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When a control is found to be ineffective, which of the following steps should be take next?
When a control is found to be ineffective, the primary objective is to remediate the deficiency by implementing corrective measures. PRMIA (Professional Risk Managers' International Association) guidance, aligned with best practices in risk governance, emphasizes a structured approach to handling control deficiencies. Below is a detailed breakdown based on PRMIA risk management principles:
Step 1: Identify and Assess the Ineffective Control
A control is deemed ineffective when it fails to mitigate the identified risks to an acceptable level.
The root cause of the failure must be determined through a Control Effectiveness Review (CER).
PRMIA recommends control testing and incident analysis to assess the severity of the control failure.
Step 2: Develop an Action Plan to Address the Control Deficiency
PRMIA best practices state that risk management should prioritize corrective actions rather than delaying remediation.
The organization must define an action plan to close the gap, which includes:
Revising or strengthening the control mechanisms.
Implementing new controls, if necessary.
Assigning responsibility for remediation to control owners.
Setting deadlines for resolution.
This step aligns with PRMIA's Risk Governance Framework, which emphasizes proactive risk management.
Step 3: Implement Corrective Measures and Monitor Progress
Once an action plan is designed, the organization should execute the corrective actions.
PRMIA's Risk Monitoring Guidelines require regular follow-ups and testing to ensure the control is functioning correctly.
The effectiveness of the remediation should be validated through post-implementation review and ongoing control testing.
Step 4: Re-Assess Risks and Control Effectiveness
Once corrective measures are in place, the organization should re-evaluate risks to confirm that the issue is resolved.
The risk assessment process should be updated to reflect the changes in the control environment.
Why the Other Options Are Incorrect?
Option A: 'Risks should be re-assessed to determine if there is the appropriate level of control assessment.'
While risk re-assessment is a good practice, it does not directly address the ineffective control.
PRMIA guidelines prioritize closing the control gap first before reassessing risks.
Option C: 'The controls should be re-assessed during the next cycle to determine if they are still ineffective.'
Waiting until the next assessment cycle delays remediation, which could expose the organization to unmitigated risks.
PRMIA risk frameworks recommend immediate corrective action when a control is found to be ineffective.
Option D: 'Risks should be re-assessed to determine if there can be an exception for the level of control assessment.'
PRMIA does not support exceptions for ineffective controls unless there is a well-documented risk acceptance process.
A control failure should be remediated rather than seeking exceptions.
PRMIA Risk Reference Used:
PRMIA Risk Governance Framework -- Defines the importance of immediate corrective actions for control failures.
PRMIA Risk Monitoring Guidelines -- Stresses continuous monitoring and validation of controls.
PRMIA Risk Management Standards -- Recommends a structured action plan for ineffective controls.
PRMIA Operational Risk Framework -- Emphasizes the need to close control gaps to maintain a strong risk posture.
Final Conclusion:
According to PRMIA risk management best practices, when a control is found to be ineffective, the best course of action is to design and implement an action plan to remediate the issue (Option B). This approach ensures that the organization mitigates risk promptly and maintains a strong control environment.
In operational resilience, material customer detriment or significant harm to the customer is which of the following?
Step 1: Definition of Material Customer Detriment
Material customer detriment refers to service disruptions that cause financial loss, inability to access essential services, or significant hardship.
PRMIA and UK FCA Operational Resilience Standards define 'significant harm' as going beyond inconvenience to include monetary or operational distress.
Step 2: Why Option D is Correct
Significant harm occurs when customers face tangible financial or service losses, not just reputational inconvenience.
Regulatory frameworks (e.g., Basel, FCA, PRMIA) require banks to protect customers from material disruptions.
Step 3: Why the Other Options Are Incorrect
Option A ('Low threshold, any complaint') Incorrect because not all complaints indicate material detriment.
Option B ('Inconvenience and reputational damage') Incorrect because true material harm is more than just inconvenience.
Option C ('Financial system resilience') Incorrect because this describes systemic financial stability, not customer impact.
PRMIA Risk Reference Used:
PRMIA Operational Resilience Framework -- Defines material customer detriment.
UK FCA Operational Resilience Guidelines -- Requires firms to minimize severe harm to customers.
Final Conclusion:
Material customer detriment involves actual financial hardship, not just inconvenience, making Option D the correct answer.
For the Barings case study, what external event may have accelerated the discovery of the loss event?
Background of the Barings Case Study
The Barings Bank collapse occurred due to unauthorized derivatives trading by Nick Leeson in Singapore.
Leeson concealed losses, and his trading positions became unmanageable.
How the Kobe Earthquake Affected Barings
On January 17, 1995, the Kobe earthquake caused extreme market volatility.
