1. Risk Management And Internal Control Guidelines
Tennessee Department of Finance and Administration
Tennessee Comptroller of the Treasury
August 2007

2. MANAGEMENT’S GUIDE TO RISK MANAGEMENT AND INTERNAL CONTROL
INTRODUCTION
MANAGEMENT’S GUIDE TO RISK MANAGEMENT AND INTERNAL CONTROL

3. INTRODUCTION (CONT’D)
Enterprise Risk Management
Changing Political And Regulatory Environment
Sarbanes-Oxley Act
General Accounting Office
AICPA Auditing Standards

4. INTRODUCTION (CONT’D)
Internal Control and Governance Problems
Results of Texas State Comptroller’s ERM Implementation
Texas State Auditor Considers Increased Accountability a Priority

5. INTRODUCTION (CONT’D)
Committee Of Sponsoring Organizations Of The Treadway Commission
Second report Enterprise Risk Management—Integrated Framework
First report Internal Control—Integrated Framework

6. INTRODUCTION (CONT’D)
Guidance--Education and Tools
Agency Heads Responsibility

7. OVERVIEW

8. Overview Relationship of COSO I and II
COSO Cube (three-dimensional matrix)
Objectives
Components
Entity Unit
Effectiveness
Roles and responsibilities

9. Relationship of COSO I to COSO II
Internal Control—Integrated Framework (COSO I)
Still important for entities looking at internal control by itself
Enterprise Risk Management—Integrated Framework (COSO II)
Broader than internal control
Expands and elaborates on internal control
Focuses more fully on risk
Introduces the concepts of risk appetite, risk tolerance, and portfolio view

10. COSO Cube
Direct relationship between objectives and enterprise risk components
Focus on the entirety of an entity’s ERM, or by objectives categories, component, entity unit, or any subset thereof

11. Objectives Categories
Strategic
Effectiveness and efficiency of operations
Integrity and reliability of reporting
Compliance with applicable laws, regulations, contracts, and grant agreements
Stewardship of assets

12. Components Internal environment Objective setting Event identification
Risk assessment
Risk response
Control activities
Information and communication
Monitoring

13. Effectiveness
Are the 8 components present and functioning effectively?
The components are criteria for effective ERM
Present and functioning properly = no significant deficiencies and material weaknesses
Test operating effectiveness of controls different from obtaining evidence of implementation
How controls were applied during the period
Consistency with which controls were applied
By whom and by what means they were applied

14. Roles and Responsibilities
Audit committee, board of directors, or other oversight body
Commissioner/director/department head
Senior management
Internal audit
Other entity personnel

15. SECTION I INTERNAL ENVIRONMENT

16. SECTION I INTERNAL ENVIRONMENT What is it?
Risk Management Philosophy
Set of shared beliefs and attitudes
Reflects the entity’s values, influencing its culture and operating style
Affects how risks are identified, kinds of risks accepted, and how they are managed

17. Internal Environment (cont’d)
Risk Appetite
Amount of risk management is willing to accept
Influences the entity’s culture and operating style
Oversight by Audit Committee
Oversight by another group
May significantly influence elements of Internal Environment

18. Internal Environment (cont’d)
Integrity and Ethical Values
Management’s values
Code of conduct
Commitment to Competence
Knowledge and skills of staff
How well tasks need to be accomplish

19. Internal Environment (cont’d)
Organizational Structure
Framework to plan, execute, control, and monitor activities
Assignment of Authority and Responsibility
Extent of authority and responsibility
Human Resource Standards
Staff development, training, and evaluation

20. SECTION II OBJECTIVE SETTING

21. Objective Setting
EVERY AGENCY FACES A VARIETY OF RISKS FROM EXTERNAL AND INTERNAL SOURCES, AND A PRECONDITION TO EFFECTIVE EVENT IDENTIFICATION, RISK ASSESSMENT, AND RISK RESPONSE IS ESTABLISHMENT OF OBJECTIVES

22. Objective Setting
OBJECTIVES MUST EXIST BEFORE MANAGEMENT CAN IDENTIFY POTENTIAL EVENTS AFFECTING THEIR ACHEIVEMENT
ENTERPRISE RISK MANAGEMENT (ERM) ENSURES THAT MANAGEMENT HAS IN PLACE A PROCESS TO SET OBJECTIVES AND THAT THE CHOSEN OBJECTIVES SUPPORT AND ALIGN WITH THE AGENCY’S MISSION AND ARE CONSISTENT WITH ITS RISK APPETITE

