Analyzing the Erm Developments … Research Paper
Pages: 10 (3136 words) | Style: APA | Sources: 10
According to "The Economist Intelligence Unit," one of the primary reasons for financial crisis is not being able to achieve success in risk management. A process by the name, Enterprise risk management is utilized by organizations for identification of negative events along with provision of strategies for risk management. This process is amongst the different approaches recommended to defend against the different complexities caused by firm's risks. The risks faced by organizations can be rated and seen wholly owing to the basics and language developed by the integrated framework of, COSO's (Committee of Sponsoring Organizations involving the Treadway Commission) Enterprise Risk Management. Enterprise Risk Management can help handle effectively uncertainties along with any risks and opportunities associated. The value addition capacity is enhanced in this way. The ERM has the capacity of taking different views of legalities, insurance risks, strategic risks, operational and financial risks, provided that it is applied strategically. Not much research has been conducted on ERM despite its significance in dealing with risk management. The existing research consists of field studies of firms that are known to have adopted ERM. The research covers factors in different essentials of ERM adoption. It provides description regarding the appointment of chief officer of risk as well. An extension of the previous task has been made through detailed examination of ways through which ERM ensures enhanced performances and improved management. Currently, organizations are facing increasing pressure of implementing ERM. Amongst different pressures, the more prominent ones are legal cases in process in court, SEC (Securities Exchange Commission), stock exchange regulations, along with the decisions of Standard and Poor for incorporation of ERM in assessments.
The ERM Process
Enterprise Risk Management helps the company management and staff detect impact causing occurrences. ERM helps in management of associated opportunities and risks as well. It ensures successful achievement of company goals simultaneously. Risk is essentially defined as reduced confidence regarding events and their ultimate consequences that might affect the company goals and general performance adversely. Generally, risk is comprised of the possibility of adverse event occurrence along with the potential harm caused by the event. The process is used for pointing out, planning, and analyzing of different responses to an array of risks faced by the organization. The research on pros of ERM includes deliberation on the ERM initiatives. Two primary factors have been identified by studies leading to the adoption of ERM, performance (optimal effectiveness and efficiency) and compliance (like legislations, regulations and directives). The nature of Management of risk is both, a continuous and interactive process. ERM process comprise of risk identification, analysis of probability and impact, finding and prevention of risks along with ensuring information report and communication. Quite a few approaches are recommended for risk management. Sequences of interrelated series that have to be managed include:
Establishment of context
Control and monitoring of risk.
The process of identifying the right kind of tools can be helpful to not only the ones responsible for managing risk but also to the entire organization.
The ERM Systems
Managers can manage potential future risks and uncertainties along with dealing with opportunities using ERM system. The firm's value enhances quite efficiently and effectively through this system. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) has developed the most widely utilized ERM across the globe. The entire process was initiated for identification of any such situation that can have an impact on the organization. It is basically aimed at minimizing risk of the organization in order to ensure achievement of its purpose and goals. Four components make successful ERM namely, structure, infrastructure, process and culture.
ERMs are unable to achieve success where managements lack accountability and motivation. Owing to this reason, a friendly environment needs to be created in the firm. Such an environment of can be created through policy determination, objectives, and strategies of risk management along with establishment of a manageable company risk. Consistency in current operations is also a requisite for this process. Participation and support in risk management and communication of the process to employees is also required for them to be aware of the importance of risk management.
A productive ERMS in pursuit of attaining sustainability successfully requires systematic compliance. It is important for the process to be enhanced regularly along with its practicality for specific operations in the company. According to COSO, ERM is composed of seven steps;
i. Objective setting
ii. Identifying the event iii. Assessing the risk
iv. Risk response
v. Control of activities
vi. Communication and information vii. Monitoring Structure
Any firm with a successful establishment of ERMS needs to ensure the right kind of structure for risk management. It is supposed to ensure identification of duties in the risk management process. Each employee of the organization including the top management is needed to participate in the system. A more suitable structure is yet to be designed for ERMs.
Think of the infrastructure as the foundation of ERMS along with an efficient support and drive. An appropriate infrastructure of an effective ERMS for an organization includes:
Efficient system of evaluation
Suitable training of employees
External and internal channels of communication
Review of the quality management of risk
Types of risks addressed by ERM
Risk is defined as the chance of an event along with the potential risk it might cause. Any risk that has the potential of damaging the value creation of the company is defined as a negative event. In order to ensure value deliverance to company stakeholders, types of risks that the company faced need to be recognized along with different ways to address them. General classification of risks causing damage to a firm's productivity includes strategic, operational, financial reporting, and compliance. Some examples of particular kinds of risk types are:
i. Vitality of the business decreases
ii. Intellectual property and trade secrets suffer loss iii. Competing for talent
iv. Negative effects on the trust mark and reputation
i. Disorderly supply of products
ii. Imitations iii. Under-exploitation of resources/enhance in product cost
iv. Issue or damage of any physical property
v. Annihilation of flow of global data
Disobedience of laws that rule the following fields:
i. Environmental Employee safety and health
ii. Patient safety / clinical trial subject iii. Quality of products/safety issues (violating FDA alongside other Health Authority regulations, Pharmacovigilance)
iv. Sale and promotion of the company products (such as Health Care Compliance (HCC), global Anti-Corruption laws, Foreign Corrupt Practices Act (FCPA), U.S. government contracts/programs)
v. Shielding personal data subject to standards of protection of global data
vi. Statutory laws and local tax variations
4. Financial & Reporting
i. Foreign exchange, credit risk, funding and cash flow
ii. Financial misstatement (this is inclusive of disobeying the Sarbanes Oaxley Act)
Usefulness of ERM to the Management
Daily business activities do not call for board member participation. Yet, the board members are required to ensure conduction of a productive ERM system or program. What are ways to ensure effective conduction of ERM along with the potential risks faced by organization? Three primary levers are included in this context. Firstly, development of a governance structure is needed for management of activities and risk. Secondly, levels of risk policies have to be created for elaborating the board expectations and appetite of the risks being faced. Lastly, the board should ensure establishment of feedback loops for assessment of effectiveness of the program. Boards are hence required to try enhancing their GPA, meaning their Governance, Policy and Assurance.
An integral step for providing the right kind of ERM oversight is the creation of a highly effective structure for controlling risk at the level of BOD (Board of Directors). Risk control or governance comprises of different decisive points of the board along with the committees and roles. Moreover, the link between management and committees is established. Common points linked with the control of board risk are:
Decreased consistency between the management governing structures and the board or separation of roles and duties that is uncertain.
Vague and/or fragmented oversight of risk duties for the entire board and a few sub-committees.
Shortage synthesis between risk management and strategy.
Reduced independence of the chief officer of risk and/or the functions of risk management.
Decreased experience and expertise among the board members.
Risk governance is required to offer oversight for risk management and the board demands a communication tool to describe the expectations and requirements clearly. Significant tools of such nature are the approved risk policies by the board. The board is required to approve the policies along with monitoring the compliance with current and future expectations. Some common factors linked with risk policies are:
Shortage of particular kinds of tolerance limits or levels for major risks.
Lack of standards among a variety of ERM policies, market risk, credit risk, and operational risk among others
Insufficient monitoring and reporting of policy exceptions and resolutions
Missing key or core components of policy, or concealed… [END OF PREVIEW]
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