Monitoring and Reporting on Risk

1. Chapter 11 Monitoring and Reporting on Risk

2. Board Risk • The board is ultimately responsible for risk management • Oversee strategic risks, operational risks, and financial risks • Many federal regulations have been put in place to evaluate risk management • The Board also presents a risk in Corporate Governance

3. Corporate Governance • The mechanisms and procedures that determine how corporations are run; • Medium to large corporations have separation of ownership and control, which means the corporation is owned by its shareholders but controlled by its board of directors and managers; • CG ensures that mgmt and the Board operate with the best interests of the owners in mind.

4. How to align the interest of Directors with those of Shareholders: • Incentive compensation • Legal Liability • Management reputation • Takeover threats

5. Risk Management Reporting • Board risk committee • Board audit committee • Finance committee • Chief risk officer (CRO)

6. Board Risk Committee • Implements the risk management process at all times and levels • Identifies risks • Sets the company’s tolerance for risk • Prioritizes risks to be handled

7. Chief Risk Officer • Executive in charge of overseeing the risk management department • Communicates with the board on risk decisions and policies

8. Audit Committee • Evaluates the company’s compliance to regulations and financial reporting standards • Focus on compliance with standards already in action • Work with internal and external auditors • Responsible for annual financial reporting

9. Internal Controls • Committee of Sponsoring Organizations of the Treadway Commission (COSO) • 3 objectives: • 1.Effectiveness and efficiency of operations • 2. Reporting • 3. Compliance

10. COSO’s Five Components

11. Internal Controls Within a Company • The board sets policy and appoints authority for implementing the risk management objectives • The management of the risk department are responsible for creating internal controls to monitor risk • Employees support the risk management department • Auditors monitor compliance of the internal controls

12. Internal Control Linked to Risk Monitoring • Internal controls can indicate changes in risk • Productive risk monitoring uncovers risk while still manageable • Not every risk can be identified

13. Internal Audit Support to Risk Monitoring • The internal audit department assess the company’s success in completing their objectives • Evaluation and assessment • Approve existing internal controls • Ensures accuracy • External auditors verify financial reporting

14. Risk Management vs. Internal Auditors • Complementary functions • Risk management pinpoints and prioritizes risks then establishes plans to manage the risks • Internal auditors examine and investigate the internal controls put in place by the risk management

15. Risk-Based Auditing • 3 Principles • Audit to business objectives • Materiality of the risk focus • Identify threats to the success of the business

16. Risk Assurance • Level of confidence in the risk management department as a whole • Reduces cost and increases value • Several benefits

17. Control Risk Self-Assessment • CRSA: management tool designed to self-audit risk assurance within a certain area of responsibility • Evaluates effectiveness, focuses on goals and threats, and allows managers to get a better understanding of where the company is falling short and standing out

18. Risk Management Monitoring and Reporting • The flow of accurate information throughout the entire chain of command within the business is the focus • Timely and detailed • User-friendly format is important