This can help reduce human errors and improve the overall effectiveness of the risk management framework.
- Continuous improvement: Regularly evaluate and update the operational risk management framework to keep pace with changes in the organization’s environment, regulatory requirements, and industry best practices.
Next Step!
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About the Author
Dr. Dawkins Brown is the Executive Chairman of Dawgen Global , an integrated multidisciplinary professional service firm .
Dr. Brown earned his Doctor of Philosophy (Ph.D.) in the field of Accounting, Finance and Management
He has over Twenty Six (26) years experience in the field of Audit, Accounting, Taxation, Finance and management . Starting his public accounting career in the audit department of a “big four” firm (Ernst & Young), and gaining experience in local and international audits, Dr. Brown rose quickly through the senior ranks and held the position of Senior consultant prior to establishing Dawgen.
He is a member of Chartered Management Institute (CMI), member of the Institute of Internal Auditors (IIA) , member of the Association of Certified Fraud Examiners (ACFE), member of Information Systems Audit and Control Association ( ISACA ) member of American Planning Association (APA) , member of the American Finance Association (AFA) and member of Association of Certified E-Discovery Specialists (ACEDS).
As Executive Chairman of Dawgen Global , he is responsible for the strategic guidance and strategy execution of several entities within the Dawgen Global Group.
