1. The Risk Intelligent Enterprise
ACCOUNTING INFORMATION SYSTEMS
The Crossroads of Accounting & IT
Chapter 12
The Risk Intelligent Enterprise
Enterprise Risk Management
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2. When You Need Advice About Enterprise Risk Management, Whom Do You Call? Meet the CFO.
CFOs, not only are more frequently overseeing IT functions, but are also overseeing enterprise risk management.
ERM may be housed in legal, a separate risk management department, or in the financial area headed by the CFO.
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3. 83% of chief financial officers advise on risk mitigation.
Given the higher percentage of CFOs that are asked advice about ERM, it is an important topic for accounting professionals to understand.
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4. 72% of chief financial officers advise regarding IT.
Again, given the higher percentage of CFOs who are expected to provide advice and recommendations regarding IT, it has become even more important for accounting professionals to have a sound understanding of IT issues.
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5. The SEC acknowledged that the root cause of the recent economic downturn was lack of risk management competency in corporate America.
Firms that had sound ERM practices in place were found to have weathered the economic downturn better than those that did not.
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6. Enterprise Risk Management
Enterprise risk management (ERM) goes beyond security and controls.
It is not possible to develop security and controls to address every threat that an enterprise might face.
Identifying, assessing, and mitigating risks has been shown to produce better business performance.
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8. Understanding risk is necessary to understanding controls.
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9. Currently, ISO 31000 is gaining in popularity as an ERM standard.
This is the same organization that provides ISO quality standards used globally.
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10. Risk Intelligence
The risk intelligent enterprise moves beyond security and controls to managing risk and then to using risk to create value.
Risk intelligence can be categorized into:
Unrewarded risks:
No positive payoff.
Only a downside or negative result associated with the risk.
Example: the risk of unauthorized access and theft of confidential customer credit card information.
Rewarded risks:
Possibility of a positive payoff.
Example: risks associated with a business acquisition or merger.
Although some view risk as entirely negative, there are rewarded risks. Some risks are undertaken with the possibility of a positive payoff. An acquisition of a new company may have risk associated with it, but also the possibility of a higher return.
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11. ERM Three rings: IT controls Internal controls
Enterprise risk management
How do IT controls, Internal Controls, and ERM fit together?
Internal controls encompass IT controls.
ERM encompasses both internal controls and IT controls.
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12. ERM IT controls can be viewed as three zones:
Entity-level controls for top management
Application controls for business processes
IT general controls for IT services
IT controls consist of 3 zones:
1) Entity-level IT controls, such as controls that affect the entire organization
2) Application controls, such as controls for accounting software
3) IT General controls, such as controls for networks, databases, and hardware
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13. COSO defines ERM as: Enterprise risk management is a process, effected 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 (COSO, 2004).
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14. ERM Cube Three dimensions to the ERM cube: ERM units. ERM objectives.
ERM components.
The COSO ERM framework encompasses the COSO internal control framework.
COSO expanded the Internal control cube to create the ERM cube.
Notice that portions of the ERM cube are similar to the COSO internal control cube.
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15. ERM Units Enterprise units may consist of: Entity-level units
Divisions
Business units and/or
Subsidiaries
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16. ERM Objectives
The ERM framework specifies four categories of an enterprise’s objectives:
Strategic objectives relate to goals that support the entity’s mission.
Operational objectives relate to the effective and efficient use of the entity’s resources.
Reporting objectives relate to the reliability of the enterprise’s reporting, both internal and external.
Compliance objectives relate to the entity’s compliance with all applicable laws and regulations.
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17. ERM Components
The COSO enterprise risk management framework consists of eight interrelated components.
Internal environment
Objective setting
Event identification
Risk assessment
Risk response
Control activities
Information and communication
Monitoring
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18. Internal Environment
The internal environment relates to the culture of the organization and its risk consciousness.
Influenced by the tone set by top management, the internal environment is also reflected in policies and procedures as well as the organizational structure.
An entity’s risk management philosophy affects its risk appetite, the amount of risk it is willing to accept in pursuit of value.
What is the student’s risk appetite?
How many have a high risk appetite?
Low risk appetite?
What are some examples of actions that exceed their risk appetite?
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19. Objective Setting Four types of objectives: Strategic objectives
Operations objectives
Reporting objectives
Compliance objectives
Risk tolerance is the acceptable level of variation in attaining objectives. For an IT support desk, the objective might be to resolve 100% of client issues during the client’s first call. An acceptable variation might be to resolve 85% of client issues on the first call.
If the objective cannot be achieved, such as 100%, then what is the tolerance for variation from the objective? How much variance is considered acceptable?
With a nuclear power facility, what would be the acceptable variance?
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20. Event Identification
Event identification involves identifying potential events that might affect the entity.
