Risk Management

At the core of business management are the rules, practices and processes that define how your organization is directed, operated and controlled. This system, known as corporate governance, is aimed at creating more ethical business practices by aligning the interest of your organization’s stakeholders. In today’s business environment, the more ethical-and transparent-your organization is about its corporate governance practices, the more financially viable it will be.

One of the most important components of effective corporate governance is enterprise risk management (ERM), or the program your organization puts in place to identify, analyze, prioritize and mitigate risks. Determining the level of risk that comes along with certain business operations is not only important, but it’s also mandatory in the case of regulatory compliance.

In this article, we’ll take a closer look at corporate governance, including some of the mechanisms your organization can implement to reduce any inefficiencies or incidents that might arise. Armed with this knowledge, your organization will be better positioned to start on the worry-free path toward an effective and efficient risk management system.

What are the Mechanisms of Corporate Governance?

Corporate governance is the act of directing, controlling, and evaluating your organization. It includes setting forth your organization’s governance structures and principles by a supervisory board to identify the distribution of rights and responsibilities among different stakeholders, and to cultivate a company culture of integrity.

At its foundation, corporate governance is necessary because it helps manage any potential conflicts of interest between shareholders and company management, or among shareholders. However, unlike the day-to-day operational management of the company by your full-time executives and employees, corporate governance has more to do with what the board members of your company do, including how the board sets the values of your company.

Establishing the values, rights, and responsibilities of your organization is a critical step in decision-making, but you also need to consider how you will enforce that code of conduct after you’ve created it. To do so, your organization should use both external and internal corporate governance control mechanisms designed to protect your assets from incidents, reduce any inefficiencies that might arise, and support your overall business objectives.

External Mechanisms of Corporate Governance

External control mechanisms are those controlled by entities outside your organization such as regulators, governments, trade unions and financial institutions. Most of the time, the objectives of external control mechanisms are to assess adequate debt management and legal compliance and are often imposed on organizations by external stakeholders in the forms of union contracts or regulatory guidelines.

To determine regulatory compliance, many organizations must undergo an independent audit as part of the evaluation of the overall corporate governance structure.

Independent Audits

An important part of regulatory compliance and another important external mechanism is that of the independent audit. During an independent audit, an external auditor is responsible for reviewing the financial statements of your organization and issuing an opinion as to their reliability.

In most cases, an independent audit serves both your internal and external stakeholders by helping investors, employees, shareholders and regulators determine the financial performance of your organization. An external audit can also give you a broad view of your organization’s internal working mechanisms and its future outlook.

In addition to external audits, regulatory bodies may also suggest guidelines for best practices, and organizations can choose whether or not to follow them. Typically, organizations report their compliance status to external stakeholders. One such compliance regulation is the Sarbanes-Oxley Act (SOX), which was enacted in 2002 following the scandals surrounding Enron and MCI (formerly WorldCom).

SOX Compliance

Today, all public companies in the United States are obligated to comply with SOX, which was created to provide greater accuracy and transparency of corporate disclosures in financial statements and to safeguard investors from fraudulent accounting practices through effective risk management.

To demonstrate SOX compliance, your organization will need to submit proof, annually, of all risk controls during an external audit. While the cost of SOX compliance varies from organization to organization, you can expect to spend $500,000 to $1 million on compliance efforts and audits-an investment that’s much lower than the penalties associated with non-compliance.

Because SOX compliance is not optional for public companies in the US, ignoring the SOX compliance process can cause a variety of problems for organizations. Not only do SEC enforcement actions cost time and money, but they also potentially result in fines that run into figures in the millions of dollars.

In addition to avoiding legal fines and penalties, some of the benefits of SOX compliance include more robust internal controls and greater public confidence, and less opportunity for financial fraud or other suspicious activity by employees or stakeholders.

Internal Mechanisms of Corporate Governance

While external mechanisms of corporate governance are undoubtedly important, the foremost sets of controls for your organization are the internal mechanisms you use to monitor the progress and activities of your organization, and take corrective actions when your business goes off track.

Internal control mechanisms aim to serve the internal objectives of your organization and its internal stakeholders. Typically, these objectives include smooth business operations, clearly defined reporting lines and performance measurement systems.

