Risk Management

Question 1

What are the three levels of risk?

Answer 1

Strategic- long term and major impact

Managerial- arising from lack of managerial competence, information, or control

Operational- arising from day to day business

Question 2

What are the seven classifications of risks?

Answer 2

Hazard 
Operating
Financial
Commercial
Litigation 
Reputation
Compliance

Question 3

What is a checklist of 8 internal controls that can be used to identify weaknesses and/or recommend improvements?

Answer 3

Division of responsibilities- ensures transactions or decisions pass thru one set of hands - having an independent internal audit dept. is one aspect of this
Arithmetic/Accounting- ensures adequate systems to record and reconcile all data
Management- ensures managerial competence and that managers are sufficient in number
Personnel- ensures that staff are competent and sufficient in number
Supervision- ensures adequacy of ratio of supervisors to staff, supervision techniques and systems
Organizational- ensures that the organizational structure is not a source of risk, including rewarding performance
Authorization/Responsibility- refers to levels in organization where decisions can be taken
Physical - refers to custody and protection of assets and data

Question 4

What is the 3-component model to risk management?

Answer 4

1) information systems to monitor risks
a) Big Data monitoring transactions and trends
b) risk officers, committees, security patrols

2) preventative steps to reduce risk such as internal controls
3) contingent steps to respond to risk such as fire drills, stakeholder info, public relations plans, penalty clauses and contractual terms

Question 5

What are the 4 Risk Management strategies (TARA)?

Answer 5

Transfer - outsource, insure, hedge financial exposure, contractual documents place risk with counterparts

Avoid - don’t do it

Reduce - reduce probability/impact

accept/Absorb - residual risk, self insure

Question 6

Describe the aspects of effective corporate governance at the board level.

Answer 6

1) Board of Directors appointed by shareholders and responsible to shareholders for how they run the business
2) BoD must insure effective systems of control- (audit and risk committees should oversee this)
3) Board should provide direction and strategy for business
4) should be a nomination committee for board selection
5) should be a remuneration committee for senior management pay (which should be based on performance)
6) there should be a balance in the board between Executive Directors (those with mgmt responsibilities) and Non-Executive Directors (those who just advise and monitor)
7) there should be a division of responsibility between chairman who manages board and CEO who manages the firm
8) open participation and discussion (one person does not dominate, no group think)