Module 1 - Quiz 1 Flashcards
Risk mitigation in ancient Greece
involved attending to gods and human actions
Evidence of risk management practices goes as far back as
Ancient Greece
What determined risky events in ancient Greece
Gods
Financial Events That Shaped Risk Management
- Early 2000s – Accounting scandals at major companies
- 2007-2009 Global Financial Crisis
Sarbanes Oxley Act (SOX; 2002) purpose
prevent a firm’s management from interfering with an independent financial audit & protect the public from fraudulent/erroneous practices
Dodd-Frank Act 2010
primary focus was to regulate the financial services industry and stop mortgage companies from taking advantage of consumers
Financial Stability Oversight Council (FSOC)
identifies risks that affect the financial industry and keeps large banks in check
Consumer Financial Protection Bureau (CFPB)
protects consumers from corrupt business practices of banks
Office of Credit Ratings
ensures that rating agencies (Fitch, S&P, Moody’s) provide reliable credit ratings to those they evaluate
Federal Insurance Office
A whistle-blowing provision in the law encourages anyone with information about violations to report it to the government for a
financial reward
Enterprise Risk Management
The culture, capabilities, and practices, integrated with strategy-setting and performance, that organizations rely on to manage risk in creating, preserving, and realizing value
Risk Capacity
The maximum amount of risk that an entity is able to absorb in the pursuit of strategy and business objectives
Risk Appetite
The types and amount of risk, on a broad level, an organization is willing to accept in pursuit of value
Risk Tolerance
Boundaries of acceptable variation in performance related to achieving business objectives
Risk Portfolio View
A composite view of risk the entity faces
- which positions management and the Board of Directors to consider the types, severity,
and interdependencies of risks and how they may affect the entity’s performance
relative to its strategy and business objectives
Risk Profile
A composite view of the risk assumed at a particular level of the entity
- or aspect of the business that positions management to consider the types, severity, and interdependencies of risks, and how they may affect performance relative to the strategy and business objectives
Risk Inventory
All risks that could impact an entity
Prevailing Risk Management Frameworks
- Reduce Complexity
- Clarify Roles
- Ensure Consistency
Reduce Complexity Framework
Coordinating efforts across different business units, control functions, and regulations. They ensure that no work is duplicated, no risks are overlooked, including regulatory risks.
Clarify Roles Framework
Frameworks help stakeholders understand their roles in risk management, promoting collaboration across departments and within organizational units
Ensure Consistency Framework
Frameworks provide a stable foundation for communication and risk management evaluation, regardless of leadership changes. They help establish industry standards by offering a consistent approach over time.
Who established the prevailing frameworks?
- Committee of Sponsoring Organization of the Treadway Commission (COSO)
- International Standards Organization (ISO 31000)
- Basel Committee on Banking Supervision (BCBS) (World standard)
- OCC Heightened Standards for Large Financial Institutions (U.S. Variation)
Committee of Sponsoring Organization of the Treadway Commission (COSO)
It’s a voluntary private-sector initiative made in the mid-80s dedicated to improving organizational performance and governance focusing on
▪ Effective controls
▪ Enterprise risk management
▪ Fraud deterrence
Five committees that sponsored COSO
- Institute of Management Accountants (IMA)
- The American Institute of Certified Public Accountants (AICPA)
- The American Accounting Association (AAA)
- The Institute of Internal Auditors (IIA)
- The Financial Executive Institute (FEI)
Two distinct frameworks of COSO
- Internal Control (2013)
- Enterprise Risk Management (2017)
Key Players in Corporate Governance
- Board of Directors (BoD)
- Management
- Shareholders
- Other stakeholders
Board of Directors
- Oversee management & business strategy
- monitor/evaluate the CEO’s performance
- Delegate authority to the CEO
- Play a direct role in committees
Is there a Board structure that is right for every entity?
No
The Board Structure is made up of
- Size
- Composition
- Characteristics
- Experience
- Independence
Board Committees
- Audit Committee
- Nominating Committee
- Compensation Committee
Audit Committee
provide oversight of the financial reporting process, the audit process, the entity’s system of internal controls, with compliance with laws and regulations
Nominating Committee
Responsible for the corporate governance of an organization and selecting the best candidates for each seat on the board
Compensation Committee
Responsible for an entity’s overall
compensation philosophy, incentive
structure, policies, and programs
- a key responsibility is establishing
performance goals for the CEO
What Does Management DO?
- Led by the CEO, it is responsible for
setting/managing/executing strategy - Keeps the Board of Directors informed on the status of the entity’s operations through monthly meetings and special meetings
- Focuses on the long-term success of the entity/avoids undue emphasis on short-term objectives
What Do Shareholders DO?
- Invest in an entity
- Elect representatives
- Have the right to receive the information materials for investment/voting decisions
- long-term stewards (& fiduciaries, a legal term) of their investment