23. Objective Setting
WHILE AN AGENCY’S MISSION AND STRATEGIC OBJECTIVES ARE GENERALLY STABLE, ITS STRATEGY AND MANY RELATED OBJECTIVES ARE MORE DYNAMIC AND ADJUSTED FOR CHANGING INTERNAL AND EXTERNAL CONDITIONS
AS CONDITIONS CHANGE, STRATEGY AND RELATED OBJECTIVES ARE REALIGNED WITH STRATEGIC OBJECTIVES

24. Objective Setting
IN CONSIDERING WAYS TO ACHIEVE ITS STRATEGIC OBJECTIVES, MANAGEMENT IDENTIFIES RISKS ASSOCIATED WITH A RANGE OF STRATEGY CHOICES AND CONSIDERS THEIR IMPLICATIONS
VARIOUS EVENT IDENTIFICATION AND RISK ASSESSMENT TECHNIQUES ARE USED IN THE STRATEGY-SETTING PROCESS

25. Objective Setting
BY FOCUSING FIRST ON STRATEGIC OBJECTIVES AND STRATEGY, AN AGENCY IS IN A POSITION TO DEVELOP RELATED OBJECTIVES
AGENCY WIDE OBJECTIVES ARE THEN LINKED TO AND INTEGRATED WITH MORE SPECIFIC OBJECTIVES THAT CASCADE THROUGH THE ORGANIZATION TO SUB-OBJECTIVES ESTABLISHED FOR VARIOUS ACTIVITIES

26. Objective Setting
OBJECTIVES NEED TO BE READILY UNDERSTOOD AND MEASURABLE
ERM REQUIRES THAT PERSONNEL AT ALL LEVELS HAVE AN UNDERSTANDING OF THE AGENCY’S OBJECTIVES AS THEY RELATE TO THAT INDIVIDUAL’S SPHERE OF INFLUENCE
ALL EMPLOYEES MUST HAVE A MUTUAL UNDERSTANDING OF WHAT IS TO BE ACCOMPLISHED AND A MEANS OF MEASURING WHAT IS BEING ACCOMPLISHED

27. Objective Setting THREE BROAD CATEGORIES OF OBJECTIVES OPERATIONS
REPORTING
COMPLIANCE

28. SMART OBJECTIVES
Specific Use specific terms rather than vague abstract ones
Measurable Include some method for objectively measuring their achievement
Achievable Are challenging but realistic
Relevant Follow the business strategy of the organization
Timely Specify a time period

29. Objective Setting
EFFECTIVE ERM PROVIDES REASONABLE ASSURANCE THAT AN AGENCY’S REPORTING AND COMPLIANCE OBJECTIVES ARE BEING ACHIEVED
BECAUSE, HOWEVER, ACHEIVEMENT OF OPERATIONS OBJECTIVES IS NOT SOLEY WITHIN AN AGENCY’S CONTROL (i.e. IT IS SUBJECT TO EXTERNAL EVENTS) ERM PROVIDES REASONABLE ASSURANCE THAT MANAGEMENT IS MADE AWARE OF THE EXTENT TO WHICH AN AGENCY IS MOVING TOWARD THE ACHIEVEMENT OF THESE OBJECTIVES ON A TIMELY BASIS

30. Objective Setting 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)

31. Objective Setting
EFFECTIVE ERM DOES NOT DICTATE WHICH OBJECTIVES MANAGEMENT SHOULD CHOOSE, BUT THAT MANAGEMENT HAS A PROCESS THAT ALIGNS STRATEGIC OBJECTIVES WITH AN AGENCY’S MISSION AND ENSURES THAT THE ENTITY’S CHOSEN STRATEGIC AND RELATED OBJECTIVES ARE CONSISTENT WITH THE AGENCY’S RISK APPETITE

32. Objective Setting – Risk appetite
RISK APPETITE IS A GUIDEPOST IN STRATEGY SETTING
THERE IS A RELATIONSHIP BETWEEN AN AGENCY’S RISK APPETITE AND ITS STRATEGY
DIFFERENT STRATEGIES CAN BE USED TO ACHIEVE DESIRED RETURN, EACH HAVING DIFFERENT RISK

