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Internal Risk Management in Business

Did you know that organizations around the world lose 5% of their revenue to employee fraud each year? Or that the typical employee theft scheme lasts 14 months before it’s detected? Or that 61% of companies have had an insider attack in the past year? Or, worst of all, 66% of organizations consider malicious insider attacks and accidental insider threats more likely than an external attack?

While it’s easy to focus on the threats outside your door, the numbers speak for themselves. It’s time to get serious about internal risk management.

Here’s a guide to help you get your footing in internal risk management, from how internal risk management works to the types of internal risks to the gaps between internal and external controls–and how you can take a smarter approach to internal risk management.

How Internal Risk Management Works

Broadly, there are two types of risk management: internal and external. Most of the time, though, businesses only focus on external risk management.

This is understandable, considering that external risks account for several existential threats to your business. When you deal with external risk, you’re talking about the larger business environment–everything from the economy to politics to culture. And if you don’t pay attention to these signals, the times can easily leave your business behind.

However, when businesses focus too much on external risk factors, they tend to ignore serious threats within their own four walls–threats that can be just as detrimental as media coverage or a cyberattack.

When we talk about internal risk factors, we’re talking about risks within your organization. For example, your organizational structure and its ability to stay competitive qualifies as an internal risk. So is your ability to meet your financial obligations, or management stability, or internal human resources, or even your internal company politics.

In other words, if external risks shape your company from the outside, internal risks shape your company from the inside. And because of that, internal risks involve security concerns not from a third party, but from people in your own organization.

Internal Control and Risk Management vs. External Control

Because of the difference in focus, internal risk management and external risk management have a different set of controls.

External risk management focuses on protecting an organization from outside threats. Because of that, external controls are designed to defend against damage from the outside. For instance, third-party risk management qualifies as a form of external control since you’re dealing with a vendor outside of your organization.

Internal risk management, on the other hand, focuses on the inner workings of your organization. It is designed to make sure that things run smoothly inside your organization so that you’re in a good position to tackle outside challenges. For example, internal audits are the most classic example of internal risk management–they allow you to check internal processes and ensure that everything runs as intended.

At this point, you can probably guess an essential point about internal and external risk management: because they focus on two different areas of risk management, you can’t rely on the same tools. That would be like walking around the office wearing rain boots all day, or going outside in just your socks. The level of protection is mismatched to the environment.

How to Do Internal Audit Risk Management

The good news is that while you may not use the same tools for internal risk management, the process is pretty comparable to external risk management. If you understand the essential framework of external risk management, you can adapt it to develop and internal model.

If you’re building your internal risk management model from scratch, here’s a quick process breakdown to get you started.

Start with a Risk-Based Internal Audit

First, just like an external risk management process, you would start with a risk assessment.

Before you begin, sit down and identify the types of risks you’re looking for. This will allow you to set a metric for assessing performance. For example, mismanaged insider access qualifies as a risk, and once you identify it, you can set a performance scale to measure your current practices.

Your internal risk assessment should be just as thorough as your external assessments of third-party vendors. In fact, if you’re not sure where to begin, you can adapt your external assessment questions for use in an internal assessment, with additional questions introduced to address specific internal concerns.

Identify Stakeholders

From there, you can identify your internal stakeholders, much like you would identify your external stakeholders.

A good way to think about this is to consider who is involved in what. That way, you can think about them as a stakeholder in a specific problem–and someone who may introduce or mitigate risk in a situation depending on the nature of their involvement. You can often segment this based on job tasks or even departments.

Choose Control Measures

Once you know your risks, your performance, and your stakeholders, you can choose your control measures.

If you already know your way around external risk management, you know that many risks cannot be eliminated, but they can be controlled. This is why it’s important to choose the right control measures. For example, managing sensitive access is a key cybersecurity control measure.

A good way to do this is to break it down into the risks you’re trying to control, then assign controls to each one.

Record, Refine, and Repeat

Last but not least is the most important part of internal risk assessment: recording what you found, refining it, and monitoring continuously over time.

Unfortunately, compliance in one assessment does not guarantee compliance from then on. This may be unintentional–if a law changed, for example, and your processes don’t update to reflect it, you’re no longer compliant. This is also the area where many businesses falter–after all, your team already has full-time jobs to attend to, and it’s easy for risk management to char on the back burner.

Your Expert Partner in Internal Risk Management

We know that internal risk management can be an uphill battle, especially when you’re trying to manage external risk management on top of it. That’s why we offer internal risk management solutions that make it easy to make informed decisions for the good of your organization, no matter how simple or complex. So if you’re ready to handle risk management without the hassle, get in touch today to learn how we can help.

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