Prof. Dr. Olaf Passenheim Enterprise Risk Management Download free books at Download free eBooks at bookboon.com 2 Prof. Dr. Olaf Passenheim Enterprise Risk Management Download free eBooks at bookboon.com 3 Enterprise Risk Management 1 st edition © 2013 Prof. Dr. Olaf Passenheim & bookboon.com ISBN 978-87-7681-684-1 Download free eBooks at bookboon.com Click on the ad to read more Enterprise Risk Management 4 Contents Contents List of Figures 5 1 Introduction 6 1.1 Risks are Opportunities 6 1.2 Risk Management vs. Enterprise Risk Management 7 1.3 Framework of ERM 9 2 Enterprise Risk Management 14 2.1 Events – Risks and Opportunities 14 2.2 Denition of Enterprise Risk Management 15 2.3 e ERM framework 16 2.4 e ERM process 18 2.5 Risk Culture 34 3 Conclusion and Outlook 35 www.sylvania.com We do not reinvent the wheel we reinvent light. Fascinating lighting offers an infinite spectrum of possibilities: Innovative technologies and new markets provide both opportunities and challenges. An environment in which your expertise is in high demand. Enjoy the supportive working atmosphere within our global group and benefit from international career paths. Implement sustainable ideas in close cooperation with other specialists and contribute to influencing our future. Come and join us in reinventing light every day. Light is OSRAM Download free eBooks at bookboon.com Enterprise Risk Management 5 List of Figures List of Figures Figure 1: Missing alignment of ERM and operational Risk Management Figure 2: Integrated enterprise risk management Figure 3: Risk Management Process Figure 4: Risk Identication Figure 5: Elements of a business plan Figure 6: Evaluation of Risks Figure 7: Risk Matrix Download free eBooks at bookboon.com Enterprise Risk Management 6 Introduction 1 Introduction 1.1 Risks are Opportunities Earlier, so it seems, the world was less dangerous. Today, more and more enterprises with innovative, complicated technologies and sensitive know-how work at an international level. e greater, the stage becomes on which they move and the more complicated the role they play, the more numerous become the traps which potentially endanger the achievement of the enterprise’s aims. Hence, raised attention and suitable instruments to play this game are – especially in a dicult economic sphere – more than ever compulsory. Today new technologies are under the magnifying glass to a much greater extent that previously. ere might be two reasons for this. Firstly, nowadays, most economic disasters are published worldwide within seconds and become known in an instant. Secondly, many new technologies are considered to be risky: James Watt in his time produced steam boilers with one rather low overpressure risk. A malfunction with one of his machines would have had an eect of only some meters and would have been limited to a short time span. However, “modern” catastrophes like Chernobyl had an eect of some thousand kilometers and the resultant radioactivity may still be problematic for many generations to come. e combination of fast communication and a wider spread of the eects of errors are responsible for the call for risk management at an enterprise level. Company scandals like those at Enron, Swissair and AIM have devastated the stock market and diminished the overall value of stocks by several billion dollars. Trust in the controlling ability of the auditors with regard to stock market supervision has been lost. Pension funds, the big nanciers of the 21st century, require transparency in the form of a professional evaluation of the business risks and an open communication of the most important dangers which a business might face. Complex markets, an advancing regulation density and rising requirements for the transparency and eectiveness of companies are only few of various business risks. Questions by the shareholders or the board of directors regarding the actual risk situation of the company oen result in the need for comprehensive auditing of the actual risk situation. Download free eBooks at bookboon.com Enterprise Risk Management 7 Introduction 1.2 Risk Management vs. Enterprise Risk Management As a consequence of economic