33. Objective Setting – Risk appetite
RISK APPETITE IS THE AMOUNT OF RISK, ON A BROAD LEVEL, AN AGENCY IS WILLING TO ACCEPT IN PURSUIT OF ITS MISSION, VISION, BUSINESS OBJECTIVES AND VALUE GOALS
DIRECTLY RELATED TO AN AGENCY’S CULTURE, CAPABILITY, RISK CAPACITY AND STRATEGY
SHOULD CONSIDER RISK APPETITE BOTH QUALITATIVELY AND QUANTITATIVELY - IT IS MANY TIMES EXPRESSED IN ACCEPTABLE/UNACCEPTABLE OUTCOMES OR LEVEL OF RISK

34. Objective Setting – Risk appetite
SOME POSSIBLE QUESTIONS
WHAT RISKS WILL THE AGENCY NOT ACCEPT? (For example, environmental or quality compromises)
ARE THERE SPECIFIC RISKS THAT THE AGENCY IS NOT PREPARED TO ACCEPT? (For example, risks that could result in non-compliance with federal regulations)
IS THE AGENCY PREPARED TO ENTER INTO PROGRAMS WITH LOWER LIKELIHOOD OF SUCCESS BUT LARGER POTENTIAL RETURNS?

35. Objective Setting – Risk appetite
USE OF A LIKELIHOOD-IMPACT ASSESSMENT (MATRIX) IS A GOOD TOOL IN DOCUMENTING RISK APPETITE
FOR EACH RISK FREQUENCY OF OCCURRENCE (PROBABILITY) AND WORST OUTCOME (IMPACT) ARE ASSESSED AND CAPTURED IN A MATRIX
THE MATRIX IS THEN COMPARED WITH A CHARTED RISK APPETITE MAP THAT OUTLINES THE MAXIMUM ADVERSE RISK AN AGENCY IS WILLING TO ACCEPT

36. Impact vs. Probability High I M P A C T Low PROBABILITY High
Exceeds Risk Appetite I M P A C T
Within Risk Appetite
Low
PROBABILITY
High

37. Objective Setting – Risk tolerance
RISK TOLERANCE, THE ACCEPTABLE LEVEL OF VARIATION AROUND OBJECTIVES, MUST BE ALIGNED WITH RISK APPETITE
REQUIRES THE ARTICULATION OF ACCEPTABLE VARIABILITY FROM THE SPECIFIED RISK APPETITE FOR ALL POSSIBLE OUTCOMES
OPERATIONALIZES THE RISK APPETITE
GENERALLY EXPRESSED IN TERMS OF RISK MEASURES OR OUTCOMES

38. Objective Setting – Risk tolerance
SHOULD BE SET SUCH THAT THE AGGREGATION OF RISK TOLERANCES ENSURES THE ORGANIZATION OPERATES WITHIN THE RISK APPETITE

39. SECTION III EVENT IDENTIFICATION

40. EVENT IDENTIFICATION
INTERNAL AND EXTERNAL EVENTS AFFECTING ACHEIVEMENT OF AN AGENCY’S OBJECTIVES MUST BE IDENTIFIED, DISTINGUISHING BETWEEN RISKS AND OPPORTUNITIES
MANAGEMENT IDENTIFIES POTENTIAL EVENTS THAT, IF THEY OCCUR, WILL AFFECT THE AGENCY, AND IN WHAT MANNER

41. Event identification
EVENTS WITH A POSITIVE IMPACT REPRESENT OPPORTUNITIES THAT SHOULD BE CHANNELED BACK INTO MANAGEMENT’S STRATEGY OR OBJECTIVE-SETTING PROCESSES
EVENTS WITH A NEGATIVE IMPACT REPRESENT RISKS, WHICH REQUIRE MANAGEMENT’S ASSESSMENT AND RESPONSE

42. Event identification
AN EVENT IS AN INCIDENT OR OCCURRENCE ARISING FROM INTERNAL OR EXTERNAL SOURCES THAT AFFECTS IMPLEMENTATION OF STRATEGY OR ACHIEVEMENT OF OBJECTIVES
A NUMBER OF EXTERNAL AND INTERNAL FACTORS DRIVE EVENTS

43. Event identification CONTRIBUTING EXTERNAL FACTORS ECONOMIC
NATURAL ENVIRONMENT
POLITICAL
SOCIAL
CONTRIBUTING INTERNAL FACTORS
INFRASTRUCTURE
PERSONNEL
PROCESS
TECHNOLOGY

