Value-adding Activities of Operational Risk Management Methodologies: A South African Perspective

Abstract

Operational risk management forms a crucial part of management and since the early 1990s this practice has escalated rapidly due to various reasons, such as an increase in the regulatory requirements and risk-related incidents. For example, the requirements of the Public Finance Management Act 1 of 1999 and the Municipal Finance Management Act 56 of 2003, which require institutions to implement and maintain effective, efficient and transparent systems of risk management and control. Incidents, such as the fall of the VBS Mutual Bank, also indicated problems with adequate operational risk management. The development and implementation of operational risk management methodologies could add value to the management of operational risk exposures and adhere to specific regulatory requirements. However, it seems that operational risk methodologies are currently only used for compliance and not used appropriately. This article investigates the value-adding activities of risk methodologies which can contribute to ensure an effective operational risk management. These activities are empirically confirmed by means of a survey which also identified a gap between the envisaged value and its current implementation by organisations. It is foreseen that this research could support the enhancement of the operational risk management methodologies to improve the operational risk management of private and public organisations.