Events can be either:
External events, such as higher interest rates
Internal events, such as fraud enacted by an employee
Events can be classified as producing:
Negative impacts (risk)
Positive impacts (opportunities)
What are the potential events that might affect the students?
Are the events, internal or external?
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21. Risk Assessment
A risk is the possibility that an event will occur and negatively impact the entity’s ability to achieve its stated objectives.
Risk assessment is the process of assessing the extent to which events would impact an entity’s ability to achieve its objectives.
Two aspects to risk assessment:
Impact: the effect that an event will have on the entity’s ability to achieve its objectives if the event occurs.
Likelihood: the possibility or probability that a potential event will occur.
Risk assessment can be broken into:
Impact: the effect
Likelihood: the possibility or probably a potential event will occur
Of the potential events students identified, what would be:
1) The impact
2) The likelihood
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22. Risk Assessment In assessing risk impact, pertinent questions are:
What is the asset’s value? What is the value of customer payment card data stored in the enterprise database? What is the cost to the enterprise if a hacker steals the payment card information?
How much is the asset, such as information, worth to the competition? These assets might include intellectual property, such as the engineering designs for the latest computer chip. What is the value of that intellectual property to the competition?
What is the estimated potential loss per threat?
A high value asset will have a greater impact than an asset of lesser value.
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23. Risk Assessment In assessing risk likelihood, pertinent questions are:
1. What is the possibility or probability of the event (threat) occurring?
2. What is the estimated frequency of the threat occurring?
Possibility may refer to assessing likelihood using qualitative measures, such as high, medium, or low.
Probability may refer to assessing likelihood using a quantitative measure, such as percentages.
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24. Risk Assessment
Annual loss potential is estimated by combining the impact and the frequency of the threat.
Example: A salami attack has low impact but high frequency.
Impact combined with frequency determines the annual loss potential from the potential event.
Possibilities include:
Low frequency but high impact.
High frequency but low impact.
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25. Risk Response Four categories of risk response:
Avoidance: avoid or exit the activities that give rise to the risk.
Reduction: actions taken to reduce risk likelihood, risk impact, or both.
Sharing: Reduce risk likelihood or risk impact by sharing the risk with another entity, such as car insurance.
Acceptance: no action is taken to affect risk likelihood or risk impact.
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26. Control Activities
After an entity has identified risk responses, the next step is to identify the appropriate control activities to ensure that risk responses are implemented as planned.
Examples of control activities include:
performance reviews
physical controls
segregation of duties
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27. Information and Communication
Identifying, capturing, and communicating information accurately, completely, and in a timely manner to enable employees to carry out responsibilities, including risk management responsibilities.
An integrated enterprise system can provide management with additional data and information for use in making enterprise risk management assessments and decisions.
Business intelligence capabilities offer management the ability to gain further insights into enterprise risk management.
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28. Monitoring
Process of monitoring an entity’s enterprise risk management.
Approaches to monitoring include:
Ongoing monitoring of activities that occurs on a ongoing basis, such as weekly reviews.
Separate evaluations, such as an internal audit.
A combination of both ongoing monitoring and separate evaluations.
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29. What is Spreadsheet Risk Management?
A significant risk for many enterprises is the widespread use of spreadsheets with limited controls.
A spreadsheet risk management program includes using access and change controls with spreadsheets in order to be SOX compliant.
While some organizations have security and controls over IT hardware and software, spreadsheets and other shadow data may be widespread and not subject to the controls used throughout the rest of the organization.
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30. SOX Section 404 Internal Control requirements apply to spreadsheets.
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31. How many in the class have ever made a cut and paste error?
Imagine making a $24 million cut and paste error?
What controls could have prevented an error of this magnitude?
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32. Spreadsheets introduce significant risks into the financial reporting process for some organizations. These organizations might have thousands of spreadsheets in shadow data. Although spreadsheet use is typically widespread, controls over spreadsheets tend to be limited.
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33. Global Spreadsheet Identification (SSID) Log
Top Ten Tips For Spreadsheet Risk Management
Tip 1
Inventory all spreadsheets using a global spreadsheet identification system.
Each spreadsheet is assigned a unique spreadsheet ID number (SSID).
Spreadsheets are inventoried in a global SSID log for tracking.
Some organizations do not have a record or know how many spreadsheets are used throughout the organization.
Taking an inventory and using a global spreadsheet ID system is a start.
The SSID can be tracked in a spreadsheet log like the one shown here.
Global Spreadsheet Identification (SSID) Log
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34. Spreadsheet Risk Assessment
Top Ten Tips For Spreadsheet Risk Management
Tip 2
Assign risk for each inventoried spreadsheet by assessing:
Impact of a financial statement error resulting from the spreadsheet’s use, and
The likelihood of a financial statement error.