44. SOME TYPICAL GOVERNMENT RISKS
Economic changes such as lower economic growth reduce tax revenue and opportunities to provide a wider range of services or limit the availability or quality of existing services
Failure to innovate leading to sub-standard services
Loss or misappropriation of funds through fraud or impropriety
Environmental damage caused by failure of regulations or government inspection regime
Inconsistent policy objectives resulting in unwanted outcomes
Project delays cost overruns and inadequate quality standards
Inadequate skills or resources to deliver services as required
Failure of contractors, partners or other government agencies to provide services as required
Failure to properly evaluate pilot projects before a new service is introduced may result in problems when the service becomes fully operational
Failure to measure performance adequately
Technical risk – failure to keep pace with technical developments, or investment in inappropriate or mismatched technology
Inadequate service plans to maintain continuity of service delivery
Failure to monitor implementation
Achieving Service Delivery

45. Event identification
AN AGENCY’S EVENT IDENTIFICATION METHODOLOGY MAY BE COMPRISED OF A COMBINATION OF TECHNIQUES, TOGETHER WITH SUPPORTING TOOLS
TECHNIQUES VARY WIDELY IN LEVEL OF SOPHISTICATION

46. EXAMPLES OF TECHNIQUES FOR IDENTIFYING EVENTS:
EVENT INVENTORIES (LISTING COMMON POTENTIAL EVENTS)
INTERNAL ANALYSIS (COMPLETED AS PART OF A ROUTINE PLANNING CYCLE PROCESS, TYPICALLY THROUGH STAFF MEETINGS)
ESCALATION OR THRESHOLD TRIGGERS (COMPARE CURRENT TRANSACTIONS OR EVENTS WITH PREDEFINED CRITERIA)
FACILITATED WORKSHOPS AND INTERVIEWS (DRAW ON ACCUMULATED KNOWLEDGE AND EXPERIENCE OF MANAGEMENT, STAFF AND STAKEHOLDERS THROUGH STRUCTURED DISCUSSIONS)

47. Event identification
POTENTIAL EVENTS ARE ALSO IDENTIFIED ON AN ONGOING BASIS IN CONNECTION WITH ROUTINE BUSINESS ACTIVITIES, SUCH AS
INDUSTRY/TECHNICAL CONFERENCES
PEER WEBSITES
BENCHMARKING REPORTS
TRADE & PROFESSIONAL JOURNALS
MEDIA REPORTS
MONTHLY MANAGEMENT REPORTS

48. Event identification
ANOTHER USEFUL TOOL IS TO INTRODUCE AN INTERMEDIATE STEP - IDENTIFYING WHAT YOU DEPEND UPON TO ACHIEVE YOUR OBJECTIVES
THIS IS SOMETIMES MUCH EASIER THAN TRYING TO THINK ABOUT ALL THE EVENTS THAT COULD PREVENT SUCCESS

49. Event identification
EVENTS DO NOT OCCUR IN ISOLATION – ONE EVENT CAN TRIGGER ANOTHER AND EVENTS CAN OCCUR CONCURRENTLY
MANAGEMENT SHOULD UNDERSTAND HOW EVENTS RELATE TO ONE ANOTHER

50. Event identification
IT MAY BE USEFUL TO GROUP EVENTS INTO CATEGORIES (i.e. GROUPS OF SIMILAR POTENTIAL EVENTS)
SIMILAR EVENTS SHOULD BE COMBINED TO DEVELOP AN INITIAL RISK UNIVERSE AND DETERMINE HOW TO TRACK AND UPDATE THE LISTING OF POTENTIAL EVENTS AND RISKS

51. Event identification FINANCIAL FOLKS NEED TO REMEMBER THAT:
EVENT IDENTIFICATION NEEDS TO INVOLVE A COMPLETE CROSS-SECTION OF MANAGEMENT, AS POSSIBLE EVENTS INCLUDE BUSINESS SCENARIOS OF WHICH FINANCIAL MANAGEMENT MAY NOT BE AWARE

52. INDICATORS THAT THE ERM OBJECTIVE SETTING PRINCIPLES ARE IMPLEMENTED
1. THE ORGANIZATION DEFINES GOALS AND OBJECTIVES FOR THE ENTERPRISE AS A WHOLE
2. AN EFFECTIVE STRATEGIC PLANNING PROCESS IS IN PLACE TO FORMULATE STRATEGIES THAT WILL ENABLE THE ORGANIZATION TO ACHIEVE ITS BUSINESS OBJECTIVE

