CGMA TOOLs

How to
communicate risks
using a heat map

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CONTENTS

Two of the world’s most prestigious accounting bodies,

AICPA and CIMA, have formed a joint-venture to establish
the Chartered Global Management Accountant (CGMA)
designation to elevate the profession of management
accounting. The designation recognises the most talented
and committed management accountants with the discipline
and skill to drive strong business performance.

Introduction 2

Initial Risk Assessment: Potential Impact and Likelihood 3

of Occurrence

Defining Your Metrics 4

Quantifying Potential Risk Impacts 5

1
Introduction

Managing and communicating risks have become crucial tasks in

today’s economy. COSO’s Enterprise Risk Management—Integrated
Framework provides a way for organisations to incorporate risk
management into their day-to-day operations. Enterprise risk
management (ERM) is a structured enterprise-wide view of risks
affecting an organisation. An ERM process is shown in figure 1.

Figure 1: ERM Process

Self-assessment
Internal audit Monitor
Performance

Plan Implement
Mitigation Identify
Risk Owner Risk
Strategy Risk
Oversight
Committee

Accept
Share Plan
Mitigate Response Assess Potential Impact
Avoid Strategy Risk Likelihood

Organisations use a variety of ways to identify potential impact and likelihood of occurring. This tool,
entity-wide risks (eg, surveys, workshops, risk factors a risk heat map, is used in the risk assessment process
disclosed in financial reports, etc.). When the entity- and is a great for facilitating communication.
wide risks are identified then each risk is assessed for

2 How to Communicate risks using a heat map

Initial Risk Assessment: Potential Impact
and Likelihood of Occurrence

In the risk assessment process, visualisation of risks using a heat

map presents a big picture, holistic view to share while making
decisions about the likelihood and impact of entity-wide risks within
an organisation. A heat map is a two-dimensional representation
of data in which values are represented by colours and can be
designed from being simple (qualitative only: 3x3) to very complex
(both qualitative and quantitative: 5x5). It is important to carefully
design the heat map so that the terms used to describe “potential
impact” and “likelihood” are what is used in your organisation.

When a heat map is used in workshops to assess assessment shown in figure 2. The horizontal axis
the risks by individual managers, the discussions shows the likelihood of a given risk occurring, that
can be enhanced, for they can see how risks in one is, the likelihood that the risk will materialise and
part of the organisation impacts another part of become an issue. The vertical axis shows the potential
the organisation. The resulting heat map can also impact that the risk will have on the objective or goal
be used to communicate the risk assessment to not being achieved should it materialise. The colours
senior management, audit committees, and boards are risk areas (eg, green coloured boxes are in the low
of directors. The heat map also enables a business area; yellow boxes are in the medium area; red boxes
conversation about mitigation alternatives. in the high area). The risks are plotted on the heat map
based upon the “Potential Impact” and “Likelihood” of
Organisations may want to start out by using occurring (Risk = Impact × Probability/Likelihood of
a qualitative only (3x3) heat map to do the risk occurring).

Figure 2: Enterprise Risk Assessment Scale (Qualitative Only: 3x3)

High 3 6 9
Potential Impact

Medium 2 4 6

Low 1 2 3

Remote Possible Probable

Likelihood

3
Defining Your Metrics

As organisations gain experience doing risk assessments, they may

want to build on their qualitative heat map by adding definitions
to “Potential Impact” and “Likelihood” that quantify the terms. For
“Potential Impact,” definitions for what is meant by High, Medium,
and Low and for “Likelihood,” percentages could be added for
Remote, Possible and Probable as shown in figure 3.

