Risk Management Quiz 1 With Complete Solution

Risk - ANS Captures potential deviation from expected outcomes that may affect business achievement and can be quantified by observers Why Manage/Mitigate Risks? - ANS 1) Reduces costs from financial distress 2) Reduces risk exposure from those who cannot leave the firm Why Use ERM? - ANS Goal is to BALANCE RISKS in order to achieve a level of risk that maximizes shareholder VALUE.....done so through leveraging some risks and mitigating others Enterprise Risk Management ERM - ANS Implementing processes that allow... -proper IDENTIFICATION/ASSESSING, MANAGING, and MONITORING of risks and -are combined with appropriate SYSTEMS AND GOVERNANCE to MITIGATE undesirable risks ***NO RISKS=NO REWARDS Benefits ERM - ANS -Increases range of opportunities for the firm -Identifies and manages the firm's risks -Increases positive outcomes -Decreases negative outcomes -Reduces performance variability -Improves resource development -Enhances enterprise resilience Preventable Risks - ANS Risks arising with no strategic benefits or shareholder value, which would cost the firm money EX) Employee Fraud Strategic Risks - ANS Risks taken that create strategic benefits and shareholder value EX) Firm Expansion External Risks - ANS Risks outside the firm beyond its influence/control EX) Natural Disaster COSO Cube - ANS Applying the ERM COMPONENTS (front) to the AREAS OF RISK (top) across LEVELS OF THE ORGANIZATION (side) As we think about the focused framework of COSO and our class model of working through ERM, please list the 5 key components of the framework: - ANS 1) Governance and Culture 2) Strategy and Objective Setting 3) Performance 4) Review and Revision 5) Information, Communication, Reporting Risk Capacity - ANS The total amount of risk a firm is ABLE TO BEAR Risk Appetite - ANS The amount of risk a firm is WILLING TO BEAR Higher Risk Appetite - ANS Willing to accept higher levels of risk for higher levels of return, usually more focused on significant increases in value and earnings Lower Risk Appetite - ANS NOT willing to accept high levels of risk... anti risks and focused on stable growth and earnings Risk Appetite Statement Structure - ANS 1) Quantitative and Qualitative Foundation 2) Relevance For Large Group Stakeholders 3) Connections to Key Decision Making Processes Across Firm Effective Risk Appetite Statement Characteristics - ANS -Linked to firms objective and drivers of firm value -Stated clearly with sufficient precision -Determines acceptable risk tolerances -Facilitates alignment of people, processes, and infrastructure -Facilitates the monitoring of risk Areas Risk Appetite Plays Role In - ANS 1) Forward Planning 2) Performance Management 3) ERM Risk Tolerance - ANS SPECIFIC AMOUNT OF RISK a firm is willing to accept in total or move more narrowly within a risk category or business unit, generally expressed as acceptable variation in performance relative to the objective What is Risk Appetite vs. Risk Tolerance? - ANS Risk appetite is the amount of risk a firm is willing to bear, whereas risk tolerance is the specific amount of risk a firm is willing to accept to move more narrowly within a risk category or business unit. Also, risk appetite is more strategic and risk tolerance allows risk appetite to be operational. Why is ERM so important for strategy? - ANS ERM is important for strategy because by using the ERM capabilities of balancing risks and creating value... the firm is able to select and define a strategy that will allow management to use based on the level of risk that the firm is willing to undertake in order to gain value. Share your learnings from the speakers - ANS -Red or High Risks do not necessarily mean that there is insufficient risk mitigation -Managing the high/red risks is about prioritizing the available resources -Their approach to ERM is to think about the way the company was organized to gather and record the results Which of following is a characteristic of the 2017 COSO ERM Framework? A. Unlike the 2004 framework, the 2017 frameworks recognizes that ERM is vital for a firm's strategy. B. In the 2017 framework, the ERM components of governance & culture and Information, Communication and Reporting are common processes that flow through the firm. C. Unlike the 2004 framework, the 2017 framework focuses on the erosion of value and minimizing risks. D. All the choices - ANS A. Unlike the 2004 framework, the 2017 frameworks recognizes that ERM is vital for a firm's strategy. Which one is not included in the 4 categories of Risk in COSO framework? A. Strategic B. Corporate C. Operational D. Financial/Reporting - ANS B. Corporate A pandemic is a type of ________________ risk according to Kaplan and Mikes. A. preventable B. external C. strategy - ANS B. external Managers should only mitigate risks to create value. A. True B. False - ANS B. False & balance risks The CRO is reviewing how the firm integrates ERM into strategic planning. Which of the following indicates that there is room for improvement? A. The firm assigns one individual to implement a part of the objective and another individual to manage the associated risks.