Understanding Enterprise Risk Management In-Depth

In today’s blog, we will discuss “Understanding ERM In-Depth; Using the Right ERM Strategy as A Catalyst for Addressing Risk, While Improving Audit Outcome”.

Companies are under significant pressure to stay abreast of a wide array of business risks that may impact their organization’s success and sustainability. BODs and senior management’s risk oversight role is becoming as critical to the sound running of an organization, especially for companies with significant market risk exposures. This has caused BODs and corporate officers to become more involved in strategic ERM planning at early stages, rather than just reviewing and signing off on an ERM strategy after it has been fully developed by management. Furthermore, the increasing demands and high expectations from the BOD levels have caused a major shift in how audit committees and chief audit executives approach their internal audit programs. Internal auditors are encouraged to incorporate a risk-based approach to internal controls auditing.

ERM Framework and Strategy:

I’ve seen many clients undergo major efforts in developing an ERM framework that work for their business. Most of these frameworks, in my opinion, appear to be nothing more than an over-engineered process that could have been completed with a COSO-based or NIST-based ERM framework. Bottom line here is to take advantage of frameworks that have already been established so that you are not “re-inventing” the wheel. Your ERM framework should capture ALL key and critical business areas within your organization. Your framework should also account for both, business and information risks. Key word here….ENTERPRISE!

ERM and Internal Audit:

The role of the internal auditor and the internal audit process is quickly changing. Today, internal auditors are encouraged to take a risk-based approach to their audit programs. I am working with a particular client where they are using risk composites to drive or “trigger” their audits. The way it works is that when both the likelihood and the MOI (magnitude of impact) of the threat are equally high, the audit department is notified to audit the control(s) that are supposed to mitigate the risks or threats. As an auditor, I strongly encourage that your audit team employ a risk-based approach to your audit strategy. Additionally, getting integrated with your ERM division offers great rewards in this process. This strategy will also improve your audit outcome. Know the risk….employ the effective control(s)….mitigate the risk….you get the idea!

ERM and GRC (Governance, Risk, and Compliance):

I had a customer ask me. “What is the most critical component of the GRC Process”? Although this is a tough question and every component of the GRC process is important, it is my opinion that cornerstone of GRC is risk (R). Without knowing and understanding the risks that businesses face today, it would be difficult to provide BODs with risk oversight, identify controls that need continuous monitoring, and achieve a risk-based approach to compliance management. Once your risk appetite has been determined and your business risks have been identified, you can perform risk analytics and modeling to further enhance your ERM program and provide BODs and corporate officers with oversight of their enterprise risks. All in all you can see the importance and significance of ERM within a GRC or corporate governance strategy. I’m curious to hear other approaches to this thought.

I would like to hear your views on the following:

1. What is your approach to Enterprise Risk Management?
2. How do you incorporate risk into your GRC or Corporate Governance Strategy?
3. What ERM framework works best for your organization?

Thank you

James Sayles
MBA, BS, CISSP, CISA, CISM
Vice President, Chief Risk and Compliance Officer
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COSO Enterprise Risk Management

BUSINESS PRESCRIPTION — COSO ENTERPRISE RISK MANAGEMENT:

Organizations are looking for a structured methodology that lets them quantify risk, establish risk appetite/tolerance, identify and prioritize controls, and establish a system of record to meet a multitude of legal and compliance obligations.

This is where COSO comes in. The COSO Internal Control Framework was originally authored in 1994 with the aim of establishing internal controls to manage operational efficiency and effectiveness, financial reporting reliability, and compliance with laws and regulations. The Internal Control Framework has received a lot of attention recently, as it is the approach most organizations are taking for Sarbanes-Oxley compliance and is recommended by the SEC and Public Company Accounting Oversight Board.

What has been lacking is a structured framework to build an ERM process upon that integrates and extends the Internal Control guidance. PricewaterhouseCoopers, working alongside a project advisory council, worked with COSO in developing this needed guidance. The result: the recent release of the COSO ERM framework.

COSO defines enterprise risk management as:
“Enterprise risk management provides a framework for management to effectively deal with uncertainty and associated risk and opportunity and thereby enhance its capacity to build value.”

The COSO framework provides an answer to the challenges organizations are facing in governance, risk, and compliance. This framework’s goal is to build a risk management process as a foundational element of business operations.

The Evolution Of Technologies And Tools In Support Of COSO ERM

Sarbanes-Oxley (SOX) was the primary driver in providing a wake-up call within organizations for a consistent and defined structure to ERM.

Facing Section 404 compliance, organizations turned to documenting accounting controls in spreadsheets of SOX-specific solutions. Organizations have now become aware that a broader approach to risk and compliance management is needed. This results in a shift in the approach and tools needed to document risk, compliance, and internal controls. Neither the spreadsheet approach nor specific SOX tools are enough — organizations now need tools that can document and manage risk and compliance to the broader risk and compliance demands the organization faces.

SOX vendors, such as OpenPages and Paisley Consulting, are quickly expanding their tools to become broad enterprise risk and compliance management platforms. Others, particularly Axentis, provide an enterprise risk and compliance management platform already — including SOX compliance — and are among the first to integrate the COSO ERM framework into their solution.

Vendors in the SOX segment will face increasing demand for broader enterprise risk and compliance management capabilities — those that are to narrowly focus are likely to falter.

(COSO is the Committee of Sponsoring Organizations of the Treadway Commission. It is a cooperative effort between the American Institute of Certified Public Accountants, American Accounting Association, the Financial Executives Institute, the Institute of Internal Auditors, and the Institute of Management Accountants. Further information on COSO and the Enterprise Risk Management framework can be found at http://www.coso.org.)