Why Effective Controls are Essential to Mitigate Risk

Implementing effective controls is an essential component of any risk management program. ‘Controls’ are measures that an organization must put in place to successfully minimize, mitigate, or manage risk levels – enabling them to operate within their risk appetite.

Building and implementing a flexible risk & control framework is the most effective method of mitigating risk. This approach keeps ‘risk’ within the management’s sphere of influence, and the framework can be adjusted accordingly to reflect the sensitivity of an organization to a particular risk factor.

This blog focuses on the importance of ‘controls’ in a risk management program and highlights the necessity of mapping them to the relevant risks. It explores why your business must conduct regular control checks & testing to ensure controls are effective, shares how to keep risk levels within your risk appetite, and explains how firms can use operational data to assess the impact and effectiveness of controls.

Understanding Control Types

‘Controls’ to lower risk levels can come in many shapes & forms. Many firms use preventive controls like strict policies, processes, procedure documents, or safety & security equipment (like antivirus or firewalls) that are put in place to lower risk. Some risk types require detective controls like audits, inspections, checks, monitoring, surveillance, and incident reporting. Some controls involve corrective measures like patch updates, route cause analysis, and training to lower risk levels that are too high. Some controls require imparting knowledge and guidance in the form of training, communication, and policy updates. Finally, there are also mitigating controls to transfer the risk, like purchasing insurance, implementing contingencies & backups, and formulating business continuity plans to defer operational risk and ensure the business can remain operational.

Before implementing ‘controls’, organizations must consider all possible types of control measures and determine which are the most effective and practical for each risk. Risk Managers should aim to cultivate a proactive approach, by selecting controls that mitigate the risk before it occurs – rather than implementing corrective measures after a Key Risk Indicator (KRI) has already reached a high level.

There are several approaches typically employed by businesses to reduce risk, these include;

Risk Avoidance: This approach aims to eliminate any exposure to a risk factor that has the potential to cause a loss. For example; a construction company may decide to halt operations during an electric storm to avoid harm to workers.

Loss Prevention: This effort is used by organizations to reduce and prevent losses such as operational errors, fraud, or theft. Examples of this include setting up surveillance cameras and conducting regular audits.

Loss Reduction: This control activity is aimed at limiting the extent to which a loss may occur. For example, installing a sprinkler system in a warehouse and including emergency doors would likely reduce the losses resulting from a fire.

Risk Separation: This risk control technique limits the spread of activities and risk exposure over several locations. Its key goal is to reduce the overall severity of the risk. For example, employing a geographically diverse workforce so production may continue uninterrupted should issues arise at one warehouse. Other examples include using internal audit techniques or having a separate team or individual checking or overseeing processes to detect mistakes or fraudulent activity.

Using ‘Controls’ to Operate within Your Risk Appetite

Risk appetite and tolerance concepts are integral components of an effective risk management process.  The absence of a ‘risk appetite’ could mean that your organization’s efforts at risk mitigation are misdirected.

Risk appetite and tolerable risk levels must be agreed at a board level. Firms should determine a risk appetite by analyzing their current risk exposure and deciding which levels are tolerable and will cause minimal impact to the business and which level would be deemed too high and must be controlled. Risk levels should then be continuously monitored, and if risk levels exceed the agreed appetite, rules can be set to notify the relevant teams so action can be taken, and controls can be introduced.

Risk ‘controls’ are critical to ensure that a business does not exceed its risk appetite and to keep it operating at a tolerable risk level. Risk controls play a crucial part in allowing organizations to operate with certain risks present; while ensuring there are guardrails to keep these risks from escalating. Businesses must establish risk appetites that are linked to risk controls based on both internal and external considerations, enabling them to determine acceptable levels of risk and establish a set of active ‘controls’ that work within available budget & resources.

Building and Maintaining a Control Register

Building and maintaining a control register is integral to the risk management process. A ‘control register’ is a log businesses use to document and track ‘controls’ across their enterprise – and it should be directly linked in the organizations risk register.

For each ‘control’ within the ‘control register’, firms typically capture critical details including, control name and description, control type, owner, purpose, the risk it is controlling, how often the control is applied, the implementation status, effectiveness, testing frequency, and any related policies or evidence. Dates and actions are also captured regarding the last review date and any upcoming reviews or outstanding actions relating to the control.

A ‘control register’ typically includes at least one control for every risk the company is managing. Some risks might have multiple controls, for example, to manage the risk of theft in a retail store, they might have multiple controls including CCTV, a security guard, and product tags. All the controls should be checked regularly to ensure they are fully operational, and incident data regarding actual theft incidents should be used to ascertain if further controls are needed.

Utilizing tools such as a ‘risk matrix’ and ‘business risk analysis reporting’ when building a control register will help teams visualize the risk level based on probability and impact – enabling them to establish where controls are needed the most.

With risk all around us, it is important to document every control and ensure they are linked back to the risks they aim to mitigate.  Not only is it a prerequisite for robust risk management, but it is also useful for early risk mitigation – managing threats before they cause a loss. This documentation is also key when senior management reviews the likelihood and consequences of risk to determine the budget for risk remediation efforts.  

