Implementing enterprise risk management is crucial for organizations for several fundamental reasons. By understanding these risks, the company can take proactive steps to mitigate them by implementing corporate risk management. Companies have a responsibility to protect the value of their shareholders. Effective risk management can help protect this value by minimizing exposure to adverse events that may negatively impact a company's financial performance and reputation.
Identifying the Internal Audit and Compliance team When addressing the issue of implementing corporate risk management, it is important to record some situations that coexist in the relationship between internal auditing teams and compliance or compliance teams:
The compliance area is not a sub-area of internal auditing. Pejorative tones are often attributed by those who are technically unaware of the function and purpose of each of these areas, often disqualifying them, which disfavors both internal auditing and compliance. The compliance or compliance area is a management function. On the other hand, internal auditing is independent of management functions and oversees these activities. Internal auditing should never treat the compliance team as part of the auditing team. Like several incidents around the world, the area of compliance or compliance is the first party to be reported by whistleblowers, but what can be seen is that it may be the last part to be considered for carrying out investigations. In some ways, compliance investigations are complex and involve a unique set of skills, and can easily be misguided if not treated subtly. Nevertheless, compliance is an excellent source of internal auditing to mitigate legal problems encountered during investigations. Internal auditing is focused and attentive to the existence and efficiency of internal controls. The compliance team isn't necessarily experienced in internal controls and organizational processes. In essence, their training and experience encompasses a low understanding of internal controls and their relevance. In this sense, an adequate partnership between internal auditing and compliance will allow knowledge transfer, essential to address these controls specifically and to be able to build a solid line of defense against irregularities. Present words associated with a negative to a company's board - no! — It can be admitted that the area is not sensitive to the organization's strategies. It's not like that, as much as compliance has this difficulty, often questioned by its own team, internal auditing has a certain amount of ownership in when and why it should be said no! The internal audit team is generally trained to analyze monetary or non-monetary impacts to substantiate their internal auditing recommendations. With the areas working side by side, internal auditing would help compliance alleviate tension with business units and make compliance work productive. Key attributes for an Internal Audit program Internal auditing services are increasingly gaining space and importance in organizations, due to the need to raise their valuation in the market and generate greater trust and transparency in their operations, since one of their main objectives is to analyze and evaluate companies' internal control systems.
Internal auditing best practices contribute to organizations maintaining compliance with their organizational obligations and also assist in the implementation of corporate risk management. Just as internal auditing professionals should or may be considered as a valid and efficient option, in the process of hiring internal auditing, attention must also be paid to some attributes that will make the program well structured:
A significant internal audit must have a well-structured auditing process, which defines the scope of the audit and a defined plan; It is essential that internal auditing professionals be chosen based solely on skills and competencies, in addition to having sufficient autonomy; A well-structured internal auditing program must be risk-based; Planning ahead is often essential. On-site personnel must be informed well in advance about how long the internal audit process would take, what all the audited sites would be, and what documents might be needed to provide to the auditing team; An internal audit should begin with an initial meeting between senior management and the auditing team. Senior management must also be kept informed of daily findings to maintain transparency; Internal audit planning is the most important parameter of a well-structured program; The advantage of internal auditing based on a qualified standard is that external observers will recognize its format and professionalism; Internal auditing professionals must be well familiar with the standards against which operations are being audited. The scope of the audit must be well defined; Consistent guidelines must be followed to score and evaluate the results of the internal audit and all must have a well-documented record of objective evidence to support those results; The training of internal auditing professionals is essential, and management must allocate the necessary budget. Communication between members of the auditing team is also important. The aspects considered when implementing corporate risk management Risk management in organizations aims to reduce the impacts of risks, should they materialize. This management goes beyond the assessment of your chances of loss, also addressing the establishment of measures aimed at mitigating risks over time.
The current scenario of the organizational environment has increasingly required the adoption of monitoring and control measures and techniques aimed at reducing the occurrence of failures, avoiding problems that jeopardize the entity's image, before shareholders, customers and the market in general. We know how difficult it is for organizations to implement risk management, which can either be outsourced or owned by the company. After all, modifying procedures requires persuasion and skill, so convincing investors about the importance of internal auditing in the final result of financial statements will in most cases be resisted by clients.
In summary, corporate risk management supports the company to achieve its objectives and uncertainties that it may encounter in its journey, always considering the following aspects:
Events — Risks and opportunities; Definition of risk management; Achievement of objectives; Components of risk management — COSO; Relationship between objectives and the components of the COSO — ERM methodology. The objective of this work is to establish conditions for risk management professionals in companies and consultancies to be aligned with the organization's strategy, in order to identify the main risks inherent to each business process and evaluate the effectiveness of internal controls.
How risk management works For the preparation of risk management, the following risk components are observed, namely: strategic, financial, risk monitoring and reporting; prevention considering risk appetite, impact, and probability of its occurrence.
