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ACCA Strategic Professional · Strategic Business Leader · Identification, assessment and measurement of risk

Brenner plc, a retailer, sources garments from a low-cost country. A news report alleges poor labour conditions at its main supplier. The board considers the impact and likelihood: likelihood is moderate, but the impact on brand and investor confidence could be severe. Which response best reflects sound risk assessment under a risk-appetite approach?

The board should assess the risk on both likelihood and impact, treat the severe brand and investor confidence impact as significant, and mitigate it through supplier audits and contractual codes of conduct. Moderate likelihood does not justify ignoring it, and reputational harm cannot be fully insured.

  1. ARate the risk using both likelihood and impact, treat the severe impact as significant, and consider supplier audits and contractual codes to mitigate itCorrect
  2. BIgnore the risk because the likelihood is only moderate
  3. CTransfer the risk entirely to insurers since reputational harm is always insurable
  4. DAvoid assessment until a regulator requires disclosure

Explanation

Risk assessment combines likelihood and impact, so a severe impact makes a moderate-likelihood risk significant. Mitigation such as supplier audits and codes is appropriate. Reputational harm is only partly insurable, and waiting for a regulator is reactive.

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