Question

Summarize how implementing Enterprise-Wide Risk Management (ERM) can relate to accountability and profitability.

Answer 1

Hello,

Enterprise Risk Management (ERM) refer to the procedures and activities employed by an organisation to meet it's objectives and long term goals by managing it's risk exposures to various factors like business risk, financial risk or operating risk. Entity examines the probability of an event hitting the entity and it's magnitude and effect on entity and eventually on the stakeholders. For instance - when a particular law prohibiting insider trading is enacted by legislature, then various research firms and brokerage houses has risk that they may inadvertantly indulge in insider trading and may incur catastrophic actions by regulator say their employees do insider trading for their private benefit. So now such firms need to proactively assess the effect of that regulation on them and see can they employ safeguards to comply with new law. This is core of ERM - identifying new opportunities while at the same time managing your risks.

Having ERM system in place not only helps entity achieve it's objectives and thereby boosting profits, but it also helps fixing roles and responsibilities of individuals. ERM structure clearly demarcates the roles of individuals and to whom they are accountable like directors are bound to act in the best of the interests of shareholders of the company. Various measures of ERM include establishing internal control environment in the organisation, adopting SOX requirements, following COBIT and many other frameworks. These certifications boost the sentiment of investors on company as good governer and thereby boost it's profitability and industry competitiveness.