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ACCA Strategic Professional · Strategic Business Leader · Managing, monitoring and mitigating risk

Karuna Logistics assesses each identified risk by scoring likelihood and impact from 1 to 5 and multiplying them. A data-centre outage scores likelihood 2 and impact 5. A minor fuel-price rise scores likelihood 5 and impact 2. The board is concerned that the matrix treats these two risks as equal. Which is the most valid criticism of the scoring approach?

The main weakness is that multiplying ordinal scores gives identical results for very different risks. A rare but catastrophic outage and a frequent minor cost both score 10, so the matrix can hide severe low-probability exposures that need separate board attention.

  1. AMultiplying ordinal scores hides the difference between low-probability, high-impact risks and frequent, low-impact risksCorrect
  2. BUsing numerical scores makes risk assessment purely objective and therefore unreliable
  3. CLikelihood should never be assessed because it cannot be estimated
  4. DImpact should be measured only in financial terms for the matrix to work

Explanation

Both risks score 10, yet the outage could threaten survival while the fuel rise is a frequent, tolerable cost. Multiplying ordinal scales masks this difference, so catastrophic low-likelihood risks may be under-prioritised. The other options misstate the limitations: scores are subjective, not objective, and likelihood can be estimated.

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