Leeson's unauthorized trades were highly exposed to the Nikkei 225 index, and the earthquake triggered heavy losses.
The event accelerated the exposure of Leeson's fraudulent activities, leading to Barings' collapse.
Why Answer D is Correct
The Kobe earthquake created market turmoil, forcing Barings to confront its financial position, ultimately revealing the hidden losses.
Why Other Answers Are Incorrect
Option
Explanation
A . The collapse of Lehman Brothers into bankruptcy in 2002.
Incorrect -- Lehman Brothers collapsed in 2008, not 2002.
B . The Singapore earthquake of January 17th, 1995.
Incorrect -- No significant earthquake occurred in Singapore on that date.
C . The collapse of Lehman Brothers into bankruptcy in 2008.
Incorrect -- Barings collapsed in 1995, not related to Lehman Brothers' 2008 failure.
PRMIA Reference for Verification
PRMIA Case Study on Barings Bank Collapse
Basel Committee Principles on Risk Oversight and Fraud Prevention
What are the roles of business versus risk management in developing and implementing risk assessments?
The Principles for Risk Governance, as established by PRMIA (Professional Risk Managers' International Association), emphasize the Three Lines of Defense (3LoD) Model, which is widely used in risk management and governance frameworks.
Business Line Ownership of Risk (First Line of Defense)
The business units are responsible for identifying, assessing, managing, and monitoring risks within their operations.
Since they generate the risks through their activities, they must own the risk assessment process.
This aligns with PRMIA Governance Principles, which state that risk management should be embedded within business operations to ensure proactive risk identification and control.
Risk Management's Role (Second Line of Defense)
The risk management function is not directly responsible for conducting risk assessments but plays a key role in designing and maintaining the risk assessment framework.
This includes setting standards, methodologies, and tools for assessing risks across business functions.
Risk management provides supervision and oversight, ensuring that risk assessments align with organizational policies and regulatory expectations.
Oversight from Senior Management & the Board (Third Line of Defense)
Internal audit (third line of defense) independently reviews and provides assurance that the risk management framework is effective and that risk assessments are conducted properly.
PRMIA's Risk Governance Standards emphasize that internal audit should evaluate the effectiveness of the risk assessment framework without being involved in its direct execution.
Why Other Answers Are Incorrect
Option
Explanation
A . Risk management, in its role as second line of defense, performs the risk assessment process from beginning to end. There is no business line involvement.
Incorrect -- Risk management facilitates and oversees the risk assessment process, but the business must take ownership of the risks it generates.
C . Business owns the risk assessment process so risk management does not play a role in the process.
Incorrect -- While the business owns the process, risk management plays a crucial role in developing the framework, setting policies, and providing oversight.
D . Business management's role in the risk assessment process should be confined to oversight.
Incorrect -- Business management is actively responsible for executing risk assessments, not just overseeing them.
PRMIA Reference for Verification
PRMIA Standards for Risk Governance -- Establishes the Three Lines of Defense and the separation of responsibilities.
PRMIA Risk Management Framework (RMF) Guidelines -- Defines the roles of business and risk management in risk assessment.
PRMIA Enterprise Risk Management Best Practices -- Outlines how risk management facilitates risk assessments while the business retains ownership.
This answer is verified according to PRMIA's official risk governance documents and best practices. Would you like additional clarification or supporting documentation references?
Which of the following best describes the role of the compliance department?
Three Lines of Defense Model
The compliance department functions as the second line of defense, ensuring oversight over the first line's compliance controls.
It does not directly implement controls but monitors and advises on compliance risk management.
Responsibilities of the Compliance Department
Ensures regulatory compliance with laws, policies, and industry standards.
Monitors and enforces risk management controls within business operations.
Provides advisory and training on compliance risks.
Why Answer D is Correct
The first line of defense (business operations) is responsible for executing compliance controls.
The compliance department (second line) provides oversight and governance to ensure compliance adherence.
Why Other Answers Are Incorrect
Option
Explanation
A . The compliance department is responsible for implementing the first line's compliance risk management controls.
Incorrect -- The first line (business units) implement compliance controls, while compliance oversees.
B . The compliance department is responsible for providing oversight over the auditor's implementation of compliance risk management controls.
Incorrect -- Internal audit is part of the third line of defense, not directly overseen by compliance.
C . The compliance department is responsible for providing oversight over the board's implementation of compliance risk management controls.
Incorrect -- The board provides high-level governance; compliance ensures business adherence to regulations.
PRMIA Reference for Verification
PRMIA Governance & Compliance Oversight Framework
Basel Committee's Guidelines on Compliance Risk Management
