Lecture 12
Enterprise Risk Management
1
Events – Risks and Opportunities
• Events can have negative impact, positive impact, or both.
• Events with a negative impact represent risks, which can prevent value
adding or erode existing value.
• Events with positive impact may offset negative impacts or represent
opportunities.
• Opportunities are the possibility that an event will occur and positively
affect the achievement of objectives, supporting value creation or
preservation.
2
What is a risk?
• The expectations are focused into the future and therefore not make sufficient
allowance for uncertainties.
• Additionally, these uncertainties could end in an outcome that is either more
positive or more negative than expected.
Uncertainties=Threats+Opportunities
• Threats are events that have a negative impact on any result.
• Opportunities are events that have a positive impact on results; and
• Uncertainties encompass the complete range of positive and negative impacts;
• Risk can be also described as “the possibility of suffering harm, loss or danger.”
3
Enterprise Risk Management
• Enterprise Risk Management (ERM) is a process, affected by an entity’s
board of directors, management and other personnel, applied in strategy
setting and across the enterprise, designed to identify potential events
that may affect the entity, and manage risk to be within its risk appetite,
to provide reasonable assurance regarding the achievement of entity
objectives.
4
The ERM framework
• The enterprise risk management framework can be set into four
categories:
1. Strategic–high-level goals, aligned with and supporting its mission
2. Operational–effective and efficient use of its resources
3. Financial/Reporting–reliability of reporting
4. Hazard/Compliance–individual errors and compliance with applicable laws
and regulations.
5
Strategic Risks
• Strategic Risks include risks from:
• Damage to reputation
• Competition
• Customer Wants
• Demographic and social/cultural trends
• Technological innovations/patents
• Capital investment, shareholder requirements and
• Regulatory and political trends
6
Operational Risks
• Operational Risks include risks from:
1. Business operations
• e.g., human resources, product development, capacity, efficiency, product/service
failure, channel management, supply chain management, business cycles
2. Empowerment
• (leadership, change willingness)
3. IT
7
Financial/Reporting Risks
• Financial/Reporting Risks include risks from:
• Price (e.g., asset value, interest rate, foreign exchange)
• Liquidity (cash flow, call risk, opportunity cost)
• Credit (e.g. rating)
• Inflation, purchasing power and
• Basis financial risk (e.g., hedging)
• Wrong or incomplete reporting (e.g., financial performance)
• Information/business reporting (e.g., budgeting and planning, accounting,
information, taxation)
8
Hazard/Compliance Risks
• Hazard/Compliance Risks include risks from:
• Fire and property damage
• Windstorms and other natural phenomena
• Theft and other crime including personal injury
• Business interruption and
• Liability claims
9
The ERM process
• Enterprise risk management is a procedure to minimize the adverse
effect of a possible financial loss by
1) Identifying potential sources of loss;
2) Measuring the financial consequences of a loss occurring and
3) Using controls to minimize actual losses or their financial consequences.
10
1 mark important Summarize
The ERM Process
• The ERM process is a continuous cycle that involves the following steps:
• Risk Identification: Identifying potential risks that could affect the organization's objectives.
• Risk Assessment: Evaluating the likelihood and impact of identified risks.
• Risk Response: Developing and implementing strategies to manage risks, such as avoiding,
reducing, sharing, or accepting risks.
• Risk Monitoring and Reporting: Continuously monitoring the risk environment and the
effectiveness of risk management activities, and reporting risk information to stakeholders.
• Risk Review and Improvement: Regularly reviewing and updating the risk management process
to ensure it remains effective and aligned with the organization's objectives.
Summarize
The ERM Process
• Step-by-step breakdown of the ERM process:
• Risk Identification: Identifying potential risks.
• Risk Assessment: Evaluating likelihood and impact.
• Risk Response: Developing strategies (avoid, reduce, share, accept).
• Risk Monitoring and Reporting: Tracking risks and communicating findings.
• Risk Review and Improvement: Continuously improving the risk management process.