Ideally, your internal corporate governance mechanisms will maintain your organization’s larger internal control fabric-the policies, procedures, and technical safeguards that protect your organization’s assets by preventing errors and inappropriate action.

In a similar fashion to the external audits used by regulatory bodies to determine compliance, your organization can also conduct internal audits to determine the effectiveness of internal controls.

Even if regulatory compliance isn’t required for your organization, assigning an internal auditor to assess whether your control mechanisms are meeting regulatory requirements is a good place to start.

Fortunately, your organization doesn’t have to come up with your system of internal controls entirely on its own. The Internal Control-Integrated Framework, developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), defines five necessary components for designing a sound internal control structure:

• Internal control environment
• Risk assessment
• Internal control activities
• Information and communication
• Monitoring

Within COSO’s framework, each of these five key components of internal control includes principles with supporting points of focus to help with designing, implementing, conducting, monitoring, and assessing internal control processes.

In the next section, we’ll discuss how internal controls can help your organization improve its corporate governance and introduce some of the most effective internal controls for corporate governance.

What is the Role of Internal Control in Corporate Governance?

To refresh, internal controls are the policies, procedures, and technical safeguards that protect your organization’s assets by preventing errors and inappropriate action. They’re the more practical aspect of corporate governance-the ways in which your organization ensures compliance with its own moral code.

When it comes to corporate governance, internal controls can help your organization monitor activities and then take corrective actions to accomplish your organizational goals. Typically, internal control procedures are implemented by your organization’s board of directors, audit committee, management, and any other personnel to provide reasonable assurance that you’re meeting your objectives related to reliable financial reporting, efficient operations, and compliance with laws and regulations.

To ensure your organization adheres to corporate governance guidelines, internal control activities also help produce an audit trail that can be followed during both internal and external audits. Ultimately, both money and information should have a clear path through your organization-with good internal controls, that path can easily be re-traced.

For example, one of the compliance requirements for SOX compliance specified in Section 404 is that of the Management Assessment of Internal Controls. 404(a), which applies to all publicly traded companies, requires management to certify whether internal controls over financial reporting (ICFR) are or are not effective and, if not, why.

A clear audit trail will not only help your organization achieve and maintain SOX compliance, but it will also allow your shareholders to feel more confident about their investments and your customers to feel more confident about the goods or services they’ve purchased. When organizations can show proof of good corporate governance via internal controls, they’re often more successful.

The goals of internal corporate governance controls usually include:

• Safeguarding assets: internal controls help prevent asset loss due to mistakes or fraud.
• Minimizing errors: internal controls ensure that financial information is carefully reviewed to reduce errors.
• Promoting efficiency: internal controls prevent mistakes, which improves efficiency in the long run.
• Minimizing risk: internal control procedures may include regular risk assessments to find areas where inaccuracies are occurring to improve those areas.

To meet these goals and more, your organization may engage in several internal control activities, which fall into three broad categories: preventative, detective, and corrective. While detective controls seek to understand incidents once they have occurred, corrective controls take corrective action to remedy those vulnerabilities, and preventative controls actually attempt to prevent those risks from occurring in the first place.

Now that we’ve established how internal controls play a role in corporate governance, it’s time to introduce the types of internal controls that can best help your organization with its corporate governance.

What are the Procedures for Internal Control of Corporate Governance?

To be most effective, internal corporate governance controls rely on the responsibilities of your organization’s stakeholders for proper execution. While the board of directors are responsible for setting the values, rights and responsibilities and the corresponding internal controls that will help promote these activities; management is responsible for maintaining the system of internal control and communicating the expectations and duties to staff. In return, staff and operating personnel are responsible for carrying out those internal control activities set forth by management.

Here are some of the most common procedures for internal control used in corporate governance today:

Authorization

Authorization is a process that involves establishing a basis by which various employees have the authority to execute certain types of transactions and serves as a proactive approach for preventing invalid transactions.

This includes approval authority requirements which require specific managers to authorize certain types of transactions, adding a layer of responsibility to your records systems by providing that the transactions have been seen, analyzed, and approved by the appropriate authorities.

Documentation

Documentation includes paper and electronic communication that supports the completion of the transaction lifecycle. It’s anything that provides evidence of a transaction, who has performed each activity pertaining to the transaction, and the authority to perform such activities.