crisis many executives now recognize that single risks can be valued realistically only in their interaction with other risks. Risks should no longer be regarded isolated, but be identied, analyzed and controlled within the framework of all interacting risks. As recent studies conrmed, almost every company looks at these risks in isolation. During the past years, separate subsystems have developed in many companies, for example, on account of legal requirements for the management of risk. ese companies look at single risk ranges, for example Treasury or Compliance. e dependence between the risks oen remains unnoticed. e management of risk up to now places the main focus on avoiding the repetition of errors made in the past. e fact that basic conditions can quickly change, like competitive environments or raw materials prices, are oen out of sight. Structures for the risk management in a company as well as models and methods for risk management which are based on established, statistical and technical experiences do not always consider the constant changes in the market environment and in the company structure. What is oen missing is a logical alignment of risk management with strategic business goals (see gure 1). Operational Risk Management • Risk Identification • Risk Analysis • Risk Response • Risk Controlling Strategic ERM Appoach Risk Management Competence („Toolset“) ERM Risk Strategy Risk Report (Key-Risk-Indicators) Structural Organisation Process Organisation Internal Control System Internal Audit Emergency Concept Strategy Organisation Processes Alignment Operational Risk Management • Risk Identification • Risk Analysis • Risk Response • Risk Controlling Strategic ERM Appoach Risk Management Competence („Toolset“) ERM Risk Strategy Risk Report (Key-Risk-Indicators) Structural Organisation Process Organisation Internal Control System Internal Audit Emergency Concept Strategy Organisation Processes Alignment Figure 1: Missing alignment of ERM and operational Risk Management Download free eBooks at bookboon.com Enterprise Risk Management 8 Introduction e challenge for a company is to bring together its established subsystems with the goal to develop an integrated, company-wide risk management system with dynamic structures. To make the risk management function, it must orientate itself not only to the goals of the company, but also to its strategy and culture. e goal a company wants to achieve with its risk management strategy must be compatible with the overall business objectives. Parallel, lessons learnt from risk management can also lead to an adaptation of the business’ objectives and corporate strategy (see gure 2). ̋Eqpukuvgpe{"ykvj"Uvtcvgi{."Xkukqp"cpf"Okuukqp ̋Fghkpkvkqp"Vctigvu<"V{rgu"qh"Tkum."Tkum"Vqngtcpeg."Vkog."Tkum"Crrgvkvg ̋Cpcn{uku"qh"qwveqog"hqt"qrgtcvkqpcn"dwukpguu ̋Cfcrvkqp"kp"tgncvkqp"vq"vjg"ejqugp"tkum"rtqhkng"*cfcrvkqp"okpkowo"qegrgt"{gct+ ̋Uvtcvgi{"Cwfkv ̋Tgrqtvkpi"vq"uvcmgjqnfgtu"cpf"uwrgtxkuqtu Qticpkucvkqpcn"Htcogyqtm Qticpkucvkqpcn"Uvtwevwtg ̋Fghkpkvkqp1"Urnkv"qh"hwpevkqpu ̋Fghkpkvkqp"qh"tgurqpukdknkvkgu ̋Qticpkucvkqpcn"oqwpvkpi Rtqeguu"Qticpkucvkqp ̋Tkum{"rtqeguugu ̋Pgy"rtqfwevu1"dwukpguu"ctgcu ̋Qticpkucvkqpcn"tgyctf"u{uvgo"cpf"tguqwtegu ̋Qticpkucvkqpcn"fgxgnqrogpv Kpvgtpcn"Eqpvtqn"U{uvgo ̋Tkum"ectt{kpi"eqpegrv ̋Nkokv"U{uvgo"hqt"tkum"eqpvtqn ̋Rtqeguugu"hqt"tkum"eqpvtqn ̋Tkum"tgrqtvkpi"cpf"kpvgtpcn"eqoowpkecvkqp Kpvgtpcn"Cwfkvkpi Uvtcvgike"Htcogyqtm ̋Eqpukuvgpe{"ykvj"Uvtcvgi{."Xkukqp"cpf"Okuukqp ̋Fghkpkvkqp"Vctigvu<"V{rgu"qh"Tkum."Tkum"Vqngtcpeg."Vkog."Tkum"Crrgvkvg ̋Cpcn{uku"qh"qwveqog"hqt"qrgtcvkqpcn"dwukpguu ̋Cfcrvkqp"kp"tgncvkqp"vq"vjg"ejqugp"tkum"rtqhkng"*cfcrvkqp"okpkowo"qegrgt"{gct+ ̋Uvtcvgi{"Cwfkv ̋Tgrqtvkpi"vq"uvcmgjqnfgtu"cpf"uwrgtxkuqtu Qticpkucvkqpcn"Htcogyqtm Qticpkucvkqpcn"Uvtwevwtg ̋Fghkpkvkqp1"Urnkv"qh"hwpevkqpu ̋Fghkpkvkqp"qh"tgurqpukdknkvkgu ̋Qticpkucvkqpcn"oqwpvkpi Rtqeguu"Qticpkucvkqp ̋Tkum{"rtqeguugu ̋Pgy"rtqfwevu1"dwukpguu"ctgcu ̋Qticpkucvkqpcn"tgyctf"u{uvgo"cpf"tguqwtegu ̋Qticpkucvkqpcn"fgxgnqrogpv Kpvgtpcn"Eqpvtqn"U{uvgo ̋Tkum"ectt{kpi"eqpegrv ̋Nkokv"U{uvgo"hqt"tkum"eqpvtqn ̋Rtqeguugu"hqt"tkum"eqpvtqn ̋Tkum"tgrqtvkpi"cpf"kpvgtpcn"eqoowpkecvkqp