COSO has published in 2004 an updated version of their framework, called Enterprise Risk Management – Integrated Framework.
Risk management is defined 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 risks to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives".
[include picture RK-COSO_ERM-EN]
The entity objectives can be viewed in the context of four categories:
ERM considers activities at all levels of the organization:
- Division or subsidiary
- Business unit processes
The eight components of the framework are interrelated
- Internal framework
- Establishes a philosophy regarding risk management. It recognizes that unexpected as well as expected events may occur.
- Establishes the entity's risk culture.
- Considers all other aspects of how the organization's actions may affect its risk culture.
- Objective Setting
- Is applied when management considers risks strategy in the setting of objectives.
- Forms the risk appetite of the entity i.e., a high-level view of how much risk management and the board are willing to accept.
- Risk tolerance, the acceptable level of variation around objectives, is aligned with risk appetite.
- Event Identification
- Differentiates risks and opportunities.
- Events that may have a negative impact represent risks.
- Events that may have a positive impact represent natural offsets (opportunities), which management channels back to strategy setting.
- Involves identifying those incidents, occurring internally or externally, that could affect strategy and achievement of objectives.
- Addresses how internal and external factors combine and interact to influence the risk profile.
- Risk Assessment
- Allows an entity to understand the extent to which potential events might impact objectives.
- Assesses risks from two perspectives: Likelihood and impact
- Is used to assess risks and is also used to measure the related objectives.
- Employs a combination of both qualitative and quantitative risk assessment methodologies.
- Relates time horizons to objective horizons.
- Assesses risk on both an inherent and a residual basis.
- Risk Response
- Identifies and evaluates possible responses to risk.
- Evaluates options in relation to entity's risk appetite, cost vs. benefit of potential risk responses, and degree to which a response will reduce impact and/or likelihood.
- Selects and executes response based on evaluation of the portfolio of risks and responses.
- Control Activities
- Policies and procedures that help ensure that the risk responses, as well as other entity directives, are carried out.
- Occur throughout the organization, at all levels and in all functions.
- Include application and general information technology controls.
- Information and Communication
- Management identifies, captures, and communicates pertinent information in a form and timeframe that enables people to carry out their responsibilities.
- Communication occurs in a broader sense, flowing down, across, and up the organisation.
- Monitoring. The effectiveness of the other ERM components is monitored through:
- Ongoing monitoring activities.
- Separate evaluations.
- A combination of the two.
The internal auditors play an important role in monitoring ERM, but do NOT have primary responsibility for its implementation or maintenance. They assist management and the board or audit committee in the process by monitoring, evaluating, examining, reporting, recommending improvements.