Risk Control Matrix: How to Implement for Success

Regulatory Reporting

How does your organisation choose to approach and manage risk? Your risk appetite and control mechanisms may change overtime, but at any point in time, a risk control matrix can help you better manage and deal with risks.

To better answer, “What is a risk assessment matrix?” we will share everything you need to know about how to create your own.

Coming Up

1. What is a A Risk and Control Matrix?

2. Why Use a Risk and Control Matrix?

3. What are the Benefits of a Risk and Control Matrix?

4. How Do You Create a Risk and Control Matrix?

5. How to Respond to Business Risks?

6. How to Determine the Chances of a Risk Occurring?

7. What are the Essential Parts of a Control and Risk Matrix?

8. Wrap Up

What is a A Risk and Control Matrix?

A risk and control matrix, or RACM/RCM, is a tool that aids organisations in being able to identify, rank, and deal with risks. The visual tool is created at the intersection of two main considerations, namely: the likelihood that a risk will occur along with the potential impact that the risk occurring will have on the business.

Once listed and ranked, the risk matrix can include organisation and categorisation based on high, moderate, or low risks. Risk matrices can play a large role in being able to prioritise risk, as well as to develop risk mitigation strategies.

Why Use a Risk and Control Matrix?

No matter the size of your organisation, risk is inevitable. Ignoring risk can result in detrimental outcomes, or even the shut down of your business. As such, many businesses utilise a risk assessment matrix in order to approach risk wisely and in a timely manner.

Using a risk control matrix can benefit your organisation by:

  • Providing a way to measure the size and scope of risk
  • Determine whether your approach is the right one for dealing with each type of risk
  • To prioritise risk and make it easy to understand for everyone

A risk control matrix also makes it simple to always have an up-to-date look at risks that may be incipient or recurring. With a risk matrix, you can also begin to notice patterns and maintain a record of risks so you always know the best way forward when something uncertain may arise.

What are the Benefits of a Risk and Control Matrix?

The benefits of a risk control matrix are far-reaching. For starters, everyone in the organisation will gain transparency and understand the risks at hand. Not only will people be aware of what they may expect, but having a visual representation of risk allows for the proper allocation of resources.

This means that every person on your team will understand their responsibility and role associated with dealing with risk, which aids in accountability.

Additionally, executives and stakeholders alike can gain peace of mind by knowing the possible risks, as well as being able to review the mitigation strategy chosen.

When it comes to financial reporting, a risk and control matrix can aid in the auditing process. Along with automation solutions that make auditing easier, a risk assessment matrix provides an auditor a robust view of how the business maintains internal controls, which can provide a level of security and confidence in the financial reports.

Automation solutions provide you with an easy way to execute processes with little to no human intervention. At the same time, they can help reduce compliance risk because every action that takes place within the system is recorded.

When it comes time to review your processes, having an audit trail ready to review at the click of the button eases the process for both internal and external auditors.

How Do You Create a Risk and Control Matrix?

Typically, risk can feel like an overwhelming concept to try and manage, given the inherent uncertainty and unknowns. However, developing a risk and control matrix does not have to be complex.

In fact, by following these steps, you can create your own risk and control matrix without hassle:

1. Identify the Risks and Controls

The first step involves identifying the risks that your organisation faces. A good definition of risk is “the possibility that events will occur and affect the achievement of strategy and business objectives.”

The best way to identify risks cohesively is to involve your team and key stakeholders and carry out a brainstorming session. The more people involved, the less likely you are to overlook a potential threat.

Since risks come in different shapes and sizes, it’s best to categorise risk into these buckets:

  • Financial risk
  • Operational risk
  • Strategic risk
  • External risk

2. Determine the Risk Criteria

Once you’ve listed the risks, it’s time to start evaluating them for their two main attributes (which we briefly touched on at the start of this article). You’ll want to rank the likelihood (or probability that the risk will occur) and the impact (or the level of severity that the risk will have on your business).

Naturally, people have different opinions about the two factors here. So, the more input you get from your team, the more likely you are to get closer to the realistic answers for both points.

