1

ESTABLISHING AN EFFECTIVE ENTERPRISE RISK MANAGEMENT (ERM) PROGRAM

Presented by: Frank DiBenedetto

Introduction to ERMFlorida State Board of Accountancy

#0016036 1Credit Hour AA

2

What is Enterprise Risk Management (ERM) ?

Enterprise Risk Management (ERM) is a process: o effected by an entity’s board of directors, management, and other personnel, o applied in strategic manner and across the enterprise, o designed to identify potential events that may affect the entity, and o manage risk to be within the risk appetite,

to provide reasonable assurance regarding achievement 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 organization

Compliance and risk management framework is based 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

Support from the Board of Directors and senior management is essential to ensure alignment of focus, resources and attention for ERM.

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 & Senior Management

6

Corporate Risk Policy

Enterprise Compliance and Risk Management PolicyEstablishes 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 organization

• Gain 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

mitigated

IDENTIFY opportunities to enhance risk management activities (especially activities that mitigate the Top Corporate

Risks.)

8

Determine Risk Tolerance

Impact Level Customer Service/ Reliability

Environmental Financial/ Credit

Severe (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 Level Health/ Safety Reputation Workforce

Severe (5) ** ** **

Major (4) ** ** **

Significant (3) ** ** **

Moderate (2) ** ** **

Minor (1) ** ** **

** Risk Tolerances criteria need to be determined on a Company and Business unit basis

10

5 Colors Heat MapTop Corporate Risk Score

Tier 1 10-25 Impact xLikelihoodTier 2 5-9

Tier 3 1-4 Score

Likelihood

Almost Certain

>90%5 5 10 15 20 25 15-25 Red

Likely65-90% 4 4 8 12 16 20 10-12 Orange

Possible35-65% 3 3 6 9 12 15 8-9 Yellow

Unlikely5-35% 2 2 4 6 8 10 4-6 Light

Green

Rare<5% 1 1 2 3 4 5 1-3 Dark

Green

1 2 3 4 5

Minor Moderate Significant Major Severe

Impact

5 Colors Heat Map

11

ERM Terminology

Terminology Definition

Objective The main reason(s) for the existence of a process, activity, or project.

Risk Description Condition (trigger event) that can result in a Quantified Consequence

Inherent Risk the uncontrolled risk, prior to implementing any mitigation efforts

Risk Tolerance the level of risk you are willing to take

Impact the level that the event affects meeting your objectiveMinor (1) • Moderate • Significant • Major • Severe (5)

Likelihood the probability that the event will happenRare (1) • Unlikely • Possible • Likely • Almost Certain (5)

Controls Existing activities that reduce the inherent impact and/or likelihood of the risk

Residual Risk the risk that remains after Controls have been implemented ( is it acceptable based on Risk Tolerance?)

Mitigations Required actions to reduce the residual impact and/or likelihood to an acceptable Risk Tolerance level.

ERM Risk Considerations

12

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 organization

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?

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 organization

Questions 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 Plan

Effect JEA’s Objectives: d Effect JEA’s Objectives:

Formalize ERM Governance Structure: to perpetuate and instill ERM throughout management’s decision making and risk mitigation practices

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 Committee

Subordinated Committees Risk Working Groups

• Comprised of the most senior executives

• Led by business executives • Subject Matter Experts supporting Subordinate Committees

• Makes all major risk & compliance decisions

• Coordinate mitigation efforts across functions

• Assist in determining mitigation strategies

• Approves risk score changes and additions/removal of risks

• Make recommendations to ERCRC on major risk decisions

• Implement and assess mitigation effectiveness and challenges

• Evaluate & monitor risk levels, gaps, & mitigation efforts

• Approve less significant risk \ decisions

• Identify evaluate top corp. risks

16

Establishing Resources

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

Attributes of Effective Leaders of Enterprise Risk Management• Broad knowledge of the business and its core strategies• Broad knowledge, experience and capabilities relating to risk identification and management

• Strong relationships with mid-level and executive management• Strong communication and facilitation skills

• Knowledge of the organization’s risks• Broad acceptance and credibility across the organization

Internal Audit resources can be used as the catalyst to begin the ERM initiative.

17

Director Audit Services & Chief Risk Officer

Board of Directors

Audit Manager

Internal Auditors

ERM Manager

ERM Analyst

INTERNAL AUDIT ERM

Focus on Current Control Condition• Evaluates existing processes and controls• Tests noted controls• Makes recommendations for deficient controls• Develops annual Audit Plan by conducting Audit Risk Assessment interviews with management

Focus on Risk & Control Consciousness• Performs ongoing assessments of risks having greatest impact• Assists management to continuously assess potential risks or ‘what if’ events• Strategizes for long term risk management• Relies on management assertion without testing

CEO

INTERNAL AUDIT / ERM

1.Treatment of proceeds and bond issue costs per the Bond Resolution, establishment of reserves and adequacy of documentation.

18

Audit Services Independence

Maintaining independence between Audit Services and ERM functions in compliance with IIA standards

Internal audit should: • document its responsibilities in the audit charter which is approved by the Finance and Audit committee.• provide advice and support management’s decision making. • recognize any work beyond the assurance activities as a consulting engagement, and the implementation standards related to such engagement should be followed• NOT manage the risks on behalf of management • NOT give objective assurance on any part of the (ERM) framework for which it is responsible• NOT adversely affect the level or quality of its work due to assuming responsibility for risk management 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

Enterprise Risk Management – Top Corporate Risks Trends

Risk Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Business Unit RisksRisk Name 9 9 9 4 4 4 4 4 4 4 4 4 4 4 4 4Corporate Wide RisksRisk Name 12 12 12 12 12 12 8 8 8 4 4 4 4 4 4 4 Risk Name 12 12 12 12 6 6 6 6 6 4 4 4 4 4 4 4Risk Name 8 8 8 4 4 4 4 4 4 4 4 4 4 4 4 4Risk Name 6 6 6 4 4 4 4 4 4 4 4 4 4 4 4 4Risk Name 0 0 8 8 8 8 8 4 4 4 4 4 4 4

Changes201020092008 2011 2012

Total Risk Scores should be tracked over an extended time period to assess progress in mitigating the risks

21

Sustaining ERM

Sustaining ERM

Given 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 ERM

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 units Establishing clear linkage between strategic planning and budgeting processes Defining risk appetite(tolerance) for the organization and/or significant business

units, including quantification of risk exposure

23

ERM Program Summary

1. Seek Board and Senior Management Involvement and Oversight

2. Identify and position a leader to drive the ERM Initiative

3. Establish a Management Working Group

4. Establish Risk Tolerance

5. Conduct an Initial Enterprise-wide Risk Assessment and Action Plan

6. Inventory the Existing Risk Management Practices

7. Develop Risk Reporting

8. Develop the Ongoing Communications and Training

4. Conduct an Initial Enterprise-wideRisk Assessment and Action Plan

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

QUESTIONS?

Introduction to ERMFlorida State Board of Accountancy

#0016036 1Credit Hour AA