Documents provide a financial record of events and activities, and therefore, they ensure the accuracy and completeness of transactions. This includes expenses, revenues, inventories, personnel, and other types of transactions. The proper documentation can provide evidence of what has transpired as well as providing information for researching any discrepancies.

Standardized documentation used for financial transactions can help your organization maintain its consistency in record keeping over time, and it can also make it easier to review past records when searching for the source of a discrepancy in your system. Ultimately, a lack of documentation standardization can lead to overlooking or misinterpreting important information.

Reconciliation

Reconciliation is the process of comparing transactions and activities with supporting documentation and involves resolving any discrepancies that have been discovered. Occasional reconciliation ensures that the balances in your system match up with the balances in the systems held by other entities, including banks, suppliers, and credit customers.

A good internal control system should provide a mechanism to verify that transactions and activities are for the correct purposes and amounts, and that they are allowable. Any errors or discrepancies, whether intentional or unintentional, should be detected, investigated and resolved as quickly as possible.

Security

The security of your assets and data includes three different types of safeguards: administrative, physical and technical. Administrative security focuses on the departmental processes that are put in place to protect assets and data. Physical security is the protection of physical data and assets from loss by theft or damage. Technical security is the protection of electronic data loss by theft, damage, or loss in transport.

Ideally, assets and data should be kept secure at all times to prevent unauthorized access, loss, or damage. The security of your assets and data is essential for ongoing operations, accuracy of information, privacy of personal and sensitive information, and in many cases is state or federal law.

Segregation of Duties

Segregation of duties is the means by which no one person has sole control over the lifespan of a transaction. According to the American Institute of Certified Public Accountants (CPA), segregation of duties means “shared responsibilities of a key process that disperse the critical functions of that process to more than one person or department” to reduce the risk of fraud and errors.

Ideally, no one person should be able to initiate, record, authorize and reconcile a transaction. All organizations should separate functional responsibilities to assure that mistakes, intentional or otherwise, cannot be made without being discovered by another person.

Primary incompatible responsibilities that must be separated are:

• Performing transactions
• Authorization or acceptance
• Reconciliations
• Asset custodianship

The segregation of duties will ultimately depend on the side of your organization and its structure. Duties may be segregated by department or by individuals within a department, and the level of risk associated with a transaction should determine the method for segregating duties.

Improve Your Internal Controls with ZenGRC

Across industries, the only thing that all internal control schemes have in common is the arduous documentation and reporting that come with them. If your organization is using spreadsheets to manage your compliance requirements, it’s time to consider another option.

ZenGRC is an integrated cybersecurity risk management solution designed to provide you with actionable insights to gain the visibility you need to stay ahead of threats and clearly communicate the impact of risk on high-priority business initiatives. Turn the unknown into quantifiable and actionable risk insights with built-in expertise that identifies and maps risks, threats and controls for you, so you can spend less time setting up the application and more time using it.

A single, real-time view of risk and business context allows you to clearly communicate to the board and key stakeholders in a way that’s framed around their priorities, keeping your risk posture in sync with the direction your business is moving.

ZenGRC will even notify you automatically of any changes or required actions, so you can be on top of your risk posture like never before. Eliminate time-consuming, manual work and streamline collaboration by automating workflows and integrating with your most critical systems.

Now, through a more proactive approach, you can give time back to your team with ZenGRC. Talk to an expert today to learn more about how the ZenGRC can help your organization mitigate cybersecurity risk and stay ahead of threats.

At its core, risk management is about identifying risks and guarding against them. It gives organizations a plan of action to determine which risks are worth taking and which aren’t, to assure better outcomes for their bottom lines.

This post will outline the five steps of risk management, which you can use to protect your company against the uncertainties of doing business.

What Is Risk Management?

Risk Management is a multi-step process that identifies and evaluates any emerging threats or risks, whether internal or external, to a business’ information systems and data. It is essential to maintain a risk management process because it reveals all potential threats within the business, whether they already exist or before they generate a negative impact.

It also generates a series of benefits, such as avoiding data breaches and driving the need for a cybersecurity program. It also includes cost/benefit analysis activities related to security risks, operational risks, business risks, and other metrics.

What Are the Five Steps in a Risk Management Process?