Kpvgtpcn"Cwfkvkpi Uvtcvgike"Htcogyqtm Figure 2: Integrated enterprise risk management e industry in which a company acts and the business model are other factors of inuence for a company- wide risk management model. For a company in the chemical industry, for example, environment protection orders have a high value. In the insurance industry the minimum requirements inuence risk management (MaRisk VA) as the risk management must be followed and are monitored. Finally, companies must look at the complete risk sphere in which they move. Beside the classical risks which can be strategic, nancial and operational nature or concern the legal environment, so-called emerging risks must be also considered. Emerging risks are global risks which can be predicted only hard, for example climate change, political instability or volatile energy prices. Download free eBooks at bookboon.com Enterprise Risk Management 9 Introduction 1.3 Framework of ERM ere is not yet an internationally binding framework for enterprise risk management. Even terms like “Corporate Governance”, which seems to be understood in the same way by most companies, have no binding legal background in most cases but are more a declaration of will towards the share- and the stakeholder. Nevertheless, there are some frameworks which can be used as a platform to get enterprise risk management started: • ISO 31000 • Sarbanes Oxley Act • Corporate Governance Codex • COSO and COSO II 1.3.1 ISO 31000 Since end of 2008 there is a valid worldwide standard on the subject risk management: e international norm is ISO DIN 31000. Together with the revised ISO guide IEC 73 “Vocabulary”, this norm was published at the end of 2009. In the new ISO 31000 three principles are anchored: Firstly, risk management is understood to be an executive function. Secondly it is tried in the norm to move a so-called top-down estimate and thirdly, the ISO 31000 shows a very generally held base which tries to consider all the dierent risks within an organisation. e ISO 31000 came, like the quality management norm ISO 9001, via general recommendations to allow a wide applicability. Paralleling this, three guides were published for the successful application of the ISO 31000: • Embedding of risk management in the management system • Methods of risk assessment • Emergency management, crisis management and continuity management Risk management sees the ISO 31000 as an executive function. e complete risk management system is based on the principle of the PDCA cycle (Plan-Do-Check-Act): e rst step, “plan”, contains the risk politics of the organisation, order and liability. e second step, “Do”, contains the real risk management process consisting of the execution of risk identication – risk analysis – risk valuation – risk handling. Aerwards the ISO 31000 recommends in the third step, “Check”, to check the adapted risk coping strategies and with ascertained deviations from the plan in the fourth step, “Act”, to remove them. Download free eBooks at bookboon.com Click on the ad to read more Enterprise Risk Management 10 Introduction While up till now only very specic risk management norms have existed, for example, the ISO 27005 in the area of Information Security Management (ISMS), the ISO 31000 tries with a comprehensive top-down approach to register all risks and their handling within an organisation. is means a risk management aer ISO 31000 is not only to be settled exclusively on a strategic enterprise level, but it also deals with the risks to operational management levels within the company. 1.3.2 Sarbanes Oxley Act e Sarbanes Oxley Act is a regulation which passed the US Congress in 2002 as a reaction to dierent nancial scandals. It serves primarily to recover the trust of investors in the general capital market and applies rules and standards by which company functions in order to raise the level of transparency between their nancial reporting and the markets. e Sarbanes Oxley Act is directed equally at the executive boards of companies and chartered accountants. Aer major nancial scandals, criticism arose as well regarding the information policy as lacking responsibility for the behavior of managers. As a counteraction, regulations and reinforced controls should be realized. e nancial scandals of the US companies, Enron and Worldcom, initiated this course of action. 