Strategic risks are associated with decision-making by senior management and can generate a substantial loss in the organization's economic value. The risks resulting from business mismanagement often result in material fraud in the financial statements. Examples: failures to anticipate or react to the movement of competitors caused by mergers and acquisitions; decreased market demand for company products and services caused by obsolescence due to the development of new technologies/products by competitors.
Financial risks are those associated with the exposure of the organization's financial operations. It is the risk that cash flows are not effectively managed to maximize operating cash generation, manage the specific risks and returns of financial transactions, and capture and invest financial resources in accordance with established policies. These are occurrences such as inadequate financial management.
Operational risks are associated with the possibility of losses (production, assets, customers, revenues) resulting from failures, deficiencies, or inadequacy of internal processes, people, and systems, as well as external events such as natural disasters, fraud, strikes, and terrorist acts.
Compliance risks relate to the organization's lack of ability or discipline to comply with external laws and/or regulations applicable to the business and internal rules and procedures. Because it includes internal rules and procedures, it presents a broader context than the most commonly cited type of risk, the legal/regulatory risk, resulting from the application of labor, tax and tax laws, relating to contractual relations, market regulation and the provision of services.
Aspects in the implementation of corporate risk management 1. Risk and return
Before getting into the topic of risk management, it should be remembered that any and all business activities necessarily involve risks. The magnitude between gains and risks are directly proportional. Therefore, the greater the expected gains, the greater the risks involved. Entrepreneurship is the search for balance between return and risk, avoiding risks that are too high to seek continuous and sustainable returns.
The term risk is normally linked to events that may occur and that have a negative impact on the activity carried out. In the business world, the concept has been modified to identify and measure that event that may occur.
2. Risk categorization
In the risk management process, two main criteria must be adopted in its categorization: People, as agents of potential risks, and image, as the consequence of the acts performed by the agents. The lack of documentation of the processes can cause a lack of synergy between employees, generating various types of risks:
Reputational, where the company's image may be jeopardized by misuse of resources or poorly designed marketing attitudes. Market risk, where the company's market position may be hampered by the poor execution of operational and administrative tasks, spending more resources than necessary Financial risk: risks related to poor financial planning, which can put the company in financial insolvency. 3. Risk assessment
To assess risks, it is necessary to define the level of exposure that the company is exposed to risk. When managing risks, this level of exposure takes into account the probability of the risk occurring, combined with the amount of probable economic and financial loss that the company will suffer as a result of the risk event.
4. Risk measurement
Risk measurement is essential for assessment in a risk management process. The measurement process involves projecting the business budget by area, paying attention to market projections and trends. The areas mapped with potential risks are projected by category, using criteria for potential operational, reputational, and financial risks.
5. Risk treatment
When adopting risk management, the company must pay attention to the main measures: avoid it, or accept it. Avoiding risk, the company does not participate in possible gains combined with risk, which may be beneficial or harmful, depending on the amount of return and associated risk. Accepting the risk, the company recognizes that the risk exists, maps, measures and categorizes, seeking a sustainable return combined with that risk. This can be done in the following ways: hold, reduce, or share.
Retaining risk means keeping the level of risk and return proportionate, at acceptable levels, through standardization of actions and analyses of the area or type of business. Reducing means making the risk lower, taking into account that the expected return is lower than the risk taken. Sharing means spraying the risk, diluting the risk with other companies and also dividing the expected results. Benefits of implementing a risk management method The adoption of the risk management method can bring numerous benefits to the company that adopts it, of which we can highlight:
It promotes greater company transparency, bringing more credibility to the market, adding market value. Improvement of the company's organizational standards and culture. Prevention of systemic risks and identification of faulty processes in operational and administrative activities. Improvement of financial ratios, through the maximum use of resources, increased the company's efficiency and effectiveness. Benefits of risk management A TATICCA Allinial Global Brazil can help your company achieve better indicators, practices and risk culture with the following benefits:
Continuous improvement of processes Reduce risks Increase efficiency Raise the level of governance Optimize human and technical resources in management Standardization of processes, easier knowledge transfer Greater agility in identifying problems and in the decision-making process through key performance indicators Minimize the likelihood that undesirable risks will manifest Increase the likelihood that the significant risks that the company and its processes are subject to are known and adequately addressed Risk management provides important information for decision-making. By understanding the risks involved in different courses of action, business leaders can make more informed and strategic choices that take into account not only opportunities but also potential adverse consequences. In summary, implementing corporate risk management is essential to protect the interests of stakeholders, ensure regulatory compliance, promote business resilience, and improve the organization's overall performance.
Get in touch with TATICCA Allinial Global Brazil , which provides integrated auditing, accounting and tax services, corporate finance , Financial Advisory , Risk Advisory , technology, business consulting and training. For more information, visit www.taticca.com.br or email taticca@taticca.com.br. Our company has professionals with extensive experience in the market and has certified methodologies for carrying out activities.
