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1、Applying COSOsEnterprise Risk Management Integrated Framework,September 29,2004,Todays organizations are concerned about:,Risk ManagementGovernanceControlAssurance(and Consulting),ERM Defined:,“a process,effected by an entitys board of directors,management and other personnel,applied in strategy set
2、ting and across the enterprise,designed to identify potential events that may affect the entity,and manage risks to be within its risk appetite,to provide reasonable assurance regarding the achievement of entity objectives.”Source:COSO Enterprise Risk Management Integrated Framework.2004.COSO.,Why E
3、RM 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 val
4、ue 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.,This COSO ERM framework defines essential components,suggests a common language,and provides clea
5、r direction and guidance for enterprise risk management.,Enterprise Risk Management Integrated Framework,The ERM Framework,Entity objectives can be viewed in thecontext of four categories:Strategic OperationsReportingCompliance,The ERM Framework,ERM considers activities at all levelsof the organizat
6、ion:Enterprise-levelDivision orsubsidiaryBusiness unitprocesses,Enterprise risk managementrequires an entity to take a portfolio view of risk.,The ERM Framework,Management considers how individual risks interrelate.Management develops a portfolio view from two perspectives:-Business unit level-Entit
7、y level,The ERM Framework,The eight componentsof the frameworkare interrelated,The ERM Framework,Internal Environment,Establishes a philosophy regarding risk management.It recognizes that unexpected as well as expected events may occur.Establishes the entitys risk culture.Considers all other aspects
8、 of how the organizations actions may affect its risk culture.,Objective Setting,Is applied when management considers risks strategy in the setting of objectives.Forms the risk appetite of the entity a high-level view of how much risk management and the board are willing to accept.Risk tolerance,the
9、 acceptable level of variation around objectives,is aligned with risk appetite.,Event Identification,Differentiates risks and opportunities.Events that may have a negative impact represent risks.Events that may have a positive impact represent natural offsets(opportunities),which management channels
10、 back to strategy setting.,Event Identification,Involves identifying those incidents,occurring internally or externally,that could affect strategy and achievement of objectives.Addresses how internal and external factors combine and interact to influence the risk profile.,Risk Assessment,Allows an e
11、ntity to understand the extent to which potential events might impact objectives.Assesses risks from two perspectives:-Likelihood-ImpactIs used to assess risks and is normally also used to measure the related objectives.,Risk Assessment,Employs a combination of both qualitative and quantitative risk
12、 assessment methodologies.Relates time horizons to objective horizons.Assesses risk on both an inherent and a residual basis.,Risk Response,Identifies and evaluates possible responses to risk.Evaluates options in relation to entitys risk appetite,cost vs.benefit of potential risk responses,and degre
13、e to which a response will reduce impact and/or likelihood.Selects and executes response based on evaluation of the portfolio of risks and responses.,Control Activities,Policies and procedures that help ensure that the risk responses,as well as other entity directives,are carried out.Occur throughou
14、t the organization,at all levels and in all functions.Include application and general information technology controls.,Management identifies,captures,and communicates pertinent information in a form and timeframe that enables people to carry out their responsibilities.Communication occurs in a broad
15、er sense,flowing down,across,and up the organization.,Information&Communication,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 internalcontrol is essential to e
16、ffectiveenterprise risk management.,Expands and elaborates on elements of internal control as set out in COSOs“control framework.”Includes objective setting as a separate component.Objectives are a“prerequisite”for internal control.Expands the control frameworks“Financial Reporting”and“Risk Assessme
17、nt.”,Relationship to Internal Control Integrated Framework,ERM Roles&Responsibilities,Management The board of directors Risk officersInternal auditors,Internal Auditors,Play an important role in monitoring ERM,but do NOT have primary responsibility for its implementation or maintenance.Assist manage
18、ment and the board or audit committee in the process by:-Monitoring-Evaluating-Examining-Reporting-Recommending improvements,Visit the guidance section of The IIAs Web site for The IIAs position paper,“Role of Internal Auditings in Enterprise Risk Management.”,Internal Auditors,2010.A1 The internal