360° thinking . © Deloitte & Touche LLP and affiliated entities. Discover the truth at www.deloitte.ca/careers [...]... between risks and opportunities Opportunities are channelled back to management s strategy or objective-setting processes Risk Assessment – Risks are analyzed, considering likelihood and impact, as a basis for determining how they should be managed Risks are assessed on an inherent and a residual basis Risk Response – Management selects risk responses – avoiding, accepting, reducing, or sharing risk –... describes eight interrelated but diferent components of enterprise risk management which are: (for further detailing go to www.coso.org): Internal Environment – he internal environment encompasses the tone of an organization, and sets the basis for how risk is viewed and addressed by an entity’s people, including risk management philosophy and risk appetite, integrity and ethical values, and the environment... 2004 was expanded to include the area of Enterprise Risk Management he basic assumption of ERM is that every organisation creates values for speciic interest groups At the same time, all organizations and management should consider it their task to determine the level of insecurity they are prepared to accept Download free eBooks at bookboon.com 12 Enterprise Risk Management Introduction COSO II describes... communication also occurs in a broader sense, lowing down, across, and up the entity Monitoring – he entirety of enterprise risk management is monitored and modiications made as necessary Monitoring is accomplished through ongoing management activities, separate evaluations, or both Enterprise risk management is not strictly a serial process, where one component afects only the next It is a multidirectional,... in which they operate Objective Setting – Objectives must exist before management can identify potential events afecting their achievement Enterprise risk management ensures that management has in place a process to set objectives and that the chosen objectives support and align with the entity’s mission and are consistent with its risk appetite Event Identiication – Internal and external events afecting... internal control system he main focus is on the area of general, company-wide risk management and therefore puts a spotlight on the strategic approach Not only are risks considered, but also opportunities his approach can be used to extend the internal control system of a company and to develop a more comprehensive risk management system Download free eBooks at bookboon.com 13 ... Corporate Governance or the improvement of existing Corporate Governance Functioning business management Safeguarding the interests of diferent groups (e.g., of the Stakeholder) Target-oriented cooperation of the company’s management and control Transparency in company communication Adequate handling of risks Management decisions are targeted to be long-term and value added he guidelines of the OECD... – Management selects risk responses – avoiding, accepting, reducing, or sharing risk – developing a set of actions to align risks with the entity’s risk tolerances and risk appetite Control Activities – Policies and procedures are established and implemented to help ensure the risk responses are efectively carried out Information and Communication – Relevant information is identiied, captured, and communicated.. .Enterprise Risk Management Introduction he energy group, Enron, ranked within the top 7 US companies up until its breakdown in 2001 In 1996 its stock exchange value 50 billion US $ Its main business was commodities... of the company in its environment and difers in that aspect from the company constitution which deals primarily with the internal regulation of a company Download free eBooks at bookboon.com 11 Enterprise Risk Management Introduction Up till now still, no uniform understanding or uniform deinition of what Corporate Governance means exists However, in general Corporate Governance can be understood as