From charisma to innovation and technical know-how, the personal attributes and skills of a company’s leaders are crucial to its success. But if the business relies too heavily on it its top manager or founder, those same traits can become a source of risk.
When auditors evaluate key person risks, they are assessing whether an organization can continue operating effectively if a founder, executive, or specialized employee suddenly becomes unavailable. This evaluation is a core component of Business Continuity Planning (BCP) and enterprise risk management.
Understanding how auditors approach this issue, and how to prepare for their scrutiny, can help organizations reduce audit findings, improve resilience, and protect long-term value.
What Is Key Person Risk?
Key person risk arises when essential knowledge, authority, or operational capability is concentrated in one or a small number of individuals. These may include the following.
- Founders or owners with unique strategic knowledge
- Executives responsible for regulatory oversight
- IT administrators with exclusive system access
- Finance leaders managing critical reporting or cash controls
- Specialized technical staff with undocumented processes
If one of these individuals leaves, becomes incapacitated, or is unavailable during a crisis, the organization may face operational delays, compliance failures, or financial loss.
Why Auditors Focus on Key Person Risk
Auditors increasingly view key person risk as a material operational risk, especially in industries with regulatory requirements, complex systems, or lean staffing models. When auditors evaluate key person risks, they are typically trying to answer questions such as the below.
- Can the organization continue critical operations without specific individuals?
- Is institutional knowledge documented and transferable?
- Are succession and delegation plans realistic and tested?
- Does management understand and actively manage this risk?
Failure to address these questions often results in audit findings, management letter comments, or increased scrutiny in future audits.
How Auditors Evaluate Key Person Risks
While approaches vary by firm and industry, auditors commonly assess key person risk using the following lenses:
1. Identification of Critical Roles
Auditors expect organizations to clearly identify roles, not just people that are essential to business continuity. As such, these may include operational, financial, IT, or compliance-related roles.
Red flags include:
- “Only one person knows how to do this”
- No documented backups or deputies
- Informal or verbal-only knowledge transfer
2. Documentation and Knowledge Transfer
Auditors also look for evidence that critical processes are documented, current, and accessible. This includes:
- Standard operating procedures (SOPs)
- System access documentation
- Process maps or workflow guides
- Emergency contact and escalation procedures
If documentation exists but is outdated or unused, auditors may still view the risk as unmanaged.
3. Succession & Backup Planning
A key expectation is that organizations have realistic succession or backup plans and not just names on paper.
Auditors often assess:
- Whether backups are trained and cross-functional
- How quickly backups could assume responsibilities
- Whether backups have system access and authority
- How succession plans align with actual operations
4. Separation of Duties & Access Controls
Concentration of authority can increase both operational and fraud risk. In fact, auditors will generally review the following.
- Whether critical decisions or approvals rely on one individual
- System access controls and user permissions
- Emergency access procedures during absences
Strong internal controls help mitigate key person risk even when staffing is limited.
5. Business Continuity & Crisis Testing
Auditors increasingly want to see that business continuity plans are tested, in addition to written.
They may ask:
- Have key person absence scenarios been considered?
- Has management tested continuity plans?
- Were gaps identified and addressed?
Organizations that can demonstrate proactive testing are often viewed more favorably.
How The Ray Group Helps Organizations Reduce Key Person Risk
The Ray Group, based in Temecula, CA, specializes in helping organizations strengthen their risk management and business continuity practice —before auditors raise concerns. Our approach focuses on practical, audit-ready solutions that align with how auditors evaluate key person risks in real-world engagements.
We support clients by:
- Identifying critical roles and single points of failure
- Assessing key person risk within existing business continuity plans
- Helping document essential processes and institutional knowledge
- Designing realistic succession and cross-training strategies
- Aligning continuity planning with audit and compliance expectations
Rather than offering generic templates, the Audit Assessment team at The Ray Group work closely with leadership to ensure plans are tailored, usable, and defensible during audits.
Turning Audit Risk Into Strategic Resilience
Key person risk is not just an audit issue, it’s also about business resilience issue. Organizations that proactively address it are better positioned to handle growth, transitions, and unexpected disruptions.
When auditors evaluate key person risks, they are ultimately measuring preparedness, governance, and management effectiveness. With the right guidance and planning, organizations can turn this scrutiny into a competitive advantage.
For businesses seeking expert support in strengthening business continuity planning and reducing key person risk, The Ray Group in Temecula, CA offers the experience and insight needed to meet auditor expectations with confidence. Contact us today to make sure you’re prepared for your next audit.
You may also enjoy reading: Disaster Casualty Loss Tax Deduction
