What is risk reporting?

Why is risk reporting important?

Risk reporting is vital to creating an effective risk management framework. It enables organizations to do the following:

• Proactively identify and escalate issues. Organizations can identify potential risks before they materialize or escalate.
• Enhance business resilience. Organizations can better prepare for and establish strategies for responding to crises.
• Prioritize risks. By better understanding their risk posture, organizations can identify and prioritize top risks and make better-informed business decisions.
• Support compliance. Risk reporting enables organizations to show regulators and stakeholders their commitment to responsible risk management.

A fundamental truth of risk management is that risks vary in scope. For example, a minor risk might delay a project's completion by a day or two. Conversely, businesses might occasionally face major risks that jeopardize the well-being of the entire organization.

Not only do risks vary by severity, but they can also vary in terms of their impact. Some risks affect a whole organization or even an entire industry. Other risks might only affect a single department or a particular account. Impacts can vary by industry but fall into the following categories:

• Financial. In addition to lost revenue or profits, this includes market risk, penalties from regulatory infractions, equipment or personnel costs and legal counsel.
• Operational. These risks disrupt an organization's day-to-day operations and can affect business continuity. This includes failed internal processes due to human error and external events such as natural disasters.
• Strategic. These risks affect an organization's ability to achieve its goals and can be caused by a variety of things, including poor management, market competition or technology.
• Reputational. Damage can occur to an organization's name or standing, resulting in diminished brand value and negative perceptions by stakeholders and customers.

Types of risk reporting

Because risks can vary so widely from one another, there are several different types of risk reporting. Some of the more common risk reporting types include the following:

• Project risk reporting. As the lowest level of risk reporting, this pertains to risks that might affect a particular project, such as a supply chain disruption or a change in the price of raw materials.
• Program risk reporting. In business, programs are generally made up of multiple projects. A comprehensive program risk report generally covers any project-level risks or other risks that are significant enough to adversely affect the entire program.
• Portfolio risk reporting. This is generally an aggregate summary of program-level risks across an organization's entire portfolio or collection of programs.
• Business risk reporting. This is used for significant risks that have the potential to affect the entire organization.

What should a risk report include?

The structure of a risk report can vary based on its intended purpose. For example, a risk management report that outlines risks to employee safety would likely be structured differently from a report meant to convey financial risks. Even so, the following examines several elements commonly included in a risk report:

• Executive summary. This synopsis helps senior management identify the biggest risks.
• Risk profile. This description uses numerical values to help quantify a risk. Although these risk profiles can be created in various ways, they are often based on a risk's seriousness combined with the odds of the risk actually occurring.
• Risk capacity. This data reflects how much risk an organization can afford to take. For example, a risk capacity might be a worst-case statement of how much money an organization could lose without going out of business.
• Tolerance levels. This is a measurement of how much risk an organization is willing to take. Whereas risk capacity reflects how much an organization could lose before going bankrupt, risk tolerance measures how much an organization is willing to lose. A risk tolerance value is normally much lower than its risk capacity value and is sometimes categorized as conservative, moderate or aggressive.
• Key risk indicators (KRIs). These metrics are tied to a risk that has been identified. If one of these metrics reaches a threshold value, it can indicate that the identified risk is beginning to happen. As such, KRIs act as an early warning or monitoring system that can give project managers or other management teams time to act before an identified risk can fully occur.
• Effective risk management. This section of the report explains how the organization will attempt to proactively reduce or eliminate risks that have been identified.
• Environmental risks. This section of the report identifies risks that the organization's activities pose to the environment due to factors such as pollution. Depending on the type of risk report, this section is not always required.

Best practices for building an effective risk report

Some common best practices for creating an effective risk report include the following:

• Charts or other graphical elements in the report. These visuals can make the report easier to digest.
• A sunrise and sunset for each risk. The sunrise is the point at which a risk comes into play. The sunset is when an identified risk is no longer considered to be a risk. For example, in the case of making a large financial investment, the sunrise might be the time at which the contract is signed, and the sunset might be the point at which the organization has hit the break-even point for the investment.
• A clearly written risk statement explaining the threat. If necessary, a corresponding context document can add clarity. For example, this section might include KRIs explaining the significance of each indicator and what the organization plans to do if certain conditions are met.
• A closure criteria statement. Each risk should also include a closure criteria statement explaining the organization's risk mitigation efforts.

Operational risks can disrupt an organization's day-to-day operations. Learn what top business continuity risks businesses should monitor.