The importance of auditing operational risks

Operational risk management (ORM)

Operational risk management allows organizations of all sizes to identify, assess, and mitigate potential disruptions to their core business processes. Operational risk management follows a five-part cycle:

1. Risk identification: The initial stage involves pinpointing potential operational risks.
2. Risk assessment: Once identified, each operational risk must be evaluated for its likelihood and potential impact.
3. Risk response: Next, the organization formulates an operational risk management response based on its risk appetite. Leaders must decide how much exposure they will allow based on the cost and effectiveness of control procedures. Operational risk management response options include:
   1. Avoid: Implementing preventive controls to stop risks from happening, like robust security protocols or process automation.
   2. Mitigate: Implementing detective controls to address risks as close as possible to when these occur, like incident response plans or early warning systems.
   3. Transfer: Shifting the financial burden of risk to a third party through insurance or outsourcing.
   4. Accept: Deciding to live with the risk if its potential impact is considered negligible or if the cost of control outweighs potential benefits.
4. Monitor and review: Operational risk management requires regular monitoring to:
   1. Track the effectiveness of existing controls.
   2. Identify new or emerging risks.
   3. Update your risk assessments and response strategies as needed.
5. Communicate and adjust: Everyone in the organization, from senior management to frontline staff, should understand their role in operational risk management. Based on feedback from the organization and a review of the risk landscape, the identified risks and strategies should be updated regularly.

Operational auditing

Since operational risk management touches nearly every aspect of an organization, operational auditing likewise delves deep into the internal workings of an organization, aiming to improve efficiency, effectiveness, and overall performance. Operational audits assess existing internal controls and identify potential risks within processes. The audit results help managers mitigate risks proactively, identifying issues before these negatively affect performance or lead to losses. Operational audits scrutinize end-to-end processes, analyzing their efficiency and effectiveness, and identify areas for improvement. The review often involves process mapping and benchmarking techniques to discover and implement best practices for process enhancement and cost reduction.

A key benefit of operational auditing is evaluating how effectively the operational risk management program aligns with overall business objectives. Strategic alignment ensures that resources focus on the right areas and that processes move the organization closer to its desired goals. In this way, operational audits aim to enhance the value delivered to all stakeholders. Typical insights from this approach include understanding how a reviewed process improves customer satisfaction, enhances employee retention, increases shareholder returns, or helps the organization contribute positively as a corporate citizen.

Some operational audits focus on compliance to ensure adherence to company policies, procedures, and external regulations. Operational auditing centered on compliance processes protects the organization from legal and financial repercussions while upholding ethical and responsible practices. With the current emphasis on ESG reporting, cybersecurity disclosures, identity protection, and emerging regulations on artificial intelligence, operational auditors play a key role in ensuring solid processes and procedures are in place to keep up with rapid changes.

Benefits of operational auditing

The benefits of operational auditing are that it can significantly impact the organization and improve the perception of internal auditing. Operational auditors provide a critical, outside perspective to recommend improvements others close to the process may not have considered. Considering how quickly the risk landscape changes, operational audits offer a valuable service by reassessing and reviewing areas impacted by changes to ensure process optimization. Revisiting processes, especially with different auditors, infuses new ideas into the business processes that the ingrained process team could overlook. While other types of audits focus solely on control testing, operational auditing fosters a culture of continuous improvement within an organization, leading to increased efficiency, reduced risks, enhanced performance, and deepening the relationship between the organization and the audit team.

Pressure from other risk areas like financial reporting, technology, and compliance often results in audit leaders dropping operational audits from the audit plan. Still, the value of strong operational risk management and the insights internal audit can bring to the organization should be considered a critical component of a balanced audit plan. Companies routinely ask employees to do more with fewer resources, and operational auditing provides an avenue to streamline processes, reduce waste, improve customer service, and tighten operations that can have a direct financial impact on the organization. When operational audits are performed with the organization's strategic objectives at the forefront, auditors are perfectly positioned to help optimize the processes that drive management's goals. The value of operational auditing has never been more critical than right now. If your audit plan is missing this key area, it's time for a second look. Your organization needs the internal audit team's operational risk expertise.