Over the past decade, risk and uncertainty have increasingly become major issues which impact business activities. Many organizations are raising awareness to minimize the adverse consequences by implementing the process of Risk Management Framework which plays a significant role in mitigating almost all categories of risks. According to Ward (2005), the objective of risk management is to enhance a company’s performance. In particular, the importance of the framework is to assist top management in developing a sensible risk management strategy and program.
In an effort to effectively use the risk management process frameworks, it is important to differentiate between ...view middle of the document...
To be more precise, threats and opportunities can be seen as an uncertainty of outcome. The reason for uncertainty could be that the absence of a clearly defined context or the absence of knowledge and expertise in a particular operation.
What is more, some people claim that risk consists of uncertainty and damage. Ward (2005) discovered that an interesting feature of the effective framework is that it is able to identify and resolve the source of uncertainty. On this basis, it may be inferred that the better perspective of uncertainty management can be exemplified in the scope of SHAMPU and COSO process framework.
In a study of the SHAMPU framework, Chapman and Ward (1997) conclude that there are nine phases of the SHAMPU process framework. Firstly, define the project, by consolidating the current information of the project as well as coping and resolving the inconsistencies at managerial level. The second step is to emphasis on the process. This step is initiated at the determination of risk management application context and how to conduct the analysis. These phases can distinguish risk and uncertainty by considering the context that can effect the accomplishment of the objective. For instance, the consequence of risks can contribute to the possibilities of failures, whereas uncertainties can have either negative or positive consequence such as profit or loss from investment.
The third stage is to identify the problems. It can distinguish uncertainty and risk by considering the source of problems. Source of uncertainty can be referred as the source of ambiguity with respect to opportunities and threats. It is rather certain that effective identification of the source of bias can minimize the source of risk inefficiency. This is shown by the following examples; one of the risk manager roles is to detect and forecast potential hazards to better manage the overall risk framework.
The next step is to structure the issues at the early stage and the option structure will be implemented when appropriate. In the following stage, clarify the ownership. This means the scope of financial obligation and managerial obligation will be separated. After this, calculate ambiguities as well as assess the results. In this stage, we can distinguish risk and uncertainty by considering the root cause of impact. For instance, uncertainty can take place by risk manager makes the error of judgments in some cases of very unusual event (Reason, 1990 as cited in Ward, 2005).
In the following stage, harness the plans by combining all action plans, which include the contingency plans to get an official strategic plan approved. The last stage is to develop action plans as well as regularly monitor plans to handle unexpected problems and catastrophes. For example, Bank and Dunn (2003) as cited in Ward (2005) note that unforeseen failure of internal control operation such as software error can be frequently found in financial institutions. For this...