How healthy is your risk appetite

As the leading international accountancy body, ACCA operates in a challenging environment: global, continually evolving and increasingly competitive.

Augmenting ACCA’s strong position in a worldwide market is ACCA’s well-respected research program, generating high-profile, high-quality, cutting-edge research with global focus, wide dissemination and strong emphasis on public policy influence and practical value.

This article contains findings from relevant research reports.

The credit crunch generated a great debate about risk appetite. ACCA explores what the phrase actually means.

In spite of the difficulties of defining risk appetite, a clear understanding of the acceptability of risk should help to prioritize actions and ensure a consistent approach across an organization, so it is worth making the effort.

One should not take risk assessments as fact but they should be an aid to good judgement. The following six suggestions should help make sense of it.

1. Past and future

Risk is about the future and while the past may be a poor guide to the future, history can repeat itself sooner than you think. Consider the behavioural issues, group think, the tendency for groups to take bigger risks. Consider the personality factors that affect the perception of risk. And try thinking creatively about some scenarios and whether they could happen to you.

2. Cause Vs Effect

Risks have causes. One cause can give rise to many risks and several causes can conspire to create a bigger risk. It is not a binary linear process. It is therefore unwise to rely on a risk register.

When you are considering risks for your organization’s appetite for and tolerance of risk, think about whether you are considering the cause of risk or effect of risk.

Once again think about scenario’s; how can causes conspire?

3. Top Vs Bottom

Is the understanding about risk and the willingness to take it, the same at the top and at the bottom of the organization? It should be. Beware of Silos and link risk, taking to strategy.

4. Quality First

Focus on qualitative considerations first.

You can add quantities later but it is important to have a shared understanding of risk and how to manage it before risking being blindsided by the spurious accuracy of numbers.

5. Risk Reward

No one takes a risk just for the sake of it. People do it because of some perceived reward or benefit, even if it is simply the thrill derived from it.

Why do organizations consider risk appetite and practice risk assessment without comparing the risk of something with it’s potential benefits? Benefit as well as risk can be considered in terms of impact and probability.

Bear in mind that while you may want people to manage risk at a corporate level, people consider risk at a personal level.

Personal risks and benefits may be very different from corporate risks and benefits as banks have learned to the taxpayers cost.

6. Keep it simple

Finally, keep it simple, at least at first. It is in everyone’s interest to have a clear understanding of objectives, the risks affecting them, their willingness to take risks in pursuit of gain and how those risks can be kept within acceptable limits.

Start simply, using common sense in a way that is appropriate to your business, not someone else’s and ensure that everyone understands it.

(ACCA)