Enterprise Risk Management (Preview)

16 Part 1 – Concepts and Methods an organization-wide basis. It provides a comprehensive view of risks affecting the organi- zation. It allows risk information to be presented for the organization as a whole, and separately for each of its management functions and business units. ERM bridges the functional silos associated with conventional or traditional risk management. It is typically led by a central function that provides leadership, advice, coordination and oversight, for risk management to be applied consistently and systema- tically. The function is also responsible for maintaining risk information, and for reporting risk and risk management information to senior executives and board members. The transition from conventional to contemporary risk management has been gradual and it remains a work in progress for many organizations. The transition is often not very well understood by executives, let alone middle managers and employees at large. It involves a shift of culture and mindset. Much leadership and perseverance are required to make the transition, and many challenges can be expected. To surmount these challenges, risk management professionals deliver training and awareness sessions that help executives, managers and staff understand ERM and the benefits that can be anticipated from making the transition. Education and training are essential because ERM is a complex discipline that is relatively new and continues to evolve. LANDMARK EVENTS AND REFORMS Since the new millennium, major events and reforms occurred that significantly influ- enced the evolution of risk management. Figure 1.2 illustrates the timeline of these events. The accounting scandals of 2001-02 led to the Sarbanes-Oxley Act, which was implemented in 2002. In turn, the financial crisis of 2007-08 led to the Dodd-Frank Wall Street Reform and Consumer Protection Act (also known as the Dodd-Frank Act), which came into force in 2010. These laws make it mandatory for companies publicly-traded in the United States, and major financial services organizations in particular, to implement better corporate governance, information disclosure and risk management practices. Figure 1.2 – Landmark Events and Reforms 2002 Accounting scandals: - Enron - WorldCom - etc. 2007-08 Financial crisis: - Lehman Brothers - Bear Stearns - etc. 2001-02 Sarbanes- Oxley Act 2010 Dodd- Frank Act SEC and NYSE risk management rules in response to Dodd-Frank SEC and NYSE governance rules in response to Sarbanes-Oxley Beginning of credit rating agency methodology updates to better consider elements of enterprise risk management 2005