Figure 3: Enterprise Risk Assessment Scale (3x3)

High 3 6 9
Material: difficult to achieve
multiple objectives
Potential Impact

Significant: more challenging

to achieve some objectives Medium 2 4 6
Inconsequential: may have
some undesirable outcomes

Low 1 2 3

Remote Possible Probable

Likelihood

% ranges 0-20% >20–60% >60–100%

The percentages, metrics, and definitions would come understands what they are and how they are used in
from your organisation’s policies and what is used the risk assessment process. This common language
in your organisation. It is important to get approved is an added benefit in the communication process of
terminology for the percentages, metrics, definitions, assessing risks.
and terms so that everyone in the organisation

4 How to Communicate risks using a heat map

Quantifying Potential Risk Impacts

One can continue expanding on the “Potential Impact” as shown

in the following 25 point assessment scale (5x5) by adding
Earnings Per Share (EPS) or Cash Equivalents. For example two
cents per share may equate to $3 million, which may further
define a “Significant” rating. This heat map may be more precise,
however, the main point is to hold discussions about the risks
facing the organisation, so that management can either mitigate
the risk (protecting value) or seize the opportunity (value creation)
in alignment with its risk appetite. Please refer to figure 4 as an
example.

Figure 4: Enterprise Risk Assessment Scale (5x5)

Very Material: may affect

> $ ____ million (m): company's ongoing existence Extreme 15 19 22 24 25
Material: difficult to achieve
> $ ____ m–$ ____m: multiple objectives
High 10 14 18 21 23
Potential Impact

Significant: more challenging

> $ ____ k–$ ____m:
to achieve some objectives
Medium 6 9 13 17 20
> $ ____ k–$ ____k: Inconsequential: may have
some undesirable outcomes

< $ ____k: Trivial: no noticeable impact Low 3 5 8 12 16

on objectives

High => $0.000 EPS* or Cash and Equivalents Negligible 1 2 4 7 11

Low => $0.000 EPS or Cash and Equivalents Remote Unlikely Possible Likely Probable
EPS* = Earnings Per Share Likelihood
% ranges 0-10% >10–25% >25–50% >50–90% >90–100%

Figure 5, on the next page, shows a sample heat

map for risks that were primarily grouped together
according to their interrelated nature and effect on
operations, not on all of the identified risks for a
company.

5
Figure 5: Enterprise Risk Assessment Scale (5x5)

Very Material: may affect

> $75m: company's ongoing existence Extreme

Material: difficult to achieve

> $1.95m–$75m: multiple objectives
High

Potential Impact
Significant: more challenging 13
> $340k–$1.95m: 14
to achieve some objectives 11
Medium 12
> $25k–$340k: Inconsequential: may have 10
some undesirable outcomes 15

Trivial: no noticeable impact Low 16

< $25k:
on objectives

High => $0.025 EPS Negligible

Low => $0.005 EPS Remote Unlikely Possible Likely Probable

Risk Legend
Likelihood
(10) Obsolence Risk % ranges 0-10% >10–25% >25–50% >50–90% >90–100%
(11) Customer Concentration or Distribution Risk
(12) Manufacturing Risk
(13) NPI Risk
(14) Supply Chain Risk
(15) EH&S Risk
(16) Physical Asset Risk

Potential risk management gaps and

follow-up:
• A more accurate sales forecasting function was a
recurring theme thought to be a key risk indicator
associated with several of these interrelated risks.

• The perception of supply chain risk increased with

the vertical supply chain as viewed by downstream
business units.

• The likelihood and potential impact of risk events

appeared highest with the new product introduction
(NPI) process, indicating that opportunities may
exist in how the company is structured and manages
NPI.

• Environmental Health & Safety (EH&S) and

physical asset risk have robust, dedicated functions
responsible for risk management and were considered
fairly well managed in the United States. However,
some uncertainty exists among participants as to risk
ownership and how mature these functions are in
Asia Pacific locations.

6 How to Communicate risks using a heat map

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on behalf of AICPA, CIMA, the CGMA designation

The information herein was adapted from Risk Assessment For Mid-sized Companies: Tools for Developing a Tailored
Approach to Risk Management, by Scott McKay, CPA, CFE, CIA, CCSA, Copyright © 2011 by the American
Institute of Certified Public Accountants, Inc.
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www.cgma.org

January 2012

11676-359

The Association of International Certified Professional

Accountants, a joint venture of AICPA and CIMA,
established the CGMA designation to elevate the
profession of management accounting globally.