A Short Guide to Operational Risk

There is a growing awareness across both public and private sectors, that the key to embedding an effective risk culture lies in raising the general education and understanding of risk at every level in the organization. This is exactly the purpose of David Tattam's book.

"A Short Guide to Operational Risk" provides you with a basic yet comprehensive overview of the nature of operational risk in organizations. It introduces operational risk as a component of enterprise wide risk management and takes the reader through the processes of identifying, assessing, quantifying and managing operational risk; explaining the practical aspects of how these steps can be applied to an organization using a range of management tools.

The book is fully illustrated with graphs, tables and short examples, all designed to make a subject that is often poorly understood, comprehensible and engaging.

"A Short Guide to Operational Risk" is a book to be read and shared at all levels of the organization; it offers a common understanding and language of risk that will provide individual readers with the basis to develop risk management skills, appropriate to their role in the business.

Part 1: Understanding Operational Risk
1. What is Operational Risk?
2. Frameworks for Managing Operational Risk
3. Operational Risk Management in the Corporate Structure

Part 2: A Methodology to Manage Operational Risk
4. Components of an Operational Risk Management Framework
5. Risk and Control Self Assessment (RCSA)
6. Key Risk Indicators
7. Risk Incident Recording and Management
8. Compliance (External and Internal)
9. Risk Treatment, Improvement Implementation and Tracking
10. Reporting
11. Approaches to Measuring Operational Risk

Part 3: Making Operational Risk Management Work
12: The Key to Achieving Operational Risk Management Success

Index

List of Figures
Figure 1.1 Probability distribution
Figure 1.2 Probability distribution for market risk
Figure 1.3 Probability distribution for operational risk (failure of IT systems)
Figure 1.4 Fishbone diagram
Figure 1.5 Example of a fishbone diagram
Figure 1.6 Bowtie diagram
Figure 1.7 Control types
Figure 1.8 T he lifecycle of risk
Figure 2.1 T he three lines of defence
Figure 3.1 Example organisation chart for operational risk management
Figure 3.2 Responsibility for operational risk management
Figure 3.3 Structure of operational risk management policies
Figure 4.1 Operational risk management of a motor vehicle
Figure 4.2 Operational risk management of a business
Figure 4.3 A complete operational risk management framework
Figure 5.1 Risk and control self assessment
Figure 5.2 Levels of risk assessment
Figure 5.3 Chart showing inherent and residual risk
Figure 5.4 Probability distribution for operational risk
Figure 5.5 Average, exceptional and worst case scenarios
Figure 5.6 RCSA traffic light report example – two-dimensional
Figure 5.7 RCSA traffic light report example – one-dimensional
Figure 6.1 Key risk indicators and the risk funnel
Figure 6.2 How KRIs work
Figure 6.3 Setting threshold levels for KRIs
Figure 6.4 Threshold levels for customer complaint ratio
Figure 6.5 Scoring of customer complaint ratio KRI
Figure 6.6 Example of KRI manual input
Figure 6.7 KRI traffic light report example
Figure 6.8 KRI trend report example
Figure 6.9 KRI benchmarking report example
Figure 7.1 Operational risk incidents and the risk funnel
Figure 7.2 Summary workplace incidents report example
Figure 7.3 Detailed compliance breaches report example
Figure 8.1 Schematic of an external compliance process
Figure 8.2 Schematic of an internal compliance process
Figure 8.3 Compliance trend report example
Figure 8.4 Detailed compliance report example
Figure 9.1 Controls and the risk story
Figure 9.2 Assessing control effectiveness
Figure 9.3 Example of modifying controls over unauthorised access to IT systems
Figure 9.4 Detailed action tracking report example
Figure 9.5 Summary action tracking report example
Figure 10.1 KRI month end report example
Figure 10.2 KRI period change report example
Figure 10.3 KRI trend report example
Figure 10.4 KRI comparison report example
Figure 10.5 Risk and control self assessment report example
Figure 10.6 Key risk indicator report example
Figure 10.7 Risk incident report example
Figure 10.8 Compliance report example
Figure 10.9 Improvement tracking report example
Figure 10.10 Board risk report example
Figure 10.11 Aircraft cockpit
Figure 11.1 Probability distribution for operational risk
Figure 11.2 Average risk quantification
Figure 11.3 Ninety-nine per cent degree of confidence
Figure 12.1 An integrated approach to operational risk management
Figure 12.2 Integration of risk management across risk disciplines

List of Tables
Table 5.1 Risk identification example
Table 5.2 Likelihood scale example
Table 5.3 Consequence scales example
Table 5.4 Inherent risk assessment example
Table 5.5 Effectiveness of controls scale example
Table 5.6 Risk Control Self Assessment example
Table 6.1 Examples of KRIs to track creditor payment errors
Table 6.2 Practice aid for the assessment of KRI quality
Table 6.3 KRI weighting and aggregation
Table 6.4 KRI escalation and action policy
Table 8.1 Compliance breach escalation matrix
Table 9.1 Summary of operational risk treatment methods
Table 9.2 Controls over unauthorised access to IT systems
Table 11.1 Calculation of 99 per cent level of confidence
Table 12.1 Overcoming hurdles to success

David Tattam is a partner and founder of Protecht Advisory, a specialist risk consulting firm based in Sydney, Australia. He is recognized internationally as a specialist in all facets of risk management and in particular, operational risk management. David has been instrumental in developing Protecht's comprehensive operational risk management methodology and Operational Risk Management and Compliance software (WORMS™). He currently consults to, and trains a range of industries in relation to setting up risk management functions and systems implementation using Protecht's solution. He also developed and delivered operational risk management training globally including developing the in-house ORM training capabilities of a number of major banks. Prior to setting up Protecht, David held roles as the Head of Operations and Risk Management at WestLB Bank and Industrial Bank of Japan in Australia and Senior Manager at PricewaterhouseCoopers. David is an Associate of the Institute of Chartered Accountants in England and Wales, an Associate of the Institute of Chartered Accountants in Australia, and a Fellow of the Financial Services Institute of Australia.

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