While you may feel like the constant repetition of the phrase “enterprise risk management” makes it lose its meaning, you’ll realize that you need it to guarantee business safety and reduce threats. As such, it is crucial that you understand and abide by the Enterprise Risk Management (ERM) requirements.

Enterprise Risk Management and Its Importance

What is ERM?

According to the Committee of Sponsoring Organizations of the Treadway Commission (COSO), ERM is a method that you can use to handle uncertainty and risks thus allowing you to create more opportunities.

The COSO ERM systems have endeavored to provide the strategies that will help businesses to minimize threats while having a high tolerance for risks which is necessary for business growth. The goal setting strategy involves strategizing, reporting, and ensuring compliance management.

Goals of COSO ERM Framework

There is an absolute need that firms strike a balance between their risk appetite and reduction of operational surprises and losses. While there is the need to grab opportunities and improve capital deployment, you should also ensure that you are able to manage multiple and cross-enterprise risks.

Your organization should create strategic objectives that will utilize the available resources to manage your compliance needs. You need to recognize the risks revolving around your firm to develop risk management strategies as well as other alternatives that may be less risky.

When you know your risk tolerance, you can easily accept, avoid, share, or reduce the risks based on the structures of your organization. If you decide to take up the risk, you should be ready to take the possible losses that may result from your decision, and you may consider this as your ERM.

When accepting a risk, ensure that you look at the domino effect on various areas and not only on a single dimension. This will enable you to determine which risks are acceptable for your firm and those that you should keep away from.

What are the Components of Enterprise Risk Management?

ERM comprise eight interrelated components. Your organization should ensure that it considers their entire landscape before taking up an ERM program.

Objective Setting

Before you decide whether to accept or deny a risk, you should clearly lay down your business goals. The entire management, including the Board of Directors, should determine the metric to gauge success to ensure that you only take the necessary risks.

Risk Assessment

You are required to establish the likelihood of the risks materializing which is crucial in creating your risk management program.

Risk Response

Once you are aware of the risks that affect your business, you need to determine the responses which should match your business objectives. You may decide to reduce, accept, avoid or share the risks.

Internal Environment

Ensure that your risk strategy involves the employees’ ethics and integrity to help you detect them and act on them based on your ERM.

Identification of an Event

Once you determine the measures for your success and the risk appetite, you should review all the events that affect the achievement of your goals. Both internal and external events should be classified either as a risk or an opportunity. You will need the creation of policies and procedures to identify and respond to events that pose a significant risk to your business.

Information and Communication

Distribution of information will enable your employees to perform their duties as defined by the organization’s objectives and culture. The flow of information should be flawless between departments and all employees.

Monitoring

You should perform regular audits necessary for adjusting to changing risks.

What is the Auditor’s Role in ERM?

According to COSO ERM Framework, the board and the audit committee should ensure that they effectively address threats. The internal auditor is crucial in evaluation and recommendations using the COSO ERM Integrated Framework.

Why is ERM Important?

ERM make the compliance with the Sarbanes-Oxley Act of 2002 (SOX) (section 404) easier. It offers a broad approach than the controls over financial reporting outlined in the SOX 404. As such, the organizations should ensure that they put in place necessary controls for reporting structure.

How can Technology Ease the ERM Burden?

There are numerous GRC SaaS programs that ease the compliance with ERM. This technology software provides easy-to-use content that enables you to assess the risk and align your objectives thus enabling you to manage your risks.

The risk assessment tools are designed to allow incorporation of vendor management and are PCI DSS aligned with questionnaires, risk documents tracking, and tasks reminders. Also, the tools have easy-to-understand reports that have graphics to explain the risks thus making it easy to present to the Board of Directors for approvals.

The GRC tools provide a single source of information by bringing together all the procedures, reports, records, policies, and controls. This eases the auditing process and minimizes the time required for gathering documents and preparing reports.

Author Bio

Ken Lynch is an enterprise software startup veteran, who has always been fascinated about what drives workers to work and how to make work more engaging. Ken founded Reciprocity to pursue just that. He has propelled Reciprocity’s success with this mission-based goal of engaging employees with the governance, risk, and compliance goals of their company in order to create more socially minded corporate citizens. Ken earned his BS in Computer Science and Electrical Engineering from MIT.  Learn more at ReciprocityLabs.com.