Presentation on theme: "Establishing an Effective Enterprise risk management (ERM) program"— Presentation transcript:
1 Establishing an Effective Enterprise risk management (ERM) program .Presented by:Frank DiBenedettoIntroduction to ERMFlorida State Board of Accountancy # Credit Hour AA
2 Enterprise Risk Management (ERM) is a process: What is Enterprise Risk Management (ERM) ?Enterprise Risk Management (ERM) is a process:effected by an entity’s board of directors, management, and other personnel,applied in strategic manner and across the enterprise,designed to identify potential events that may affect the entity, andmanage risk to be within the risk appetite,to provide reasonable assurance regardingachievement of entity objectives.COSO’s Enterprise Risk Management – Integrated Framework
3 Risk Management Approach Attributes of Effective Leaders of Enterprise Risk Management • Broad knowledge of the business and its core strategies • Strong relationships with directors and executive management • Strong communication and facilitation skills • Knowledge of the organization’s risks • Broad acceptance and credibility across the organizationCompliance and risk management framework isbased on best practices from the:Committee of Sponsoring Organizations (COSO) of the Treadway Commission’s Enterprise Risk Management Integrated Framework.Project Management Institute’s (PMI) framework on project management risk.
4 Why do an ERM?#5 Identify potential events (risks) that may affect the enterprise.#4 Provide managers with ongoing information needed to make best decisions.#3 Increase confidence of rating agencies, government regulators and other stakeholders#2 Reduce operational surprises and financial losses to provide reasonable assurance of achieving objectives#1 Improve allocation of capital and resources
5 Support from the Top is a necessity To successfully manage risk, the ERM initiative must be:• Enterprise wide• Viewed as an important strategic effort by senior management• Driven from the top down• Clearly & consistently communicated to/from the Board & SeniorManagementSupport from the Board of Directors and senior management is essential to ensure alignment of focus, resources and attention for ERM.
6 Corporate Risk Policy Enterprise Compliance and Risk Management Policy Establishes an Enterprise Compliance and Risk Management (ECRM) framework to provide a conscious, systematic, effective approach to managing the compliance requirements, risks and opportunities with the overall goal of reducing negative impacts to the organization.Established the Enterprise Compliance & Risk Committee (ECRC) to implement the policy. Specifically:Oversee the incorporation of risk management into the major programs, corporate processes and functions.Ensure adherence to compliance and risk management processes and inclusion of compliance and risk issues in decision making.Oversee implementation and monitoring of compliance/risk policies and procedures.
7 Conduct the Initial Enterprise-wide Risk Assessment & Develop an Action Plan ASSESS the organization’s Top Corporate Risks:•Reach consensus on the Top Risks: those that could potentially have significant impact on the business objectives of the organizationGain understanding of Risks• Assign responsibility for managing the risk (cross function ownership)• Identify controls in place• Determine how the Top Risks will be managed and/or mitigatedIDENTIFY opportunities to enhance risk management activities(especially activities that mitigate the Top Corporate Risks.)
8 Determine Risk Tolerance Impact LevelCustomer Service/ ReliabilityEnvironmentalFinancial/ CreditSevere (5)**Major (4)Significant (3)Moderate (2)Minor (1)** Risk Tolerances criteria need to be determined on a Company and Business unit basis
9 Determine Risk Tolerance Impact LevelHealth/ SafetyReputationWorkforceSevere (5)**Major (4)Significant (3)Moderate (2)Minor (1)** Risk Tolerances criteria need to be determined on a Company and Business unit basis
11 ERM Risk Considerations ERM TerminologyTerminologyDefinitionObjectiveThe main reason(s) for the existence of a process, activity, or project.Risk DescriptionCondition (trigger event) that can result in a Quantified ConsequenceInherent Riskthe uncontrolled risk, prior to implementing any mitigation effortsRisk Tolerancethe level of risk you are willing to takeImpactthe level that the event affects meeting your objectiveMinor (1) • Moderate • Significant • Major • Severe (5)Likelihoodthe probability that the event will happenRare (1) • Unlikely • Possible • Likely • Almost Certain (5)ControlsExisting activities that reduce the inherent impact and/or likelihood of the riskResidual Riskthe risk that remains after Controls have been implemented ( is it acceptable based on Risk Tolerance?)MitigationsRequired actions to reduce the residual impact and/or likelihood to an acceptable Risk Tolerance level.
12 Risk Assessment Questions Questions that could be asked to help identify the organization’s most significant strategic or emerging risks:What are your primary business objectives or strategies?What are the key components of enabling your business strategy or objectives?What internal factors or events could impede or derail each of these key components?What events (external to the organization) could impede or derail each of the key components?What are the three most significant risk events that concern you regarding the organization’s ability to achieve business objectives?Where should the organization enhance its risk management processes to have maximum benefit and impact on its ability to achieve business objectives?•What types of catastrophic risks does the organization face? How prepared is the organization to handle them, if they occur?Attributes of Effective Leaders of Enterprise Risk Management • Broad knowledge of the business and its core strategies • Strong relationships with directors and executive management • Strong communication and facilitation skills • Knowledge of the organization’s risks • Broad acceptance and credibility across the organization
13 Risk Assessment Questions Attributes of Effective Leaders of Enterprise Risk Management • Broad knowledge of the business and its core strategies • Strong relationships with directors and executive management • Strong communication and facilitation skills • Knowledge of the organization’s risks • Broad acceptance and credibility across the organizationQuestions that could be asked to help identify the organization’s most significant strategic or emerging risks.• What financial market risks do you believe are (or will be) significant?• What current or developing legal/regulatory/governmental events or risks might be significant to the success of the business?• Are you concerned about any emerging risks or events? If so, what are they?• What risks are competitors identifying in their regulatory reports that we have not been addressing in our risk analysis?