Risk management can be defined as a process that helps you:

• Project risks, forecast, and evaluate risks to your organization
• Analyze and determine their effect on your business operations, finances, customers and employees, brand, stakeholders
• Identify an action plan to have a risk response and eliminate or reduce those effects

Risk mitigation and risk management make it easier to understand where a business should spend its time and resources. You don’t have to cross your fingers and hope your business remains protected from bad luck.

Step 1: Identify Your Risks

First, identify all the risks your organization might encounter in its operating environment. There are many types of risk assessments, but generally, this process is performed routinely. To start a risk assessment, examine the factors in your organization and environment — regulatory, legal, environmental, market risks, and so on — that are potentially dangerous.

Identify as many of these risk factors as possible. Anything that can harm your organization should be on your radar, including natural disasters, technological risks, and single point of failure (SPOF) risks.

Consider creating a risk log or risk register that serves as an ongoing database of each project’s potential risks. This will help you and your team manage current risks. It can also serve as a reference for past projects and guide you on future ones.

Step 2: Analyze All Risks

After risk identification, you perform risk analysis. Some risks can bring your business to a standstill, while some will only be minor inconveniences. To analyze each threat and determine its scope and potential disruption, ask: How likely are these risks to occur? And if they do, what will the consequences be?

You can then establish a link between the risks and different factors within your organization. Specifically, this will help you understand how many business functions the risk affects. The greater the number of functions, the more severe the risk.

Step 3: Evaluate and Prioritize Every Risk

Next, rank and prioritize each risk depending on its severity. This allows the risk management team to see and understand your organization’s total risk exposure. For example, risks that will lead to minor inconvenience should be a lower priority, while risks that can cause catastrophic losses should be at the top.

Additionally, you should figure out your risk profile: your risk appetite and risk tolerance. Some organizations are comfortable running many risks; others want their risk exposure to zero.

Step 4: Treat Your Risks

Develop a risk treatment plan to eliminate or contain each risk as much as possible. Starting with the highest-priority risk, you and your team should work to solve the threat (or at least mitigate it) so the risk no longer threatens your organization. A good starting point is to connect with the respective experts of each field to which the risk belongs.

Your risk mitigation strategy should include the following:

• Avoid the risk: stop activities that cause the risk.
• Reduce the risk: take action to reduce the likelihood of an adverse event occurring.
• Share the risk: take out insurance to cover the risk or contractually agree with other parties to share the potential recovery costs.
• Accept the risk: acknowledge that if the threat occurs, the organization will have to bear the consequences and be prepared with a contingency plan.

Using your available resources efficiently is crucial here without derailing your daily operations. Luckily, once you start building a risk register of past projects, you can anticipate risks rather than take a reactive approach.

Step 5: Monitor Your Risks

Regularly monitor, track, and review your risk mitigation results to determine whether your initiatives are adequate or if you need to make any changes. Your team will have to start over with a new process if the implemented risk management strategy isn’t practical.

Avoid impulsive reactions and getting into “firefighting mode” to rectify problems. Instead, a clear, calm perspective will make you better equipped to minimize the harm of project threats and capture opportunities.

What Are the Methods and Processes of Risk Management?

The risk management process is a series of steps to identify, analyze, and respond to possible risks that may arise over your organization’s life cycle, assuring your business remains on track and meets its objectives.

To help you manage your risk more effectively, here’s an overview of the different methods of effective risk management:

Risk Management Strategy

• Develop a risk management plan
• Implement comprehensive risk management documentation
• Assign risk management responsibilities
• Create a risk-aware culture
• Use risk training and communication

Risk Assessment

• Understand the importance of an assessment of risk
• Identify short-, medium-, and long-term new risks
• Analyze risk likelihood and impact
• Implement loss control

Risk Response

• Know the importance of risk appetite: risk capacity and risk exposure
• Practice the four Ts of hazard response: tolerate, treat, transfer, and terminate
• Apply risk control techniques: preventative, corrective, directive, and detective

Risk Assurance and Reporting

• Evaluate the control environment
• Carry out internal audit function
• Apply risk assurance techniques, such as audit committees
• Report on risk management (risk documentation)
• Understand and reinforce the importance of corporate reputation
  

Common Risk Management Process Examples

Predicting what might happen is never easy. So you have to take things one day at a time.