Assign risk for each spreadsheet by assessing:
The impact of an error and the likelihood of an error.
If there would be a high impact (such as $24 million) if an error occurred, that must be considered with the likelihood of an error. The likelihood of an error may depend upon the controls implemented. Does anyone else audit or crosscheck the spreadsheet results? What controls are in place to verify the accuracy of the spreadsheet?
Spreadsheet Risk Assessment
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35. Top Ten Tips For Spreadsheet Risk Management Tip 3
Store all spreadsheets on a network server to accomplish control objectives:
Access security codes. Assign access logins and password protection.
Identification. A global spreadsheet ID can be assigned when the spreadsheet is stored on the server, facilitating use of a spreadsheet inventory and tracking log.
Firewall protection. Network firewalls can provide extra layers of protection that a spreadsheet on a mobile laptop does not afford.
Virtual private network. Users accessing the spreadsheet from offsite use a VPN (virtual private network), which provides a higher security level than storing spreadsheets on mobile IT assets, such as laptops.
Spreadsheet changes. Storing the spreadsheet on the server facilitates changes made by multiple users.
Storing spreadsheets on a network server improves controls. There is also now the possibility of storing the spreadsheet in the cloud if cloud computing is used.
Although security may be better if the spreadsheet is stored on a network server, this may be very unpopular with accountants. Reasons accounting professionals may give for not storing the spreadsheets on a network server are confidentiality of the data, concern that the file may be inadvertently modified by someone else, accessibility to the file, and/or convenience.
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36. Spreadsheet Change Log
Top Ten Tips For Spreadsheet Risk Management
Tip 4
Implement spreadsheet change controls using two logs:
User log: tracks users accessing the specific spreadsheet.
Change log: documents changes made to spreadsheet design, such as changes to formulas.
Change controls are required to track all changes made to the spreadsheets. This can be accomplished by using a user log to track all users of the spreadsheet and a change log to document changes made to the spreadsheet.
Spreadsheet User Log
Spreadsheet Change Log
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37. Top Ten Tips For Spreadsheet Risk Management Tip 5
Add a contents tab to the spreadsheet to create a spreadsheet table of contents.
Accidental sheet deletions or unauthorized sheet additions can be tracked by comparing to the contents sheet.
A contents worksheet in the spreadsheet makes it easy to track unauthorized sheet additions and deletions.
Spreadsheet Contents
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38. Top Ten Tips For Spreadsheet Risk Management Tip 6
Add a documentation tab to record proper documentation for the spreadsheet.
Include information about the purpose of the spreadsheet.
Authorized users.
User instructions to reduce the likelihood of user error.
Developer notes such as formula specifications, formula links, and any macros and algorithms used.
Document the spreadsheets, including developer notes and user instructions.
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39. Top Ten Tips For Spreadsheet Risk Management Tip 7
Use data validation controls in spreadsheets to reduce data entry errors.
Data validation can be used for input controls, such as drop-down lists.
Reduce hard-keying data entry to reduce the likelihood of typing and formatting errors in entering data.
To reduce errors and increase the likelihood of only valid data being entered, data validation techniques can be used.
One useful data validation technique is drop-down lists. For example, a drop down of state abbreviations prevents a user from mistyping the state name.
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40. Top Ten Tips For Spreadsheet Risk Management Tip 8
Use the spreadsheet protection feature for an access security control.
Password protect the spreadsheet and/or specific cells to prevent unauthorized use or accidental data deletion.
To prevent unauthorized access, the spreadsheet can be password protected.
Or portions of the spreadsheet can be protected against accidental errors.
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41. Top Ten Tips For Spreadsheet Risk Management Tip 9
Test the spreadsheet to assure that it is functioning properly.
Use the spreadsheet auditing tool to track errors and verify formula links.
Enlist other users to test the spreadsheet to verify that it is functioning as planned.
Test spreadsheet calculations.
Test to see if spreadsheet logic is sound.
Testing of the spreadsheet during development can help identify flaws or errors in the design or calculations.
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42. Top Ten Tips For Spreadsheet Risk Management Tip 10
Remember the 80/20 rule for accounting design.
Accounting Insight No. 10 also applies to spreadsheet design. Invest 80 percent of your time in the design of the spreadsheet and only 20 percent of your time maintaining it.
Use a proper system development life cycle (SDLC) methodology to design and build your spreadsheets.
Design spreadsheets so that you never hard-key data into formulas.
The 80/20 rule focuses on using 80% of the time to design and develop the spreadsheet.
Only 20% of the time is then required to maintain a well designed spreadsheet.
If the design is rushed and not well planned, then 80% of the time may be spent maintaining a poorly designed spreadsheet.
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