53. INDICATORS THAT THE ERM OBJECTIVE SETTING PRINCIPLES ARE IMPLEMENTED (CONT’D)
3. BUSINESS STRATEGIES ARE CLEARLY ARTICULATED WITH OBJECTIVES LINKED TO EACH
4. THE RISK IDENTIFICATION PROCESS IS DESIGNED TO MAKE A CLEAR LINK BETWEEN THE ORGANIZATION’S OBJECTIVES AND THE ASSOCIATED RISKS

54. INDICATORS THAT THE ERM OBJECTIVE SETTING PRINCIPLES ARE IMPLEMENTED (CONT’D)
5. RISK TO THE ACHIEVEMENT OF OBJECTIVES IS EVALUATED TO ENSURE IT DOES NOT EXCEED THE LEVELS OF RISK DETERMINED BY MANAGEMENT AS ACCEPTABLE
6. ACCEPTABLE TOLERANCE LIMITS ON THE RISK TO THE ACHIEVEMENT OF KEY OBJECTIVES HAVE BEEN DETERMINED.
7. MANAGEMENT USES MEANINGFUL PERFORMANCE MEASURES IN MONITORING RESULTS AGAINST OTHER SET TOLERANCES

55. INDICATORS THAT THE ERM EVENT IDENTIFICATION PRINCIPLES ARE IMPLEMENTED
1. DATA ON THE BUSINESS OPERATING ENVIRONMENT – POLITICAL, ECONOMIC, ETC., EVENTS IS CAPTURED AND REGULARLY EVALUATED IN TERMS OF THEIR POTENTIAL IMPACT UPON THE ORGANIZATION’S BUSINESS OBJECTIVES
2. A PORTFOLIO OF EVENTS THAT COULD AFFECT THE ACHIEVEMENT OF OBJECTIVES – INTERNAL AND EXTERNAL – HAS BEEN PREPARED
3. EVENTS ARE LINKED TO AND RISK EVALUATED BY INDIVIDUAL OBJECTIVE

56. INDICATORS THAT THE ERM EVENT IDENTIFICATION PRINCIPLES ARE IMPLEMENTED (CONT’D)
4. GOALS AND OBJECTIVES FOR IDENTIFYING EVENTS AND THE RELATED RISKS EXIST AND ARE COMMUNICATED TO ALL SEGMENTS OF THE ORGANIZATION
5. RESPONSIBILITIES AND ACCOUNTABLES FOR RISK IDENTIFICATION ARE CLEARLY DEFINED AND UNDERSTOOD
6. RISK IS CONSIDERED IN TERMS OF NOT JUST ISOLATED EVENTS BUT ALSO INTER-RELATED EVENTS
7. EVENTS ARE CATEGORIZED INTO USEFUL GROUPS TO FACILITATE THE AGGREGATION OF INFORMATION FOR PURPOSES OF ASSESSING RISKS
8. THE ORGANIZATION EVALUATES EVENTS IN THE CONTEXT OF THE POTENTIAL UPSIDES (OPPORTUNITIES) AS WELL AS THE DOWNSIDE (RISKS)

57. Event identification
THE NEXT TOPIC, OR THE RISK ASSESSMENT COMPONENT, ALLOWS AN AGENCY TO CONSIDER THE EXTENT TO WHICH POTENTIAL EVENTS MIGHT HAVE AN IMPACT ON ACHIEVEMENT OF OBJECTIVES

58. SECTION IV RISK ASSESSMENT

59. Risk Assessment
Risk is “the possibility that an event will occur and adversely affect the achievement of objectives.”
Thereby decreasing value for the entity’s stakeholders.

60. Risk Assessment
- Risks are analyzed and assessed as to their likelihood and impact
- Management considers the mix of future events, both expected & unexpected
- Useful first step – often a “brainstorming” session
- What is the “worst that could happen,” or the “worst that happened?”

61. Consider the “Risk Appetite”
Broadly defined as amount of risk an entity is willing to accept in pursuing its objectives.
For most government entities: risk appetite is fairly low!
Related is risk tolerance: “tolerable level of variation associated w/ a particular objective.”

