Applying_Coso_Enterprise_Risk_Management_Integrated_Framework

Applying COSO Enterprise Risk Management Integrated Framework Today's organizations are concerned about: Risk Management, Governance, Control, Assurance and Consulting Why ERM Is Important Underlying principles: Every entity, whether for-profit or not, exists to realize value for its stakeholders. Value is created, preserved, or eroded by management decisions in all activities, from setting strategy to operating the enterprise day-to-day. Why ERM Is Important ERM supports value creation by enabling management to: Deal effectively with potential future events that create uncertainty.Respond in a manner that reduces the likelihood of downside outcomes and increases the upside. Enterprise Risk Management Integrated Framework This COSO ERM framework defines essential components, suggests a common language, and provides clear direction and guidance for enterprise risk management. The ERM Framework ERM considers activities at all levels of the organization: Enterprise-level Division or subsidiary Business unit processes Enterprise risk management requires an entity to take a portfolio view of risk. Management considers how individual risks interrelate.Management develops a portfolio view from two perspectives: Business unit level Entity level The ERM Framework The eight components of the framework are interrelated Internal Environment Considers all other aspects of how the organization's actions may affect its risk culture. Event Identification Event Identification Risk Assessment Likelihood- Impact Is used to assess risks and is normally also used to measure the related objectives. Employs a combination of both qualitative and quantitative risk assessment methodologies. Relates time horizons to objective horizons. Assesses risk on both an inherent and a residual basis. Risk Response Selects and executes response based on evaluation of the portfolio of risks and responses. Occur throughout the organization, at all levels and in all functions.Include application and general information technology controls. Information & Communication Management identifies, captures, and communicates pertinent information in a form and timeframe that enables people to carry out their responsibilities. Communication occurs in a broader sense, flowing down, across, and up the organization. Monitoring Effectiveness of the other ERM components is monitored through: Ongoing monitoring activities. Separate evaluations. A combination of the two. Internal Control A strong system of internal control is essential to effective enterprise risk management. Relationship to Internal Control Integrated Framework Expands and elaborates on elements of internal control as set out in COSO's control framework. Includes objective setting as a separate component. Objectives are a prerequisite for internal control. Expands the control framework Financial Reporting and Risk Assessment. ERM Roles & Responsibilities Management The board of directors Risk officers Internal auditors Internal Auditors Play an important role in monitoring ERM, but do NOT have primary responsibility for its implementation or maintenance. Assist management and the board or audit committee in the process by: Evaluating Examining Reporting Recommending improvements Internal Auditors The internal audit activity's plan of engagements should be based on a risk assessment, undertaken at least annually. Based on the results of the risk assessment, the internal audit activity should evaluate the adequateness and effectiveness of controls encompassing the organization’s governance, operations, and information systems. When planning the engagement, the internal auditor should identify and assess risks relevant to the activity under review. The engagement objectives should reflect the results of the risk assessment Key Implementation Factors Organizational design of business Establishing an ERM organization Performing risk assessments Determining overall risk appetite Identifying risk responses Communication of risk results Monitoring Oversight & periodic review by management Organizational Design Strategies of the business Key business objectives Related objectives that cascade down the organization from key business objectives Assignment of responsibilities to organizational elements and leaders (linkage) Example: Linkage Mission To provide high-quality accessible and affordable community-based health care Strategic Objective To be the first or second largest, full-service health care provider in mid-size metropolitan markets Related Objective To initiate dialogue with leadership of 10 top under-performing hospitals and negotiate agreements with two this year Establish ERM Determine a risk philosophy Survey risk culture Consider organizational integrity and ethical valuesDecide roles and responsibilities Example: ERM Organization Assess Risk Risk assessment is the identification and analysis of risks to the achievement of business objectives. It forms a basis for determining how risks should be managed. Example: Risk Model Environmental Risks Capital Availability Regulatory, Political, and LegalFinancial Markets and Shareholder Relations Process Risks Operations Risk Empowerment Risk Information Processing / Technology Risk Integrity Risk Financial Risk Information for Decision Making Operational Risk Financial Risk Strategic Risk Risk Analysis DETERMINE RISK APPETITE Risk appetite is the amount of risk on a broad level an entity is willing to accept in pursuit of value. Use quantitative or qualitative terms (e.g. earnings at risk vs. reputation risk), and consider risk tolerance (range of acceptable variation). DETERMINE RISK APPETITE Key questions:What risks will the organization not accept' (e.g. environmental or quality compromises) What risks will the organization take on new initiatives' (e.g. new product lines) What risks will the organization accept for competing objectives' (e.g. gross profit vs. market share') IDENTIFY RISK RESPONSES Quantification of risk exposure Options available: Accept = monitor Avoid = eliminate (get out of situation) Reduce = institute controls Share = partner with someone (e.g. insurance) Residual risk (unmitigated risk e. g. shrinkage) Impact vs. Probability Example: Call Center Risk Assessment Example: Accounts Payable Process Communicate Results Dashboard of risks and related responses (visual status of where key risks stand relative to risk tolerances) Flowcharts of processes with key controls noted Narratives of business objectives linked to operational risks and responses List of key risks to be monitored or used Management understanding of key business risk responsibility and communication of assignments Monitor Collect and display information Controls are working to mitigate risks Management Oversight & Periodic Review Accountability for risks Ownership Updates Changes in business objectives Changes in systems Changes in processes Internal auditors can add value by: Providing advice in the design and improvement of control systems and risk mitigation strategies. Internal auditors can add value by: Internal auditors can add value by: Defining risk tolerances where none have been identified, based on internal auditing's experience, judgment, and consultation with management. For more information On COSO's Enterprise Risk Management Integrated Framework, visit: www.coso.org or www.theiia.org