Marrying Compliance and Risk Management
Professionals in the risk management field have shifted gradually away from a siloed approach to a more integrated approach. As most of us know, however, the switch is not easy; it can be overwhelming to keep on top of the full range of enterprise risks. John Verver posits that technology is the critical enabler here. Without it, getting a big picture view of critical risks can be difficult.
Attitudes and approaches to managing risk across the enterprise have evolved considerably over the past decade or so. Not long ago, relatively few enterprises had a formal chief risk officer (CRO) role or any specific enterprisewide risk management function. The C-suite and board dealt with strategic risk issues, along with some of the bigger-picture operational risks, as part of their everyday roles. In sectors such as finance and insurance, there was generally a more formal recognition of the risk management function. However, in most industries, structured processes for managing risks tended to be limited to regulatory compliance issues.
Today, while fully integrated enterprisewide risk management functions are still the exception, there is a far broader awareness of the value of moving beyond a siloed approach to risk management and compliance toward considering a full range of risks in one overall, interrelated context. The challenge of actually managing to do this in an effective way is, of course, not simple. Keeping on top of macroeconomic risks, data security and privacy, IT system failures, new regulations, compliance, fraud, unethical behaviour, technology innovation and obsolescence, third parties, AML, bribery and corruption, together with countless operational and financial process risks, is potentially overwhelming.
But there is a way to do it — and the challenge is a fascinating one. The analogy that comes to mind to describe this whole process is that of recording a symphony orchestra in a sound studio. Each main component of the risk universe is like a different instrument, with unique risks and management processes. Some components, like instruments, have more impact on the overall symphony, but even the less dominant instruments can still severely reduce the overall effect if not played well.
The conductor is responsible for bringing together all of the different sounds and melodies produced by the musicians and instruments into one cohesive and interconnected result. The sound engineer then uses the sound board to take the multiple inputs produced by microphones, balance and fine tune the distinct musical elements and enhance or suppress levels of different instruments – all so they are heard in the right context and the symphony makes sense as a whole.
Enabling the symphony — and more — through technology
While no analogy is perfect, the CRO and risk management team do have a comparable role to the conductor and sound engineer: bringing together disparate risk and compliance management functions and putting the combined enterprise risk management (ERM) process in place.
As with the symphony recording process, technology is the critical enabler. Without an effective ERM function, and without effective technology, the chances of moving from a siloed approach to an integrated, enterprisewide one are slim. Without the equivalent of a sophisticated recording sound board, for example, it is nearly impossible to produce a comprehensive ERM dashboard that enables management to truly understand and respond to critical risk indicators.
One of the most exciting aspects of the evolving world of ERM is technology — and not just that which manages core processes and produces valuable risk dashboards.
Big data and analytics, used in increasingly innovative ways, enables organizations to transition from a traditional, control-oriented and backward-looking view of risk to one in which risks can be increasingly predicted, detected and even prevented.
Data analytics have long been used to monitor transactions for regulatory compliance risks, as well as internal controls. However, as the volume and velocity of data continues to increase — in some cases, exponentially — there are multiple new sources of data to monitor and analyze. Email, social media, shared industry databases, physical access control and scanning devices, vehicle GPS sensors, as well as a host of types of IoT data, all provide tremendous opportunities for increasingly intelligent ERM.
Pattern detection and prediction capabilities of analytics are becoming ever more powerful, helping transform risk monitoring and management into a far more dynamic process. This, in turn, enables an enterprise to respond to and leverage risks more strategically, giving it a dynamic competitive advantage.
Analytics also provide an opportunity to fundamentally transform traditional approaches to internal controls. Enormous effort and valuable resources are buried in implementing, adhering to and testing traditional financial and operational internal control systems. What if, instead of blindly following existing control procedures, businesses relax controls and use analytics to monitor what is actually happening? This could enable an immediate response to solve actual problems as they arise, rather than creating multiple walls of controls that protect against unsubstantial or irrelevant risks.
The highest-performing enterprises know much of this already; their CROs and ERM teams have likely been effective in driving change in risk management processes. These companies are aware of the benefits of advanced technology and integrated data analytics. For the rest of the enterprise world, the opportunity to turn an inefficient, backward-looking, disparate set of risk management instruments into a coordinated, technology-enabled symphony that truly improves corporate performance is still waiting to be played.