Keeping good documentation of your organization’s ‘risk controls’ and their effectiveness also encourages regulatory compliance. That is why many firms use GRC software to help risk teams keep a digital track of the status & progress of each risk and the corresponding controls. These platforms also offer risk & control reporting and visualization tools to communicate risk information and control status to stakeholders – providing adequate data to guide decision-making.

Regular Control Checks and Effectiveness Testing

Carrying out regular control checks and testing for effectiveness helps risk & audit teams identify any weaknesses in the internal control program and ensure each control has been appropriately designed to mitigate the intended risk.

The regular testing of controls is carried out to gain an understanding of your organization’s internal control environment, and involves performing various procedures and checks to ensure they function as intended. Testing methods could include questionnaires, observations, inspections, and the review of relevant documents & records to verify effectiveness.  Following the testing, if the controls are not functioning or found to be ineffective – new or improved controls must be put in place to mitigate the impending risk.  

The timing & frequency of control testing depends on the organization’s specific needs and the nature of the risks involved. Regular control testing is key to meet compliance requirements and ensure controls are functioning as intended to protect the organization. Failed or ineffective controls can be a risk in itself.

Leveraging Operational Data to Assess Control Impact

Once the organization has established a library of ‘controls’, it is important to make sure they are effective. Therefore, on top of regular control testing & checks it is also important to look at operational data, risk levels, and logged incidents – to ascertain if the controls are actually keeping risk within tolerable levels.

By examining past incidents and operational data, teams can identify common factors that contribute to the failure or inefficiency of a risk control. For example, if data reveals that equipment failures occur more frequently after certain usage thresholds, you can schedule maintenance controls before reaching those points to reduce the risk. 

Many firms find GRC software useful to understand control effectiveness as it offers data analytics tools to track control performance. Teams can easily view operational data from other systems and data sources in real-time within the platform thanks to API integrations. API integration works by linking the GRC platform with different business systems. Once integrated, the two platforms can send data back and forth via the APIs to share information in real-time. This allows teams to map controls to operational data, incidents, and KRIs to get a clear picture of how the risk is being controlled. The system provides instant alerts when risk levels are rising or controls fail – highlighting issues to be addressed before risk levels escalate.  By leveraging such a tool, organizations can effectively assess and analyze risk control impact – leading to enhanced risk evaluation and improved decision-making processes.

Optimizing Controls to Balance Cost and Effectiveness

Controlling risk is not a one-time event – it is a continuous process that requires risk teams to conduct regular control testing and checks for improvement purposes. Controlling risk costs money and because businesses do not have endless resources & budgets, they must decide which risks are the most critical to determine the funds required to control them. Teams should conduct regular risk assessments and analyze risk impact data to prioritize their risks and allocate appropriate resources to control them.

Methods and tools such as risk matrix’s, SWOT analysis, or bowtie visualizations can be used to identify the potential sources of risk and the likelihood and impact – helping firms to prioritize the appropriate controls.

To fully optimize controls, and balance cost vs effectiveness, risk teams must analyze their current risk controls to identify their strengths & weaknesses alongside the threats and opportunities present in their risk environment.

How GRC Software Enhances Control and Risk Management

GRC software provides organizations with a structured approach to risk management and controls, offering a centralized platform for firms to manage risks, controls, and operational performance.

Firms can use the platform to build an online digital risk register and automate the entire risk management process including; online risk assessment forms, automated risk monitoring, and workflows to formalize escalations, approvals and mitigating activities.

In the same platform, firms can also establish a fully functioning control register. Every control is logged and can easily be mapped to the relevant risk. Firms can carry out regular control checks and control testing within the platform with all details fully documented. Incident data and operational data is also held within the platform – allowing firms to easily monitor risk exposure – based on live operational data and logged incidents. This vital mapping between risks, controls, incidents, and operational data provides extensive insights to guide the business on risk prioritization and the allocation of budget & resources for controls and risk mitigation strategies. These insights and reporting outputs wouldn’t be available when using manual risk & control methods that don’t integrate with other business systems and operational processes.

These software solutions offer valuable dashboards and reporting insights through-which businesses can anticipate potential risks and control vulnerabilities. By analyzing these reports, risk teams can implement proactive measures to minimize losses, reduce risk, and ensure business continuity. With access to real-time data on risk levels, decision makers can quickly assess the effectiveness of existing controls and identify areas that require attention. This allows organizations to respond promptly, mitigate risks, and make productive decisions aligned with their business objectives.

The Strategic Value of Effective Controls

Effective risk controls, measures, and policies support organizations to successfully monitor and adjust their key risk mitigation strategies – ensuring they are on track to meet their business goals with minimal interruptions. However, the different types of risk ‘controls’ your organization puts in place must be continuously monitored and tested to achieve strategic business goals, maximize profits, and maintain a competitive edge.

Because the internal and external environment that your organization operates in are subject to change at any given moment, it is critical to create systems that can help your risk team monitor risk levels, and the effectiveness of mitigating controls, measures, and policies so they can be adjusted when the risk landscape changes, and new risks emerge.  GRC software offers a platform for organizations to implement and manage their risk controls framework effectively and efficiently. To learn more about how GRC software can support your organization to control risk, simply reach out to us for a demo.