Two important ERM frameworks are COSO and RIMS. Each describes an approach for identifying, analyzing, responding to, and monitoring risks or opportunities, within the internal and external environment facing the enterprise. Management selects a risk response strategy for specific risks identified and analyzed, which may include:
- Avoidance: exiting the activities giving rise to risk
- Reduction: taking action to reduce the likelihood or impact related to the risk
- Share or insure: transferring or sharing a portion of the risk, to reduce it
- Accept: no action is taken, due to a cost/benefit decision
Monitoring is typically performed by management as part of its internal control activities, such as review of analytical reports or management committee meetings with relevant experts, to understand how the risk response strategy is working and whether the objectives are being achieved.
COSO ERM framework:
The COSO "Enterprise Risk Management-Integrated Framework" published in 2004 defines ERM as: "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."
The COSO ERM Framework has eight Components and four objectives categories. It is an expansion of the COSO Internal Control -Integrated Framework published in 1992 and amended in 1994. The eight components - additional components highlighted - are:
- Internal Environment
- Objective Setting
- Event Identification
- Risk Assessment
- Risk Response
- Control Activities
- Information and Communication
- Monitoring
The four objectives categories - additional components highlighted - are:
- Strategy - high-level goals, aligned with and supporting the organization's mission
- Operations - effective and efficient use of resources
- Financial Reporting - reliability of operational and financial reporting
- Compliance - compliance with applicable laws and regulations
RIMS risk maturity model for enterprise risk management:
Enterprise risk management (ERM) as defined by the Risk and Insurance Management Society (RIMS) is the culture, processes and tools to identify strategic opportunities and reduce uncertainty. ERM is a comprehensive view of risk from both operational and strategic perspectives and is a process that supports the reduction of uncertainty and promotes the exploitation of opportunities.
According to the RIMS Risk Maturity Model for ERM, the following seven core competencies, or attributes, measure how well enterprise risk management is embraced by management and ingrained within the organization. A maturity level is determined for each attribute and ERM maturity is determined by the weakest link.
1. ERM-based approach - Degree of executive support for an ERM-based approach within the corporate culture. This goes beyond regulatory compliance across all processes, functions, business lines, roles and geographies. Degree of integration, communication and coordination of internal audit, information technology, compliance, control and risk management.
2. ERM process management - Degree of weaving the ERM Process into business processes and using ERM Process steps to identify, assess, evaluate, mitigate and monitor. Degree of incorporating qualitative methods supported by quantitative methods, analysis, tools.
3. Risk appetite management – Degree of understanding the risk-reward tradeoffs within the business. Accountability within leadership and policy to guide decision-making and attack gaps between perceived and actual risk. Risk appetite defines the boundary of acceptable risk and risk tolerance defines the variation of measuring risk appetite that management deems acceptable.
4. Root cause discipline - Degree of discipline applied to measuring a problem’s root cause and binding events with their process sources to drive the reduction of uncertainty, collection of information and measurement of the controls’ effectiveness. The degree of risk from people, external environment, systems, processes and relationships is explored.
5. Uncovering risks - Degree of quality and penetration coverage of risk assessment activities in documenting risks and opportunities. Degree of collecting knowledge from employee expertise, databases and other electronic files (such as Microsoft® Word, Excel®, etc) to uncover dependencies and correlation across the enterprise.
6. Performance management - Degree of executing vision and strategy, working from financial, customer, business process and learning and growth perspectives, such as Kaplan’s balanced scorecard, or similar approach. Degree of exposure to uncertainty, or potential deviations from plans or expectations.
7. Business resiliency and sustainability – Extent to which the ERM Process’s sustainability aspects are integrated into operational planning. This includes evaluating how planning supports resiliency and value. The degree of ownership and planning beyond recovering technology platforms. Examples include vendor and distribution dependencies, supply chain disruptions, dramatic market pricing changes, cash flow volatility, business liquidity, etc.