62. Consider Both Inherent & Residual Risk
Inherent – Risk without any management activity or before controls are in place.
Example: inherent risk mitigated by payment card’s policies and procedures.
Residual – level of risk that remains after management has a plan in place to deal with the risk.
Example: residual risk remains after payment card policies are in place.

63. Consider both Likelihood and Impact
Likelihood: possibility an event will occur, measured in “low, medium, high,’ percentage or some frequency of occurrence.
Impact: Effect on an agency on others.

64. Risk Assessment Uses Qualitative and Quantitative Methods
Quantitative methods more precise
Qualitative methods are necessary in situations where business activity does not lend to quant. evaluation, or is not cost/effective.
Choice should reflect needs of the business unit and its employees.

65. Consider Risk in Objective Setting
The framework of objectives: strategic, operational, reporting, compliance, (see COSO cube).
Typically considerable overlap.
Several examples follow.

66. Example: Operational
Risk that subrecipients in HIV/AIDS program are being reimbursed for unsupported expenditures.
Assessment – Extent of reimbursement and frequency is analyzed. Note that paying subrecipient invoices for which no documentation exists subjects agency to possible fraud.

67. Example: Reporting
Risk that management does not notify the Comptroller’s Office of overpayments; and failure to recover funds.
Assess why a breakdown in both state policy and actual recoupment.
Lack of notification negates possibility of a thorough investigation.

68. SECTION V RISK RESPONSE

69. V – Risk Response
“Having assessed relevant risks, management determines how it will respond, reviewing likelihood and impact, evaluating costs and benefits, and selecting options that bring residual (remaining risk) within the entity’s risk tolerances.”

70. The Four Categories of Risk Response:
Avoidance – not participating in events that give rise to risk.
Reduction: Specific actions taken to reduce likelihood or impact or both.
Sharing: Reducing likelihood or impact by sharing portion of the risk (insurance)
Acceptance: No action taken. “learns to live with the risk,” and monitor it...

71. Additional Factors in Risk Response
- For many risks, responses are obvious & well accepted.
- Response to risk may affect other factors, or affect likelihood/impact differently.
- Cost/Benefit – often cost side easier to analyze; benefit side may be more subjective.
- Risk response may lead to improvements in service areas or additional value.
- Considers both inherent and residual risk.

72. A Portfolio Perspective
ERM approach requires that risk be considered from a “portfolio” or entity-wide perspective.
Management first determines risk in each division or business unit.
Develops a composite assessment of risk reflecting unit’s residual risk profile relative to its objectives & risk tolerances.

73. A Portfolio View of Risk:
Can be depicted in several ways – focusing on major risk or event categories across divisions, program units, etc.
While risk in a program unit may be within risk tolerance; taken together they may exceed the risk appetite of entity.
Or have common elements that raise concerns.

74. Back to our previous examples:
1. Subrecipients in HIV/AIDS programs are routinely reimbursed for unsupported expenditures.
1. After further analysis corrective action plan identified and remedies failures in the reimbursement process, a cost/effective methodology to monitor expenditures.

75. And our other example…
2. Management did not notify the Comptroller of the Treasury of overpayments and failed to recoup overpaid funds.
2. Corrective action plan requires compliance with Policy 11; reviews recoupment procedures.

76. SECTION VI CONTROL ACTIVITIES

77. Integration with Risk Responses
Control activities generally are established to ensure risk responses are carried out. However, control activities themselves are risk responses.

78. Integration with Risk Responses
Share risk
Agency participates in state’s collateral pool or risk management fund.
Reduce risk
Reduces likelihood and impact, e.g. Disaster recovery plan in place to reduce the impact of a natural disaster.
Risk Avoidance
Policies that forbid certain “risky business” e.g., agency not authorized to invest in certain risky investment instruments.
Risk Acceptance
Monitoring of certain activities that are deemed high risk e.g., high risk investments.

79. CONTROL ACTIVITIES
A single control activity can address multiple risk responses or
Multiple control activities may be needed for one risk response.

