THRESHOLDS AND RISK APPETITE
As noted above, establishing targets or thresholds linked to an indicator can be very useful in setting escalation criteria for management action and in assessing trends in indicators. Thresholds should be set by reference to the business needs, and willingness to take a specific risk or to accept a level of control failure. The starting point is the required risk profile for the business. It is poor practice to set thresholds with reference initially to the available data.
In the example shown in Figure 7.5 a mean target has been set of 5 with a green band of 4–6. The indicator has bands on both sides with an amber band of 3 or 2 on the lower side and a value of 7 on the upper side. These bands represent a breach ...
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