RISK

MANAGEMENT
WHAT IS RISK?
 GENERAL DEFINITION

Risk is the possibility of something

undesirable occurring, which can lead to
loss, injury, or other adverse circumstances
 ISO GUIDE 73 ISO 31000

Effect of uncertainty on objectives. Note

that an effect may be positive, negative, or a
deviation from the expected. Also, risk is
often described by an event, a change in
circumstances or a consequence.
 INSTITUTE OF RISK
MANAGEMENT (IRM)

Risk is the combination of the probability of

an event and its consequence. Consequences
can range from positive to negative.
HAZARD VS RISK
 HAZARD VS RISK

A hazard refers to a specific source of

potential harm, while risk is the probability
that this hazard will lead to harm. For
example, a sharp object in a workplace is a
hazard, and the risk is determined by how
likely it is that someone will be injured by it
TYPES OF RISKS
 1. COMPLIANCE OR
MANDATORY RISKS

Compliance risk, also known as integrity risk, is the

potential damage businesses face when they fail to
comply with industry standards, laws, and
regulations. This risk involves both financial penalties
and reputational damage.
 EXAMPLES OF COMPLIANCE OR
MANDATORY) RISKS

Data Breaches: Organizations that fail to protect

sensitive information can face severe penalties. For
instance, T-Mobile was fined $350 million in 2022
after a data breach exposed the private information
of over 77 million customers
 EXAMPLES OF COMPLIANCE OR
MANDATORY) RISKS

Corruption and Illegal Activities: Companies can

face significant legal repercussions for engaging in
corrupt practices. An example is Novus Hospice,
where the former CEO was convicted of healthcare
fraud and conspiracy, resulting in a sentence of over
13 years in federal prison
 2. HAZARD OR PURE RISKS

Pure risk, often termed absolute risk, is a type of risk

that cannot be insured. On the other hand, when it
comes to speculative risks, the likelihood of both loss
and gain is high.

Refers to situations where there are only two

possible outcomes: complete loss or no loss at all.
 EXAMPLES OF HAZARD
OR PURE RISKS

Natural Disasters: Events such as earthquakes,

hurricanes, floods, and fires can cause significant
damage to property and loss of life. For instance, a
hurricane can destroy homes and businesses,
leading to substantial financial losses without any
opportunity for pro
 EXAMPLES OF HAZARD
OR PURE RISKS

Health-Related Risks: Illnesses and health

conditions can lead to medical expenses and loss of
income. For example, a serious illness requiring
extensive treatment can deplete personal savings
and affect an individual's earning capacity.
 EXAMPLES OF HAZARD
OR PURE RISKS

Unemployment: The risk of losing a job is a personal

pure risk that can lead to financial instability and loss
of income without any chance for gain.
 3. CONTROL OR UNCERTAINTY
RISKS
Control or uncertainty risks refer to the potential
for risks to materialize due to inadequate or
ineffective internal controls within an
organization. These risks arise when the
measures in place to manage or mitigate risks fail
to operate as intended, leading to possible
negative outcomes.
 EXAMPLES OF CONTROL OR
UNCERTAINTY RISKS

Material Misstatements in Financial Reporting: If a

company lacks adequate internal controls over
financial reporting, it may result in material
misstatements. For instance, if there are no proper
checks in place for revenue recognition, a company
might overstate its revenues, leading to inaccurate
financial statements
 EXAMPLES OF CONTROL OR
UNCERTAINTY RISKS

Fraudulent Activities: Inadequate segregation of

duties can lead to fraud. For instance, if the same
employee is responsible for both processing
invoices and making payments, it increases the risk
of fraudulent activities going undetected
 4. OPPORTUNITY OR SPECULATIVE RISKS

Opportunity or speculative risks refer to

uncertainties that have the potential to yield
positive outcomes or benefits for an organization.
Unlike pure risks, which only involve the
possibility of loss, opportunity risks can lead to
gains if managed effectively.
 EXAMPLES OF OPPORTUNITY
OR SPECULATIVE RISKS