80. Types of Control Activities
Preventive
Detective
Manual (People Based)
Automated (System Based)

81. Types of Control Activities
Preventive Controls are more reliable
Prevents errors
Proactive approach – frees up people resources

82. Types of Control Activities

83. Types of Control Activities
Reconciliations (Detective)
Personnel approving or executing transactions should not perform reconciliations.
Reviews (Detective)
Budget to Actual
Current to prior period comparisons
Performance measurements

84. Types of Control Activities
Approval/Authorizations (Preventive)
Policies and procedures
Limits to authority
Supporting documentation
Question unusual items

85. Types of Controls of Control Activities
Assets Security (Preventive and Detective)
Physical safeguards
Record retention
Periodic counts/Inventories

86. Types of Controls of Control Activities
Segregation of Duties (Preventive and Detective)
The following functions should be segregated
Approval
Accounting/Reconciling
Asset Custody

87. Levels of Control Activities
Entity Level Controls
Controls management implement to establish the appropriate tone at the top. (Strategic Objectives)
E.g., Employees sign a code of conduct
Process Level Controls
Mitigate risks involved in initiating, recording, processing or reporting transactions.
IT and Application Controls
Further mitigates process level risks

88. Levels of Control Activities
Pervasive Level
Adequate training of personnel
Access restrictions
Authorization
Segregation of duties
Specific Level
Validation
Reconciliation

89. CONTROL ACTIVITIES The Writing on The Wall
Applying too narrow a focus to the identification of risks can lead to overlooking potential risks and issues.
Think about risks without considering the existing processes and controls in place.

90. Effectiveness and Efficiency
Control activities must be tested to ensure there are no material weaknesses or significant deficiencies.
Management should also ensure that control activities are carried out in a timely manner.
Internal auditors may support management by providing assurance on the effectiveness and efficiency of control activates.

91. Control Activities Worksheet
Worksheet provided in Section VI can be used as a template for documenting risks and related controls
Divided into 3 parts
Part I Strategic, Operations, and Reporting Objectives
Part II Compliance Objectives
Part III Fraud

92. Control Activities Worksheet
Worksheet is NOT all inclusive.
N/A responses need to be addressed.
Remember the writing on the wall.
Any policy or procedure used as a risk response in Part I or III should be addressed in Part II, Compliance.
Template may be modified.

93. Control Activities Worksheet Part I Strategic, Operations, and Reporting Objectives
Categorized by business processes.
Budget Process
Cash Disbursement/Expenditures
Cash Receipts/Revenues
Cash Management
Liabilities
Capital Assets/Inventory/Equipment
Information Systems/Data Processing
Personnel/Employee Compensation
Financial Reporting
Accounts Receivable
Investments

94. Control Activities Worksheet Part III Fraud
Categorized by the Association of Certified Fraud Examiner’s Categories of Fraud.
Misappropriation of assets
Corruption
Fraudulent Reporting

95. Control Activities Worksheet Part III Fraud
Categories should be applied to each business process.
Fraud control risk management should be integrated into the agency's philosophy, practices and business plans rather than be seen or practiced as a separate program. When it is integrated, risk management becomes the business of everyone in the organization.

96. Control Activities Worksheet Part III Fraud
Core areas to focus on
Information systems;
Contracts;
Grants and other payments or benefits programs;
Purchasing;
Services provided to the community;
Revenue collection;
Use of government credit cards;
Travel allowance and other common allowances;
Salaries; And
Property and other physical assets including physical security.

97. Other Considerations
Risks with large or moderate impact and probable (high) or reasonably possible (medium) likelihood of occurrence are your significant risks. These are the risks you need to address with control activities.
No risk response is needed for insignificant risks but BE CAUTIOUS AND OBJECTIVE.
Insignificant risks still need to be documented on the worksheet. Explanation of insignificant nature should be documented.

98. Other Considerations
Inherent Risks - Control Activities= Residual Risks
Ensure you evaluate all insignificant risks not addressed with control activities on an aggregate basis to ensure your residual risk is within your risk tolerance.
All risks (regardless of significance) should still be included.

99. Other Considerations
If any of the risks already included in the worksheet are deemed as having a low impact or remote likelihood of occurrence, treat as as a risk that is not applicable to your agency and document explanation on worksheet.
Don’t forget about abuse.

100. SECTION VII INFORMATION AND COMMUNICATION

101. Information Needed at all levels of an organization
to identify, assess, and respond to risks
to run the entity
to achieve its objectives
Internal and external sources
Financial and nonfinancial

102. Strategic and Integrated Systems
Data processing and data management become a shared responsibility
IS architecture needs to be flexible and agile to effectively integrate with affiliated external parties
Has management’s risk management techniques contemplated organizational goals in making technology selection and implementation decisions?

