OVERVIEW OF ENTERPRISE RISK MANAGEMENT
Key definitions
ENTERPRISE
Any purposeful or industrial undertaking created for business venture
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RISK
Risk, in traditional terms, is viewed as a negative.
Websters dictionary, for instance, defines risk as exposing to danger or hazard.
The Chinese give a much better description of risk The first is the symbol for danger, while the second is the symbol for opportunity, making risk a mix of danger and opportunity.
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RISK MANAGEMENT
Risk management is an attempt to identify, to measure, to monitor and to manage uncertainty.
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Risk management
Risk management is present in all aspects of life
It is about the everyday trade-off between an expected reward and a potential danger
It is universal, in the sense - it refers to human behaviour in the decision making process
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No Risk
No Gain!
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Benefits of risk management
Supports strategic And Business planning
increased certainty and fewer surprises
Better service delivery
Quick grasp of new opportunities
Potential benefits
More efficient use of resources
Reassures stakeholders
Helps focus internal audit programme
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Promotes continual improvement
Enterprise risk management ( ERM)
COSO (Committee of Sponsoring Organizations of the Treadway Commission) defines ERM as a process, affected by an entitys
board of directors, management and other
personnel, applied in a 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 goals.
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ERM includes the methods and processes used by organizations to manage risks (or seize opportunities) related to the achievement of their objectives. ERM provides a framework for risk management, which typically involves identifying particular events or circumstances relevant to the organizations objectives (risks and opportunities), assessing them in terms of likelihood and magnitude of impact, determining a response strategy, and monitoring progress. By identifying and proactively addressing risks and opportunities, organizations protect and create value for their stakeholders, including owners, employees, customers, regulators, and society overall. (IRM)
ERM encompasses a framework of:
Risk management structure: to facilitate the identification and communication of risk; Resources: to support effective risk management; Risk culture: to strengthen decision-making processes by management; Tools and techniques: to enable the efficient and consistent management of risks across the organization.
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ERM is an ongoing process
ERM is an Integral part of how an organization operates
ERM applies to all organizations, not just financial organizations. Risk applies broadly to all things threatening the achievement of organizational objectives Risk is not limited to threats, but also refers to opportunities. The goal of an organization is not risk minimization, but seeking an appropriate risk-return position.
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RISKS vs. OPPORTUNITIES
Risk is a possibility that an event will occur and adversely affect the
achievement of objectives
Opportunity is the possibility that an event will occur and positively affect the achievement of the organizations objectives and creation of value
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Developments in Enterprise Risk Management
Understanding risks is not new at all There has always been an inherent understanding of risk ; e.g. health and safety risk
Risk management concept has been around in investment, banking,
insurance, artificial intelligence, and public policy processes
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ERM- history..
1974Basel Committee on Banking Supervision
1988 -
Basel Capital Accord setting forth a new framework for
minimum risk based Capital requirements
1985 -
COSO formed an independent commission to undertake a sector study of factors that caused fraudulent financial reporting
private
1992-
Following a series of high profile corporate frauds and
accounting scandals, the London Stock Exchange introduced new
regulations covering various aspects of Corporate
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governance
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1995-
Development of national standards on Risk Management began
with Aus/NZ Risk
Similar standards in Canada (Dey Report 1997) and Japan, and in the UK (2000) 1996NAIC (National Association of Insurance Commissioners in States) introduced risk based capital requirement for insurance companies. 2002 - A string of corporate accounting scandals has profound United
implications in the US and worldwide and led to the passage of
Sarbanes-Oxley Act 2004 COSO Enterprise Risk Management Integrated Framework
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Traditional risk management vs. ERM
Traditional risk management is more related to financial and hazard risks i.e. transferable risks Traditional risk management requires more accounting type skills ERM stresses the management of operational and strategic risks ERM requires skill in strategic planning, process re-engineering, and marketing
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Scope of ERM
Aligning risk appetite and strategy
Enhancing risk response decisions
Reducing operational surprises and losses Managing multiple and cross enterprise risks Grabbing opportunities Improving deployment of capital
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Objectives of ERM
Improve risk-based decision making
More effective use of capital
Comply with regulatory changes Improve shareholder value Anticipating problems before they become a threat Co-coordinating various risk management activities
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Types of Risks
Top managment
External pressure from: - Regulators - Shareholders - Trading - partners - Customers
RISKS
Market
Inherent
Static
Credit
Systematic
Residual
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Market risk
It is the risk that the value of on and
off-balance sheet positions of a
financial institution will be adversely affected by movements in market rates or prices such as interest rates,
foreign exchange rates, equity prices,
credit spreads and/or commodity prices resulting in a loss to earnings and capital.
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Inherent risk - A risk which it is impossible to managed or transferred away Static risk
-Risk which is unique to an individual asset
Credit risk -Failure to meet the obligated payments of counter parties on Systematic risk
-The risk of holding Market Portfolio
time
Residual risk -That remains after the action to mitigate risk is taken
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Are You Prepared?
Too many businesses fail for the wrong reasons.
They don't fail because their products are inferior, because they
are bad at marketing, or because they are bad at controlling costs. They fail because they do not identify and manage risks. When a disaster happens an incident they should survive they aren't prepared. They didn't anticipate what could happen, and they certainly didn't plan for it.
Unprepared businesses suffer badly or fail.
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Implementation Of ERM
1.
2. 3. 4. 5. 6.
The basic elements of an effective risk management program are:
Senior management and board level commitment
Risk management policies and procedures established in writing for the most prominent risks, with specific objectives and targets Clearly defined responsibilities for managing and controlling risk Ongoing employee training is essential Testing and monitoring of all programs and procedures Regular reports including independent audits prepared for review by senior management and board directors
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Limitations Of ERM
The inherent limitations include :
Realities that human judgment in decision making can be faulty
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Breakdowns can occur because of human failures such as a simple error or mistake
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Controls can be circumvented by the collusion of two or more people
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The management has the ability to override the ERM process
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Need to consider the relative costs and benefits of risk responses.
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Role Of Various Authorities
ROLE OF THE BOARD
Provide insight to
management ERM.
Understand key elements of
Inquire the management about risks. Concur on certain management decisions
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Role Of Risk Committee
Participate in risk strategy analysis.
Develop and refine risk appetite/tolerance.
Evaluate material risk exposures. Oversee the role and responsibilities of the Internal Auditor. Review semi-annual and annual consolidated reports
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Role of chief executive officer
Provide direction to the senior managers.
Setting broad based policies reflecting the entitys risk management
philosophy and risk appetite
Role Of Chief Risk Officer
Establish Corporate-wide risk limit. establish risk management standards Review and approve policy exceptions
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Role of management
Comply with risk management
policies.
Applying ERM techniques and methodologies.
Ensuring risks are managed on
daily basis Provide unit leadership with
complete and accurate reports
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Role of Internal auditor
Support management by providing
assurance on the
ERM Process function .Effectiveness and efficiency of risk responses and control activities. Completeness and accuracy
of ERM reporting
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Risk management is a Continuous Journey
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Questions ???
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