Stock Market Investments: Investing in stocks is a

classic example of speculative risk. Investors buy
shares with the hope that the stock prices will rise,
allowing them to sell at a profit.
 EXAMPLES OF OPPORTUNITY
OR SPECULATIVE RISKS

Real Estate Investments: Purchasing real estate

can be seen as an opportunity risk. Investors hope
that property values will increase over time,
providing a profitable return upon sale.
BUSINESS RISK
 BUSINESS RISK

Business risk refers to the potential for a company to

experience losses or inadequate profits due to
various uncertainties. These risks can stem from
both internal and external factors that threaten a
company's ability to operate effectively and achieve
its financial objectives.
CLASSIFICATION
OF BUSINESS
RISK
 1. FINANCIAL RISK

This type of risk pertains to the financial health of a business

and includes:

Credit Risk: The possibility that customers will default on

payments
Liquidity Risk: The risk of not being able to convert assets
into cash quickly enough to meet obligations
Currency Risk: Fluctuations in currency exchange rates
that can affect profitability, especially for international
transactions
 2. OPERATIONAL RISK

Operational risks arise from the day-to-day operations of a

business and can include

Process Risk: Inefficiencies or failures in business

processes that disrupt operations.
Supply Chain Risk: Disruptions in the supply chain that
can affect production and delivery.
IT Risk: Failures in technology systems that support
business operations
 3. COMPLIANCE RISK

Also known as regulatory risk, this involves the potential for

legal penalties or fines due to non-compliance with laws and
regulations. This is particularly relevant in highly regulated
industries
 4. STRATEGIC RISK

Strategic risks are associated with the overall strategy

of the business and can arise from changes in the
market environment, competition, or internal
misalignment with business goals. For example, failing
to adapt to market changes can jeopardize a
company's competitive position
 5. REPUTATIONAL RISK

This risk pertains to the potential loss of reputation due

to negative publicity, scandals, or poor customer
service. A damaged reputation can lead to loss of
customers and revenue
 6. CYBERSECURITY RISK

As businesses increasingly rely on digital operations,

the risk of data breaches and cyber-attacks has
grown. This includes threats to customer data and
financial information, which can erode consumer
trust
 7. ENVIRONMENTAL RISK

This type of risk involves potential negative impacts

on the environment that can affect business
operations, such as natural disasters or regulatory
changes related to environmental protection
 8. POLITICAL AND SOCIAL RISKS

These risks arise from political instability or changes

in government policies that can affect business
operations. Social risks may include societal changes
that impact consumer behavior or public perception
of a company.
 9. ETHICAL RISK

Ethical risks involve potential violations of ethical

standards, which can lead to loss of trust among
stakeholders and legal repercussions. This includes
issues like fraud and corruption.
QUESTIONS?
BUSINESS RISK
SIMULATION
1. GROUP FORMATION: DIVIDE PARTICIPANTS INTO SMALL
GROUPS, ASSIGNING EACH GROUP A UNIQUE SCENARIO
CARD.
2. RISK ASSESSMENT: EACH GROUP REVIEWS THEIR SCENARIO
AND IDENTIFIES THE POTENTIAL RISKS INVOLVED. THEY
SHOULD COMPLETE A RISK ASSESSMENT TEMPLATE THAT
INCLUDES:
RISK DESCRIPTION
BRIEF DISCUSSION OF THE SCENARIO
EXISTING CONTROL MEASURES
PROBABILITY AND IMPACT OF RISK
GROUP 1 -
HTTPS://WWW.GREENPEACE.ORG/AOTEAROA/STORY/UNBOTT
LING-THE-TRUTH-COCA-COLAS-ROLE-IN-PLASTIC-POLLUTION/

GROUP 2 -
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LOSING-ITS-POSITION-OF-TRUST/
GROUP 3 -
HTTPS://LINK.SPRINGER.COM/ARTICLE/10.1007/S43681-021-
00068-X