103. Integration with Operations
Applications facilitate access to information previously trapped in functional or departmental silos
Information becomes available for widespread use
Transactions are recorded and tracked in real time
Managers have immediate access to financial and operating information more effectively to control agency activities

104. Depth and Timeliness of Information
Information infrastructure sources and captures data in a timeframe and at a depth consistent with an entity’s need to
identify,
assess, and
respond to risks, and
remain within risk tolerances
Timeliness needs to be consistent with the rate of change in the entity’s internal and external environments

105. Information Quality
Data reliability is a critical attribute of information systems and data-driven automated decision systems
Inaccurate data results in unidentified risks or poor assessments and bad management decisions
Quality of information includes ascertaining whether informational content is
Appropriate Accurate
Timely Accessible
Current

106. Communication Inherent in information systems
Must provide information to appropriate personnel to carry out strategic, operating, reporting, compliance, and stewardship responsibilities
Must deal with
expectations,
responsibilities of individuals and groups
Other important matters

107. Internal Communication
Behavioral expectations and responsibilities of personnel
Clear statement of entity’s risk management philosophy and approach
Clear delegation of authority
Should effectively convey
The importance and relevance of effective ERM
The entity’s objectives, risk appetite, risk tolerances
A common risk language
Roles and responsibilities of personnel in effecting and supporting the components of ERM

108. External Communication
Open external communication channels
Constituents provide highly significant input on design and quality of products and services
Enables an entity to address evolving customer demands or preferences
Recognize such implications
Investigate
Take necessary corrective actions
Focus on impact on financial reporting and compliance as well as operating objectives

109. Means of Communicating
Actions speak louder than words
Actions influenced by the entity’s history and culture
Operating with integrity
Culture is well understood throughout the organization
Embed communications on ERM into an entity’s broad-based, ongoing communications programs and into the fabric of the organization

110. SECTION VIII MONITORING

111. Monitoring
Assessing the presence and functioning of components over time
Accomplished through
Ongoing monitoring activities
Separate evaluations
Combination of the two
ERM changes over time
Once effective risk responses become irrelevant
Control activities become less effective or no longer are performed
Entity objectives might change

112. Ongoing Monitoring Activities
Occur through regular management activities
Variance analysis
Comparisons of information with disparate sources
Dealing with unexpected occurrences

113. Scope and Frequency Evaluations of ERM depend on
significance of risks
importance of risk responses and
related controls in managing the risks
Address application in strategy setting with respect to significant activities
Scope depends on which objectives categories are addressed

114. Who Evaluates Self assessments
Person responsible for particular unit or function determines effectiveness of ERM for their activities
Division/function head
Line managers
Controller
Senior management
Internal auditors (management cannot delegate its responsibility)
External auditors (caution!)

115. The Evaluation Process
Evaluating ERM is a process in itself
Approaches and techniques vary
Consistent and disciplined approach should be brought to the process
Understand entity activities and components of ERM being addressed
Determine ERM system actually works
Discuss with personnel who actually perform or are affected by ERM
Analyze ERM process design and results of tests performed
Determine if process provides reasonable assurance with respect to the stated objectives

116. Methodology
A variety of evaluation methodologies and techniques are available
Checklists
Questionnaires
Flowcharting techniques
Comparing or benchmarking to best in class entity
Planning steps
Performance steps

117. Documentation
Varies based on the entity’s size, complexity, and similar factors
Evaluations more effective and efficient with appropriate level of documentation
Document and retain
Evaluation process itself
Descriptions of tests and analyses
Support for statement to external parties regarding ERM effectiveness
Retention policy

118. Reporting Deficiencies
Deficiencies noted from
Ongoing monitoring procedures
Separate evaluations
External parties
Reported directly to persons directly responsible for achieving business objectives affected by the deficiency
Report specific types of deficiencies to senior management and/or oversight body
Corrective actions taken or to be taken should be reported back to relevant personnel

119. What Is Reported
All identified ERM deficiencies that affect an entity’s ability
to develop and implement its strategy and
to set and achieve its objectives
Must report significant deficiencies and material weaknesses
Use qualitative and quantitative materiality
Report identified opportunities to increase the likelihood entity objectives will be achieved

120. To Whom to Report Determining right party is critical
Immediate superiors through normal channels
They in turn communicate upstream or laterally so the information ends up with someone who has the authority to act
e.g., senior management, department head, audit committee, other oversight body
Consider alternative channels for reporting sensitive information
Fraud and illegal or improper acts