The term enterprise risk management (ERM) is now bandied around so widely in the business world it would seem reasonable to assume that everyone is doing it. The current reality is significantly different.
The AICPA’s 2015 Report on the Current State of Enterprise Risk Oversight provides some useful insights into where organizations actually are in their risk management practices.
Go back 30 years or so and the term was far from being in common use. The Harvard Business Review published an article in 1996 entitled “The New Religion of Risk Management,” focusing on probability theory, business complexity and the role of computer technology. Conceptually, this may well have had much in common with today’s context for risk management—but in practice, it was seen in a very different light as being more of a technique practiced by specialized statisticians and high-priced consultants.
Of course, risk management is nothing new, having been the basis for most business decision making for centuries. But then, it did not have to be described as risk management; risks were simply what business and military leaders took into account when deciding on a course of action.
From intuitive to applied…
So why has risk management become such a mainstream term, particularly in this century? In part, presumably, it has been a response to the sort of massive corporate damage that occurred to organizations such as Enron, Siemens and, recently, Volkswagen. And that’s not counting the particular risks for financial institutions that led to the demise of many organizations in the past few decades. In large part, it has also been driven by the rapidly changing complexities of today’s world.
As technology drives mind-boggling levels of change in almost every aspect of the world, including business and government, it is no longer realistic to take an intuitive approach to dealing with risks. Now the very wide spectrum of risks (fraud, corruption, error, regulatory noncompliance, operational and strategic failures, just for starters) needs to be proactively managed. In an ideal world, all risks are managed within one integrated framework so that leaders can view a comprehensive profile of risks across the enterprise and then make smarter decisions accordingly.
The disconnect between recognition and actual oversight
Getting back to the AICPA report (which was actually researched and written by North Carolina State University), the findings are that things in the world of risk management are far from ideal—and far from being addressed in a consistent enterprise-wide fashion. While 59 percent of survey respondents believe that the volume and complexity of risks have changed “extensively” or “mostly” in the last five years and 65 percent admit they were caught off guard by an operational surprise “somewhat” to “extensively” in the last five years, only 25 percent believe their organization has a “complete formal enterprise-risk management process in place.” It was also observed that most Boards of Directors expected a lot more involvement by senior executives in risk oversight activities—and yet only 33 percent of organizations maintain risk inventories at the enterprise level. As the report authors conclude: “there appears to be a disconnect between the recognition of today’s high-risk business environment and the decision to invest more in structured risk oversight.” The report does not delve deeply into the reasons for the disconnect, but does refer to competing priorities, presumably for funding and resources. I suspect one of the main reasons for the lack of progress is that of ownership; only 32 percent of respondent organizations have a designated risk leader. Successful implementation of any enterprise-wide initiative without one accountable leader is not particularly likely.
All roads lead to enterprise risk management
Perhaps the best way to look at the practical challenge of implementing well-managed risk management practices is to consider it all as a journey—in which integrated enterprise-wide risk management and reporting is a destination, but not one that can be reached in the short term.
The critical thing is to ensure that at least the organization is on the right path. This means taking a consistent approach to risk management. It may currently take place in a series of silos for specific objectives, such as regulatory compliance, fraud detection or operational risk mitigation. But as long as each risk and compliance function is taking a consistent approach, applying consistent processes and using consistent, scalable technology, then ultimately it is feasible to integrate the siloed approach when the time is right to arrive at true enterprise risk management.
This piece was originally shared on the ACL Blog and is republished here with permission.