Enterprise risk management

Implementing an ERM program

Goals of an ERM program

Organizations by nature manage risks and have a variety of existing departments or functions ("risk functions") that identify and manage particular risks. However, each risk function varies in capability and how it coordinates with other risk functions. A central goal and challenge of ERM is improving this capability and coordination, while integrating the output to provide a unified picture of risk for stakeholders and improving the organization's ability to manage the risks effectively.

Typical risk functions

The primary risk functions in large corporations that may participate in an ERM program typically include:

• Strategic planning - identifies external threats and competitive opportunities, along with strategic initiatives to address them
• Marketing - understands the target customer to ensure product/service alignment with customer requirements
• Compliance & Ethics - monitors compliance with code of conduct and directs fraud investigations
• Accounting / Financial compliance - directs the Sarbanes–Oxley Section 302 and 404 assessment, which identifies financial reporting risks
• Law Department - manages litigation and analyzes emerging legal trends that may impact the organization
• Insurance - ensures the proper insurance coverage for the organization
• Treasury - ensures cash is sufficient to meet business needs, while managing risk related to commodity pricing or foreign exchange
• Operational Quality Assurance - verifies operational output is within tolerances
• Operations management - ensures the business runs day-to-day and that related barriers are surfaced for resolution
• Credit - ensures any credit provided to customers is appropriate to their ability to pay
• Customer service - ensures customer complaints are handled promptly and root causes are reported to operations for resolution
• Internal audit - evaluates the effectiveness of each of the above risk functions and recommends improvements
• Corporate Security - identifies, evaluates, and mitigates risks posed by physical and information security threats

Common challenges in ERM implementation

Various consulting firms offer suggestions for how to implement an ERM program. Common topics and challenges include:

• Identifying executive sponsors for ERM.
• Establishing a common risk language or glossary.
• Describing the entity's risk appetite (i.e., risks it will and will not take)
• Identifying and describing the risks in a "risk inventory".
• Implementing a risk-ranking methodology to prioritize risks within and across functions.
• Establishing a risk committee and/or chief risk officer (CRO) to coordinate certain activities of the risk functions.
• Establishing ownership for particular risks and responses.
• Demonstrating the cost-benefit of the risk management effort.
• Developing action plans to ensure the risks are appropriately managed.
• Developing consolidated reporting for various stakeholders.
• Monitoring the results of actions taken to mitigate risk.
• Ensuring efficient risk coverage by internal auditors, consulting teams, and other evaluating entities.
• Developing a technical ERM framework that enables secure participation by 3rd parties and remote employees.

Internal audit role

In addition to information technology audit, internal auditors play an important role in evaluating the risk-management processes of an organization and advocating their continued improvement. However, to preserve its organizational independence and objective judgment, Internal Audit professional standards indicate the function should not take any direct responsibility for making risk management decisions for the enterprise or managing the risk-management function.

Internal auditors typically perform an annual risk assessment of the enterprise, to develop a plan of audit engagements for the upcoming year. This plan is updated at various frequencies in practice. This typically involves review of the various risk assessments performed by the enterprise (e.g., strategic plans, competitive benchmarking, and SOX 404 top-down risk assessment), consideration of prior audits, and interviews with a variety of senior management. It is designed for identifying audit projects, not to identify, prioritize, and manage risks directly for the enterprise.

Current issues in ERM

The risk management processes of corporations worldwide are under increasing regulatory and private scrutiny. Risk is an essential part of any business. Properly managed, it drives growth and opportunity. Executives struggle with business pressures that may be partly or completely beyond their immediate control, such as distressed financial markets; mergers, acquisitions and restructurings; disruptive technology change; geopolitical instabilities; and the rising price of energy.

Sarbanes–Oxley Act requirements

Section 404 of the Sarbanes–Oxley Act of 2002 required U.S. publicly traded corporations to utilize a control framework in their internal control assessments. Many opted for the COSO Internal Control Framework, which includes a risk assessment element. In addition, new guidance issued by the Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board in 2007 placed increasing scrutiny on top-down risk assessment and included a specific requirement to perform a fraud risk assessment. Fraud risk assessments typically involve identifying scenarios of potential (or experienced) fraud, related exposure to the organization, related controls, and any action taken as a result.

