Unit 3 - Introduction to Enterprise Risk Management (ERM) Exam Questions and Answers 2024 Correctly done

Enterprise Risk Management (ERM) Definitions - -The process of planning, organizing, leading, and controlling the activities of an organization in order to minimize the effects of risk on an organization's capital and earnings. -The process, effected by an entity's board of directors, management, and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives. -A business strategy that identifies and prepares for hazards that may interfere with a company's operations and objectives. -An organization's enterprise risk competence (the ability to understand, control, and articulate the nature and level of risks taken in pursuit of business strategies) coupled with accountability for risks taken and activities engaged in, which contributes to increased confidence shown by stakeholders. ERM Framework - 1. Insights and Transparency -Risk Taxonomy: Establish common vocabulary for different risks. -Risk Register/Risk Heat Map: Characterize and prioritize risk based on probability, impact, and preparedness. -Risk Insight and Foresight: Use business-specific scenarios, stress tests, and early indicators to understand risks and opportunities (potentially also for key customers and peers). -Risk Models: Build simple model as support tool for business decisions. -Risk Reporting: Focus on key risks and provide clarity on these to allow actionable measures. 2. Natural Ownership, Risk Appetite, and Strategy: -Risk Ownership: Consider whether you are the natural owner of a given risk. -Risk Capacity: Understand how much risk you can take. -Risk Appetite: Decide how much risk you feel comfortable taking.-Risk Strategy: Decide on actions to transform your risk profile, including trade-offs with corresponding costs. 3. Risk-Related Decisions and Processes: -Risk-Related Decisions: Embed risk in business decision-making rather than a pure compliance-oriented activity. -Risk Optimization: Embed in each major strategic decision before launch/positive decision. -Risk Processes: Design and execute core business processes and operations on a risk-informed basis. 4. Risk Organization and Governance: -Risk Archetypes: Define enterprise risk management (ERM) mandate of the risk function. -Risk Organization: Design risk structures across entire organization and ensure buy-in of top management. -Risk-Function Profile: Establish clear allocation of responsibilities between risk taking and controlling units. 5. Risk Culture and Performance Transformation: -Risk Culture: Ensure soundness of risk culture across entire organization (perform culture diagnostic). -Risk Norms: Embed new risk norms through various corporate processes and governan ERM - The Critical Steps - ERM is not a project with a completion date, but rather an ongoing process, a process that includes several key steps including risk identification and prioritization, risk assessment and quantification, risk response strategy evaluation and implementation, and program sustainability through governance, compliance, reporting, and culture. -While it is stated that ERM is a process and not a project, the same techniques in this discussion can be used to evaluate project or capital expenditure risks. In these instances, the project does not have a completion date, but the process can be used to evaluate risk before engaging in the project and be continually updated as the project progresses. The process can also be modified to monitor and quantify identified risks and additional risks that may arise after the project is complete. -Within the ERM program framework, a powerful guidance tool can be created that is flexible enough to incorporate environmental changes such as changing risk profiles and mitigation strategies. This armsdecision-makers with valuable information enabling a decision-making process that represents information in a strategic manner, for example, critical financial and operational performance measures. -Although the techniques of risk quantification within a decision-making framework can be quite complex, its critical elements are determining risk appetite, measuring risk impact (understanding the risk exposure or opportunity), and stress testing response strategies. The last point is key. If the measurement of appetite and identification/quantification of key risk is not used in a decision-making framework, the results will not drive action, and everything will remain status quo. Risk Quantification, Risk Identification, and Risk Prioritization - Although Risk Quantification is the focus of this discussion, it is important to understand the Risk Identification and Risk Prioritization role in a broader, functioning ERM program. In particular, Risk Identification and Risk Prioritization can provide focus regarding which enterprise risks may, or should, be assessed in a deeper manner, leading to focus and accomplished by surveying and interviewing employees and gaining consensus for key risks from senior managers and risk owners. Risk Quantification Process and Results - -Understand the Exposure/Opportunity -Risk Response Design and Stress Testing -Risk Appetite Determination Results: 1. Reduce volatility and capitalize on opportunities 2. Efficient capital deployment ERM Best Practices Process - 1. Risk Governance: -Risk Strategy and Objectives -ERM Sustainability 2. Risk Awareness: -Risk Identification and Prioritization -Risk Assessment and Quantification 3. Risk Improvement:-Risk Response Strategy -Risk Response Implementation *Growth *Profitability *Continuity Enterprise Risk Management "Spotlight" - Enterprise Risk Management (ERM) is an extremely advanced discipline in many organizations. -A successful risk manager has already mastered the underlying skills needed to implement ERM. As with any new initiative, the risk manager is going to face barriers to implementing an ERM process. The risk manager who wants to overcome the barriers to ERM has 3 main selling points: (1) scorekeeping, (2) cultural change, and (3) value enhancement. Moving from traditional risk to an ERM approach can be very rewarding for a risk manager. To be successful, ERM must be more than a function within the risk management department. -The ERM process is very similar to the traditional risk management process. The foundation of the ERM process is the process for defining risk. The core of the ERM process and the key to success is the risk survey that identifies the universe of risks facing the organization. -Interviews will provide a great deal of information that is not very useful in its raw form. An ERM risk survey will almost certainly reveal more risks than an organization can tackle at one time. The model used to measure and identify risk should be modified over time and risk interviews should be repeated at least annually.