3. Assess the Risks and Controls

Based on your risk criteria, you can use a scale to determine the level of risk. There are different ways you can define risk. For example, some organisations will use a scale of: high risk, medium risk, and low risk. Others may instead choose a numerical approach by ranking the risk on a scale of 1-5, with 5 being extremely high risk and 1 being extremely low risk.

4. Prioritise the Risk

Once you have the likelihood and impact, as well as the levels of risk listed, you can then prioritise risks. The risk control matrix will likely change over time, so it’s best to constantly revisit the visualisation to amend it when necessary.

How to Respond to Business Risks?

Once you have the risks listed, you have to choose how you want to manage them. There are four main strategies to respond to risk. Most organisations look for consensus when deciding which strategy to apply to each risk.

These include:

  • Accept the risk: If the risk is tolerable, it may be worth accepting the risk. This would be the case when accepting the risk doesn’t cause more potential cost or damage than dealing with the risk.
  • Reducing the risk (mitigation): If the potential outcome of the risk is severe, then you’ll want to look for ways to minimise the risk’s effects through mitigation.
  • Sharing the risk: If you can lessen the impact of the risk by sharing it, either between departments, groups, or paying for insurance, then it could be a good way forward.
  • Avoiding the risk: When it’s possible to choose an alternate route that foregoes the risk altogether, then you can select to avoid the risk. However, when the risk is strategic or a part of the overall business plan, avoiding the risk may not be a feasible option.

How to Determine the Chances of a Risk Occurring?

One of the most challenging steps in creating a risk and control matrix comes down to determining the likelihood of a risk occurring.

In order to do so, it may be useful to break up the likelihood into five sections:

  • Highly likely: this would be any risk with an above 91% chance of occurring.
  • Likely: any risk that is between a 61-90% chance of occurring can be considered likely. These risks should be carefully approached because they are typically consistent.
  • Possible: if a risk happens about half the time, or 41-60% of the time, then attention is required.
  • Unlikely: For risks that are 11-40% chance of occurring, they can be considered low risk. These risks could still affect your organisation, so it’s best not to fully ignore them.
  • Highly unlikely: For risks that have a less than 10% chance of occurring, they can be considered highly unlikely. In many cases, these risks can be accepted because of their low probability.

By utilising automation software, it can become easier to spot risks, patterns, and trends and better deduce what risks are truly important to focus on for your business. Given advanced data analytics and technology, the creation of a risk control matrix doesn’t have to be done in the dark, so to speak.

What are the Essential Parts of a Control and Risk Matrix?

When working on your risk and control matrix, keep in mind these essential ingredients:

  • Control number: For cross-referencing purposes, you can give the control a reference number
  • Process name: use high level naming to define the process in your matrix so that anyone in the organisation is aware of what is being ranked. For example: revenue process, accounts payable process, etc.
  • Sub-process name: you can further define a process within a category by giving more detail
  • Control objective: A control objective explains why a control exists, as well as documents necessary paperwork that outlines the control mechanism and why it’s important
  • Risk: if the control fails, then the risk identifies the potential outcome of what will happen.
  • Control description: When choosing a risk mitigation strategy, you want to describe how the risk is being controlled and approached.
  • Frequency: Define how many times the control should be carried out within the business process
  • Control owner: Attribute responsibility and accountability to the person who is in charge of this business process or risk mitigation strategy

By using an automation software solution, it becomes much easier to carry out business processes and maintain adequate oversight over everything that happens within your organistions.

These solutions can carry out end-to-end automation, which in itself reduces manual error, increases oversight and reduces risk. Additionally, automation solutions remove bottlenecks, ensure data accuracy, and can alert relevant parties should an issue arise so that risk can be minimised by resolving the problem immediately.

Wrap Up

A risk control matrix is a highly useful tool for businesses of all sizes. Not only does a risk control matrix help to prioritise risk, but it also provides a visual representation and roadmap for employees and stakeholders alike so that there is a clear plan of action at all times.

With automation software, businesses can better manage and reduce risk. Automation solutions provide increased transparency, proper internal control mechanisms, and an easy way to carry out audits so that any type of risk can be managed and monitored in real-time.

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