19、audit activitys plan of engagements should be based on a risk assessment,undertaken at least annually.2120.A1 Based on the results of the risk assessment,the internal audit activity should evaluate the adequacy and effectiveness of controls encompassing the organizations governance,operations,and in
20、formation systems.2210.A1 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.,Standards,Organizational design of businessEstablishing an ERM organizationP
21、erforming risk assessmentsDetermining overall risk appetiteIdentifying risk responsesCommunication of risk resultsMonitoringOversight&periodic review by management,Key Implementation Factors,Organizational Design,Strategies of the businessKey business objectivesRelated objectives that cascade down t
22、he organization from key business objectivesAssignment of responsibilities to organizational elements and leaders(linkage),Example:Linkage,Mission To provide high-quality accessible and affordable community-based health careStrategic Objective To be the first or second largest,full-service health ca
23、re provider in mid-size metropolitan marketsRelated Objective To initiate dialogue with leadership of 10 top under-performing hospitals and negotiate agreements with two this year,Establish ERM,Determine a risk philosophySurvey risk cultureConsider organizational integrity and ethical valuesDecide r
24、oles and responsibilities,Example:ERM Organization,ERM Director,Vice President andChief Risk Officer,Corporate Credit Risk Manager,Insurance Risk Manager,ERMManager,ERMManager,Staff,Staff,Staff,FES Commodity Risk Mg.Director,Risk assessment is the identification and analysis of risks to the achievem
25、ent of business objectives.It forms a basis for determining how risks should be managed.,Assess Risk,Environmental RisksCapital AvailabilityRegulatory,Political,and LegalFinancial Markets and Shareholder RelationsProcess RisksOperations RiskEmpowerment RiskInformation Processing/Technology RiskInteg
26、rity RiskFinancial RiskInformation for Decision MakingOperational RiskFinancial RiskStrategic Risk,Example:Risk Model,Source:Business Risk Assessment.1998 The Institute of Internal Auditors,Risk Analysis,DETERMINE RISK APPETITE,Risk appetite is the amount of risk on a broad level an entity is willin
27、g 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).,Key questions:What risks will the organization not accept?(e.g.environmental or quality compromises)What risks will the organizat
28、ion 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?),DETERMINE RISK APPETITE,Quantification of risk exposureOptions available:-Accept=monitor-Avoid=eliminate(get out of situation)-Reduce=institute cont
29、rols-Share=partner with someone(e.g.insurance)Residual risk(unmitigated risk e.g.shrinkage),IDENTIFY RISK RESPONSES,Impact vs.Probability,Control,Share,Mitigate&Control,Accept,High Risk,Medium Risk,Medium Risk,Low Risk,Low,High,High,IMPACT,PROBABILITY,Low,High,High,IMPACT,PROBABILITY,High Risk,Mediu
30、m Risk,Medium Risk,Low Risk,Example:Call Center Risk Assessment,Loss of phonesLoss of computers,Credit riskCustomer has a long waitCustomer cant get throughCustomer cant get answers,Entry errors Equipment obsolescenceRepeat calls for same problem,FraudLost transactionsEmployee morale,Control RiskCon
31、trol ObjectiveActivity,CompletenessMaterialAccrual of transactionopen liabilities not recorded Invoices accrued after closing,Issue:Invoices go to field and AP is not aware of liability.,Example:Accounts Payable Process,Dashboard of risks and related responses(visual status of where key risks stand
32、relative to risk tolerances)Flowcharts of processes with key controls notedNarratives of business objectives linked to operational risks and responsesList of key risks to be monitored or usedManagement understanding of key business risk responsibility and communication of assignments,Communicate Res
33、ults,Monitor,Collect and display informationPerform analysis-Risks are being properly addressed-Controls are working to mitigate risks,Accountability for risksOwnershipUpdates-Changes in business objectives-Changes in systems-Changes in processes,Management Oversight&Periodic Review,Internal auditor
34、s can add value by:,Reviewing critical control systems and risk management processes.Performing an effectiveness review of managements risk assessments and the internal controls.Providing advice in the design and improvement of control systems and risk mitigation strategies.,Implementing a risk-base
35、d approach to planning and executing the internal audit process.Ensuring that internal auditings resources are directed at those areas most important to the organization.Challenging the basis of managements risk assessments and evaluating the adequacy and effectiveness of risk treatment strategies.,
36、Internal auditors can add value by:,Facilitating ERM workshops.Defining risk tolerances where none have been identified,based on internal auditings experience,judgment,and consultation with management.,Internal auditors can add value by:,For more information,On COSOsEnterprise Risk Management Integrated Framework,visitorwww.theiia.org,This presentation was produced by,Applying COSOsEnterprise Risk Management Integrated Framework,
