Risk Management is one of the most critical functions in an organisation.
Jeff Thomson, CEO of the Institute of Management Accountants, recently predicted that Enterprise Risk Management (ERM) will be a big trend in 2021. He argues that accountants are the perfect people for measuring and managing potential risks in organisations of all sizes and should tackle the challenge head-on.
Here’s what he had to say in Forbes.
“With extreme challenges like COVID-19 highlighting the impact of “black swan” events – those that come suddenly, with little warning – it is a relevant time to look more closely at ERM. Companies that had ERM strategies in place were able to focus on business continuity, while those that did not had to consider more drastic measures to survive.
Risk management is an activity best undertaken offensively before disasters strike. When it is done reactively, it can be too late. With the ever-increasing number of risks in business – from cyberattacks to global pandemics – it’s essential that companies adopt a proactive approach to measuring and managing risks in all their forms, and in such an endeavour, the key people involved should be not the PR spokespeople and crisis managers but the management accountants.”
So, should accountants be responsible for Enterprise Rise Management? In this article, we'll explore the issue, beginning by examining what ERM is and the crucial role accountants play.
ERM is a business strategy that identifies and prepares for future risks, both physical and figurative, that may jeopardise or interfere with a company's operations and objectives.
A detailed risk management process is vital to the security, health and success of any business. The process provides organisations with the necessary tools and foresight to identify and mitigate potential risks before they become a serious problem. Additionally, ERM provides organisations with a basis to make decisions and plan for the future.
As Thomson argues, the contributions of accountants would not be possible without their understanding of ERM and its application to the day-to-day affairs of a business.
While everyone must play a role in ensuring successful ERM in any organisation, accountants are best suited to shouldering the responsibility of Enterprise Risk Management.
- To add value to the business, accountants must be risk and compliance experts, providing invaluable insights on ERM to help their organisation respond appropriately to hazards, all while achieving the business' objectives.
- To be successful and turn a profit, companies must take strategic gambles and seize new opportunities. Therefore, as well as mitigate potential risks, accountants must promote and support profitable uncertainties to help their organisation grow and reach their goals.
- For many businesses, risk management is underdeveloped and not prioritised, with companies taking a reactive approach to ERM instead of developing proactive strategies. Accountants must lead companies to align overall strategy with ERM across every function of the organisation.
Luckily, management accountants have a clear source of guidance on ERM in the form of the COSO management framework, established in part by Jeff Thomson himself.
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework was created to provide organisations with a straightforward yet detailed way of planning for and acting on ERM, that goes beyond the traditional approach to risk management.
The Framework sets out essential ERM components, presents key ERM principles and concepts, suggests a common ERM language and provides a clear direction for conducting risk management within organisations.
According to Thomson, five elements form the backbone of Enterprise Risk Management:
- Governance and Culture
- Strategy and Objective Setting
- Review and Revision
- Information, Communication and Reporting
However, to be effective, ERM must form a significant part of a company’s core strategy.
You can learn more about the COSO framework and how to implement it for practical use in Enterprise Risk Management here.
Since management accountants often have the best understanding of their organisation's finances and supply chains, it stands to reason that the responsibility for ERM should fall to them.
If the coronavirus pandemic has taught us anything, it's that the importance of a solid risk management strategy cannot be underestimated. However, to achieve this, it's vital that risk management be a core component of overall business strategy.
Accountants must lead their organisations to ensure that potential risks and hazards are considered carefully and proactively mitigated. Not only will this safeguard the future of the business and provide financial security, but efficient risk management promotes strategic gambles and the seizing of new opportunities that allow for growth.
Through ERM, accountants can add value to their companies and clients by becoming risk experts and help organisations weather potential storms and navigate even the most unpredictable waters.
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