ACCA Strategic Professional · Strategic Business Leader · Identification, assessment and measurement of risk
Orlando Retail's risk register rates a data breach as low likelihood but very high impact, because customer records would be exposed and regulator fines and brand damage would follow. A manager proposes ignoring it because its expected annual loss is lower than for frequent small stock thefts. Which response best reflects sound risk assessment?
The breach should be treated as a significant risk. Expected-loss ranking understates low-probability, high-impact events that could threaten survival, so the board needs contingency and resilience plans. Insurance may cover some costs but cannot fully restore reputation.
- ATreat it as a significant risk, because a low-probability, high-impact event can threaten survival and needs contingency planning beyond expected-value rankingCorrect
- BIgnore it, because expected loss is the only valid basis for prioritisation
- CTransfer it entirely by insurance, because insurance removes reputational damage
- DTreat it as equal to stock theft, because both are operational risks
Explanation
Expected-value ranking can understate catastrophic risks with low likelihood. Such risks may threaten the organisation's survival and need contingency and resilience planning. Insurance may cover some financial cost but cannot restore lost reputation or customer trust.
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