The COSO Framework for Internal Control
February 12, 2025
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In the previous article, we have discussed the concept of enterprise risk management (ERM) and how it is different from traditional risk management. We also discussed how enterprise risk management (ERM) is now being adopted by an increasingly large number of companies across the world. This large-scale adoption is because of the various benefits which are provided by this model.
In this article, we will have a closer look at some of the significant contributions of enterprise risk management (ERM) to the field of risk management in general.
It also needs to be understood that the enterprise risk management (ERM) framework pays a lot of attention to the relationship amongst various risks. Practitioners of ERM are always looking out for how changes in the risk management plan for one risk have led to a change in the overall risk portfolio. The enterprise risk management (ERM) framework also adds business and strategic risks to the list. This approach considers the failure to innovate to be an important risk.
Alternatively, they could be internal in the form of reporting relationships amongst various colleagues. Also, there are physical assets such as land, machinery, and other capital equipment.
The enterprise risk management (ERM) framework ensures that the risk management activities are done at all these levels. The crux of the framework is that the enterprise risk management (ERM) model must ensure that risk management is completely aligned with the overall business model.
The enterprise risk management (ERM) framework recommends that there should be one person in charge of all the risk management activities within the organization. This person should be from the higher management. This is because they need to have access to the top-level executives as well as to the board of directors. Having a centralized risk function also means that the organization benefits from economies of scale while buying insurance, derivatives, or other such products which are used to transfer risks.
These visual relationships can provide a more intuitive interface for the organization to learn about the risks. Also, the details of various mitigation plans, the various options which were considered, and the decision criteria which was used need to be documented. This will help future managers when they make their decisions. Prior to enterprise risk management (ERM), there was not much emphasis on the documentation aspect.
The framework provides high-level guidelines to standardize the steps. That is done to ensure that the risk management decisions taken across different time periods as well as by different risk managers continue to stay consistent. The model provides enough wiggle room which can be used by risk managers if they want to customize a decision.
The bottom line is that enterprise risk management (ERM) has been a very valuable part of the overall risk management subject. It has led to radical decisions being taken in the right direction as far as identification and management of risk is concerned. It is these benefits that are leading companies of all sizes, across the world, to readily adopt the steps suggested by this framework.
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