However, that doesn’t mean that you cannot accelerate the process. For example, you can get an idea about what actions to take and which tactics to use to mitigate risks by understanding the different types of risks at play.

Compliance Risks

Regulatory compliance is critical for every organization. You must ensure you have the necessary controls to monitor your company’s compliance with its regulatory obligations. Create a risk management plan to watch all your existing processes, procedures, and technologies to stay compliant.

Market Risks

There’s no guarantee that the product or service you purchase will be priced at the same value in the future. However, you can manage this risk by entering into early and long-term contracts with different suppliers to secure your company’s future, regardless of the market conditions. You can also do the same with customers to stabilize the price of your products or services.

What Are Risk Management Standards?

Risk management standards set out a strategic set of processes that begin with the overall aspirations and objectives of an organization. They are intended to identify risks and encourage mitigation through best practices.

The standards are commonly designed and created by several agencies that collaborate to promote mutual objectives and help further assure that organizations conduct high-quality risk management processes.

Risk management standards are guidelines to help guarantee that risk management is carried out in a structured manner. The standards typically include checkpoints and examples to facilitate compliance by companies.

There are various types of Risk Management Standards.

ISO 31000

ISO 31000 was published in 2009 and revised in 2018. It includes a list of enterprise risk management (ERM) fundamentals and a framework to guide organizations in applying risk management mechanisms to their operations. It also defines processes and tools for identifying, assessing, prioritizing, and mitigating risks.

The ISO 31000 risk management standards framework includes:

• ISO 31000:2009 – Principles and Guidelines on Implementation
• ISO/IEC 31010:2009 – Risk Management – Risk Assessment Techniques
• ISO Guide 73:2009 – Risk Management – Vocabulary

A more strategic focus on ERM is included in the newer 2018 standard. It also further emphasizes the significant role of senior management in risk management and embedding risk management throughout the organization.

British Standard (BS) 31100

This code of practice for risk management was issued in 2011 and offered a process for applying the principles outlined in ISO 31000, including identifying, assessing, responding, reporting, and reviewing.

The Risk and Insurance Management Company’s Risk Maturity Model (RMM)

The RMM framework is being updated, although it is readily available in the initial 2006 version. The RMM lists out seven core attributes of a risk management program and assists organizations in assessing each on a scale ranging from nonexistent to leading.

An RMM risk management assessment, designed as an integrative framework of worldwide, cross-industry standards, enables businesses to determine how well their risk management activities match these best practices. Companies receive a maturity score and practical suggestions to help them enhance their programs and reap the numerous advantages of maturity.

Why Is Risk Management So Important for Your Business?

If you still aren’t sold on the importance of having a sound risk management process for your company’s bottom line, consider the consequences of sitting back and waiting to see how it all turns out. They are not good.

Failed or Restricted Growth

Having a risk management process can sustain and help grow your company. Sure, there’s still a chance some risks will come to fruition despite your best efforts. Still, your chances of success will be higher after identifying, evaluating, and treating risks, facilitating more confident decision-making.

Catastrophic Losses

Managing risk also has profound financial implications. You have much to gain by protecting your company — and potentially everything to lose by not.

You could lose market share simply because you failed to predict changes in market conditions. You could lose money if you fail to anticipate the risks of expanding your company. Moreover, failing to prepare to manage difficulties can further cause irreparable damage to your company’s reputation.

Lawsuits

Non-compliance with laws and regulations increases the odds of your company facing litigation from regulators, employees, customers, competitors, or other parties. Those lawsuits will cost your company money, either in legal fees, settlement costs, or both.

Simplify Your Risk Management Process with ZenGRC

Your organization’s risk management process should become part of your organization’s culture. While you can pursue a manual risk management process, a manual process is prone to errors and other bottlenecks that can result in expensive and damaging consequences.

ZenGRC simplifies risk management with comprehensive views of control environments, easy access to the information needed for risk assessment, and continuous compliance monitoring to address critical tasks at any time.

ZenGRC’s tools and templates enable you to evaluate risks and see the far-reaching effects of each risk faster by providing risk heat maps, dashboards, and reports to give you greater visibility across your organization.

Schedule a demo to see how easy it is to know what risks to mitigate, how to mitigate them, track workflows, collect and store documents, and much more!