14 Risks That Could Effect JEA’s Objectives: Conduct the Initial Enterprise-wide Risk Assessment & Develop an Action PlanRisks That Could Effect JEA’s Objectives:Effect JEA’s Objectives:d Effect JEA’s Objectives:Formalize ERM Governance Structure:to perpetuate and instill ERM throughoutmanagement’s decision making and risk mitigationpractices
15 Establish a Management Risk Committee Structure Management risk committees, bring together a wide array of personnel from across the entity that collectively have sufficient knowledge of the organization’s core business model and related risks and risk management practices. A risk committee structure should include:Enterprise Compliance & Risk CommitteeSubordinated CommitteesRisk Working GroupsComprised of the most seniorexecutivesLed by business executivesSubject Matter Expertssupporting SubordinateCommitteesMakes all major risk &compliance decisionsCoordinate mitigation effortsacross functionsAssist in determining mitigationstrategiesApproves risk score changes andadditions/removal of risksMake recommendations toERCRC on major risk decisionsImplement and assess mitigationeffectiveness and challengesEvaluate & monitor risk levels,gaps, & mitigation effortsApprove less significant risk \decisionsIdentify evaluate top corp. risks
16 Establishing Resources Attributes of Effective Leaders of Enterprise Risk ManagementBroad knowledge of the business and its core strategiesBroad knowledge, experience and capabilities relating to riskidentification and managementStrong relationships with mid-level and executive managementStrong communication and facilitation skillsKnowledge of the organization’s risksBroad acceptance and credibility across the organizationAttributes of Effective Leaders of Enterprise Risk Management • Broad knowledge of the business and its core strategies • Strong relationships with directors and executive management • Strong communication and facilitation skills • Knowledge of the organization’s risks • Broad acceptance and credibility across the organizationInternal Audit resources can be used as the catalyst to begin the ERM initiative.
17 Director Audit Services & Chief Risk Officer Treatment of proceeds and bond issue costs per the Bond Resolution, establishment of reserves and adequacy of documentation.Internal Audit / ERMINTERNAL AUDIT ERMCEOBoard of DirectorsDirector Audit Services & Chief Risk OfficerAudit ManagerERM ManagerInternal AuditorsERM AnalystFocus on Current Control Condition• Evaluates existing processes and controls• Tests noted controls• Makes recommendations for deficient controls• Develops annual Audit Plan by conductingAudit Risk Assessment interviews with managementFocus on Risk & Control Consciousness• Performs ongoing assessments of risks havinggreatest impact• Assists management to continuously assesspotential risks or ‘what if’ events• Strategizes for long term risk management• Relies on management assertion without testing
18 Audit Services Independence Maintaining independence between Audit Services and ERM functionsin compliance with IIA standardsInternal audit should:document its responsibilities in the audit charter which is approved by the Finance and Auditcommittee.provide advice and support management’s decision making.recognize any work beyond the assurance activities as a consulting engagement, and theimplementation standards related to such engagement should be followedNOT manage the risks on behalf of managementNOT give objective assurance on any part of the (ERM) framework for which it is responsibleNOT adversely affect the level or quality of its work due to assuming responsibility for riskmanagement activities• ERM guidelines requires that Management:-remains responsible for risk management-make risk management decisions themselves-assume responsibility for assessing and evaluating risks
19 Risk Reporting and Monitoring Develop risk reporting protocols including communication processes, target audiences, and reporting formats.Reporting must clearly:• reflect the relative significance of each risk• identify gaps in controlling/reducing the inherent risk• track progress on mitigation efforts
20 Enterprise Risk Management – Top Corporate Risks Trends – Tier 3 Risks .Total Risk Scores should be tracked over an extended time period to assess progress in mitigating the risks
21 Sustaining ERMSustaining ERMGiven the evolutionary nature of ERM and the dynamic nature of risk,the ERM process must be:• ongoing• not viewed as a one-time event.The initial risk assessment process needs constant monitoring and updating.The entity needs to be attuned to identify new and emerging risks.
22 Why does JEA do Risk Management? Sustaining ERMWhy does JEA do Risk Management?Sustaining ERMOngoing communications from senior management and training will serve toreinforce and nurture the risk management culture. Including but not limited to:Developed:•Board and corporate policies and practices for ERM•Continuing ERM education for the directors and executives•ERM education and training for business-unit management•Policies and action plans to embed ERM processes into the business unitsEstablishing clear linkage between strategic planning and budgeting processesDefining risk appetite(tolerance) for the organization and/or significant business units, including quantification of risk exposure
23 Risk Assessment and Action Plan 4. Conduct an Initial Enterprise-wideRisk Assessment and Action PlanERM Program SummarySeek Board and Senior Management Involvement and OversightIdentify and position a leader to drive the ERM InitiativeEstablish a Management Working GroupEstablish Risk ToleranceConduct an Initial Enterprise-wide Risk Assessment and Action PlanInventory the Existing Risk Management PracticesDevelop Risk ReportingDevelop the Ongoing Communications and Training
24 ERM Program Summary ERM is an evolutionary process of: • Determining/revising tolerance for risk• Identifying potential risks (risk inventory)• Assigning responsibility for risks• Documenting controls in place to reduce Inherent Risk• Addressing mitigations required to shrink Residual Risk to fit within Acceptable Risk Tolerance• Monitoring• Re-assessing, revising, reporting, repeating
25 Florida State Board of Accountancy #0016036 1Credit Hour AA Questions?Introduction to ERMFlorida State Board of Accountancy # Credit Hour AA