Enterprise Risk Management (Preview)

36 Part 1 – Concepts and Methods They can develop integrated solutions that take into account the relationships and interdependencies of risks, and they can allocate resources for risk management where they are most needed. ERM helps organizations develop a comprehensive view of all risks, not just the ones that are most obvious. For example, the eventuality that a fire may occur at a manufacturing plant is normally well mitigated. However, the possibility that an organizationmay be dysfunctional is often not very well analyzed nor prevented. The costs are less visible, but they can be much more significant. Companies may try to link the effects of their risk management practices with results having to do with revenue growth, profitability, lower volatility of earnings, improved reputation, lower cost of capital, higher market value, etc. However, many factors contribute to these results, and their effects need to be isolated in order to determine the contribution of risk management. Measuring the value of ERM in relation to these results is not impossible, but it requires complex analyses. Nonetheless, ERM does contribute directly or indirectly to all of these results. In some cases, it may be possible to identify a direct contribution that can be isolated and measured objectively. A few good examples often suffice to convince most skeptics of the value of ERM. LIMITATIONS OF ERM While ERM has many benefits, it is important to remember that it also has limitations. For example, it is not a substitute for ignorance, complacency, faulty judgment, reckless behavior or lack of ethics. These issues are highly problematic, especially when they are rampant at the senior executive level. The accounting scandals of 2001-02 and the financial crisis of 2007-08 provide many examples of organizational failures that would have been difficult to prevent even if ERM practices had been stronger. It is generally understood that ERM provides assurance, but not absolute assurance. ERM can only be as strong as the persons leading, supporting and participating in the effort. EMERGING PROFESSIONS ERM is complex but entirely fascinating. It offers many career opportunities in research and education, management consulting, and executive or management positions within organizations. Some professionals lead ERM at the corporate level, while others develop expertise for managing specific risks within functions. The emergence of ERM creates opportunities for academics to collaborate with practitioners, and conduct research in key areas relating to risk governance, risk management integration, performance indicators, methodologies for analyzing risks, the reporting of risk information, etc. Universities and colleges are adding risk management courses to their curriculum, and some are leading the way with initiatives or centers dedicated to ERM. Some universities even offer post-graduate degrees in risk management or ERM. Professional associations such as RIMS, the Risk Management Society, and the National Alliance for Insurance Education and Research offer risk management training and certification programs mostly developed by insurance professionals. Other professional associations such as the Global Association of Risk Professionals (GARP), the Professional Risk Managers’ International Association (PRMIA), and the Risk Management Association (RMA) have training and certification programs adapted to financial services. The Institute of Internal Auditors (IIA)