NYSE corporate governance rules

The New York Stock Exchange requires the Audit Committees of its listed companies to "discuss policies with respect to risk assessment and risk management." The related commentary continues: "While it is the job of the CEO and senior management to assess and manage the company’s exposure to risk, the audit committee must discuss guidelines and policies to govern the process by which this is handled. The audit committee should discuss the company’s major financial risk exposures and the steps management has taken to monitor and control such exposures. The audit committee is not required to be the sole body responsible for risk assessment and management, but, as stated above, the committee must discuss guidelines and policies to govern the process by which risk assessment and management is undertaken. Many companies, particularly financial companies, manage and assess their risk through mechanisms other than the audit committee. The processes these companies have in place should be reviewed in a general manner by the audit committee, but they need not be replaced by the audit committee."

ERM and corporate debt ratings

Standard & Poor's (S&P), the debt rating agency, plans to include a series of questions about risk management in its company evaluation process. This will rollout to financial companies in 2007. The results of this inquiry is one of the many factors considered in debt rating, which has a corresponding impact on the interest rates lenders charge companies for loans or bonds. On May 7, 2008, S&P also announced that it would begin including an ERM assessment in its ratings for non-financial companies starting in 2009, with initial comments in its reports during Q4 2008.

IFC Performance Standards

International Finance Corporation Performance Standards focus on the management of Health, Safety, Environmental and Social risks and impacts. The third edition was published on January 1, 2012 after a two-year negotiation process with the private sector, governments and civil society organizations. They have been adopted by the Equator Principles Banks, a consortium of over 118 commercial banks in 37 countries.

Data Privacy

Data privacy rules, such as the European Union's General Data Protection Regulation, increasingly foresee significant penalties for failure to maintain adequate protection of individuals' personal data such as names, e-mail addresses and personal financial information, or alert affected individuals when data privacy is breached. The EU regulation requires any organization--including organizations located outside the EU--to appoint a Data Protection Officer reporting to the highest management level if they handle the personal data of anyone living in the EU.

Actuarial response

Casualty Actuarial Society

In 2003, the Enterprise Risk Management Committee of the Casualty Actuarial Society (CAS) issued its overview of ERM. This paper laid out the evolution, rationale, definitions, and frameworks for ERM from the casualty actuarial perspective, and also included a vocabulary, conceptual and technical foundations, actual practice and applications, and case studies.

The CAS has specific stated ERM goals, including being "a leading supplier internationally of educational materials relating to Enterprise Risk Management (ERM) in the property casualty insurance arena," and has sponsored research, development, and training of casualty actuaries in that regard. The CAS has refrained from issuing its own credential; instead, in 2007, the CAS Board decided that the CAS should participate in the initiative to develop a global ERM designation, and make a final decision at some later date.

Society of Actuaries

In 2007, the Society of Actuaries developed the Chartered Enterprise Risk Analyst (CERA) credential in response to the growing field of enterprise risk management. This is the first new professional credential to be introduced by the SOA since 1949. A CERA studies to focus on how various risks, including operational, investment, strategic, and reputational combine to affect organizations. CERAs work in environments beyond insurance, reinsurance and the consulting markets, including broader financial services, energy, transportation, media, technology, manufacturing and healthcare.

It takes approximately three to four years to complete the CERA curriculum which combines basic actuarial science, ERM principles and a course on professionalism. To earn the CERA credential, candidates must take five exams, fulfill an educational experience requirement, complete one online course, and attend one in-person course on professionalism.

CERA Global

Initially all CERAs were members of the Society of Actuaries but in 2009 the CERA designation became a global specialized professional credential, awarded and regulated by multiple actuarial bodies; for example Chartered Enterprise Risk Actuary from the Institute and Faculty of Actuaries.