Chapter 14: Key Risk Indicators Flashcards
What is the definition of a Key Risk Indicator (KRI)?
KRIs are metrics used to monitor the level of exposure to risks and effectiveness of controls within an organisation.
Why are KRIs important?
What do they help?
- Identify and mitigate risks before they materialise
- Support regulatory compliance and enhanced decision making
What is the purpose of Key Risk Indicators?
To provide early warning signs……support what?
To provide early warning signs of potential risk events and to support proactive risk management.
What is an “Exposure Indicator”?
What does the capture and give an example?
- Monitors changes in an organisations exposure to risk
- E.g. Changes in market volatility
What is a “Failure Indicator”?
What does this capture and give an example?
- Indicate failing performances or control weaknesses
- E.g. Unconfirmed transactions in the back office
What is a “Stress Indicator”?
What does this capture and give an example?
- Captures the stretch in an organisations resources
- E.g. Rise in transactions per staff member
What is a “Casual Indicator”?
What does this focus on give an example?
- Focuses on the causes and drivers of key risks
- E.g. Financial pressure as a driver for internal fraud.
How do KRIs help translate risk appetite within an organization?
Defining it at what level?
By defining it at the board level and possibly at the operational/business unit level.
What is the difference between leading and lagging KRIs?
lagging is so slow and behind!!!!
Leading KRIs focus on risk drivers to flag risks before they occur, while lagging KRIs track events that have already occurred
What responsibility does the board have according to the UK Corporate Governance Code (2010)?
Very simple joe.
To define the firm’s risk appetite and ensure effective risk management and internal controls.
What are the features of effective leading KRIs?
Early, specific, relevant, data owned by who?
They are early warning devices, risk-specific, business-relevant, data-driven, and owned by business units.
What steps are involved in the implementation of KRIs?
5, thing from the very begining to end.
- Identify relevant metrics
- Set thresholds
- Assign responsibilities
- Regularly review
- Update KRIs.
How should KRIs be designed to reflect BEICF (Business Environment and Internal Control Factors)?
They should be risk-sensitive, provide management with information on the risk profile, represent meaningful drivers of exposure, and be used across the organization.
What is the significance of business ownership in KRI design?
Why is this the case?
KRIs should be used and owned by business leaders to ensure governance and data quality.
How can KRIs be cost-effective?
What needs to outweigh what?
By ensuring the value of information outweighs the cost of data collection and using metrics already monitored.
What is the role of KRIs in risk identification and control?
Monitor what to ensure the business remains in line with what?
They monitor exposure to risks and assess the effectiveness of controls, ensuring the business operates within its defined risk appetite.
What are common risk drivers for internal fraud and IT disruption?
- Internal fraud: financial pressures, resentment, non-segregation of duties.
- IT disruption: overcapacity, overdue maintenance, rushed testing.
How should KRIs be validated?
Colours in where?
By tracking KRI colors in loss-reporting databases at the time of incidents to ensure they remain reliable and valuable.
What is the role of KRIs in proactive risk management?
Early?
They enable early identification and mitigation of risks, enhancing decision-making and operational resilience.
How can KRIs support decision-making?
Timley and relevant data.
By providing timely and relevant risk data that aids in making informed decisions.
What is the importance of regular review and update of KRIs?
To ensure they remain relevant and effective in the face of changing risk landscapes and business needs.
What is the benefit of integrating KRIs with enterprise risk management (ERM) systems?
It allows for seamless risk monitoring and reporting, enhancing overall risk management effectiveness.
What is the significance of dynamic KRIs?
They adapt to real-time changes in the risk environment, providing more accurate and timely risk assessments.
What is the role of KRIs in the context of a case study on preventing key man loss?
They help identify causal indicators like pay gaps and exposure indicators like the number of key people without trained substitutes, leading to improved staff retention.
