Enterprise Risk Management in Financial Organizations

Introduction

Enterprise risk management is a process that has been employed by various organizations to manage different risks. In addition, it also helps them to identify numerous opportunities that will be used to enhance the achievement of different organizational objectives (Mikes 2009, p. 12). This means that organizations will be in a better position to enforce risk management in their operations. Through the identification of risks, they will be able to create value for shareholders. In addition, risk management enables an organization to protect the interests of employees, owners, customers, and the society as a whole.

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Enterprise risk management has been evolving to become a widespread practice. It was mostly practiced in financial organizations but it has been modifie to suit different organizations through their corporate and regulatory blueprints. In a broad perspective, it is being used by various organizations to address varying needs in the spectrum of risks (Kaplan 2009, p. 3). This is because, organizations face risks that are supposed to be addressed for sustainability.

Risk management processes

Because of changing business dynamics and trends, organizations have been faced by various risks that need to be addressed. This therefore necessitates the use of enterprise risk management processes in their activities and operations (Borodzicz 2005, p. 25). It should be known that debt rating agencies and regulators have increased their regulations and scrutiny (Mikes 2009, p. 16). This is in relation to companies risk management processes. In this case, there are various risk management processes that should be followed for success.

Companies need to continually employ these processes as time goes by to enhance their operations. The most important process is to establish the necessary risk management objectives (Kaplan & Atkinson 1998, p. 24). In this case, an organization will come up with different tolerances to guide them on the most significant risks.

This can be looked at from different perspectives and contexts. For instance, it should asses it’s external, internal and risk management scenarios. Every financial organization should be in a good capacity to assess risks within their tolerance frameworks (Kaplan 2009, p. 6). By doing this, it will have to prioritize risks by determining their contribution to the general risk profile.

Appropriate prioritization should be used by financial organizations to help them avoid any risky ventures. Financial organizations should also be involved in proper identification of risks. In this case, there will be proper documentation of impeding threats. This will help the organization to identify areas that it can use to gain competitive advantage in the market (Kaplan & Atkinson 1998, p. 31). It has been proven before that proper identification of risks helps organizations to avoid any future eventualities that may end up being disastrous.

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Every organization should have better frameworks of quantifying and analyzing risks. This means that there should be a proper scrutiny of individual risks and if possible effective calibration should also be done (Drury 2008, p. 19). To understand the magnitude of a given risk, there is need to come up with a probability distribution framework. This should be done in relation to different outcomes of an individual material risk.

Another enterprise risk management process that can be found in an organization is the integration of risks. Integration of risks is very important as it will produce an effective framework for aggregation. This helps in the distribution of risks in different perspectives of enterprise risk management (Drury 2008, p. 25). The integration of risks as a process can be used by an organization to reflect on different correlation of risks. In addition, it can be used to evaluate the portfolio effects of a given risk.

Integration helps a financial organization to formulate the results of a given risk. This is done in relation to its impacts on its own performance metrics. It is quite obvious that each organization has specific performance metrics that guide its operations. Another important process that is supposed to be found in enterprise risk management is the exploitation of risks (Garrison et al. 2010, p. 41). This process is found on the common principle that risks are supposed to be treated. Exploitation of risks should be done by looking at both perspectives and scenarios in risk management.

This process is concerned with the development of good strategies for treating and exploting risks. Risks can not be treated and exploited without good strategies on the way forward. A strategy will explore various options that can be used to treat and explore a given risk that an individual financial organization is facing (Garrison et al. 2010, p. 54). Monitoring and reviewing of risks is also a process that can be found in financial organizations.

This should be done by measuring and monitoring the environment that the organization operates in for sustainability (Drury 2008, p. 35). A given environment plays an important role in the success of financial organizations. In the long run, the organization should be able to review its risk management strategies to see if they have been effective. Implementation of risk management programs and frameworks is a process that needs to be embraced by all financial organizations.

Because risk management is an ongoing process, it should be continually improved. This should be done in relation to changing market trends and environment. Adequate communication is a necessity in every financial institution as far as risk management is concerned (Garrison et al. 2010, p. 41). This will enhance the flow of information and improve organizational decision making in risk management. These processes value the creation of objectives in the achievement of an organizations goal. Financial organizations should know how to balance different rewards and risks (Kaplan & Atkinson 1998, p. 61). This will guide them on how to allocate their resources. As a matter of fact, there are various levels of acceptable risk.

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Role of management accountant

Management accountants have important roles to play in enterprise risk management. In this case, they are supposed to perform risk oversight (Drury 2008, p. 28). This is done in relation to different challenges in light of the organizations business environment. After a clear analysis has been done, management accountants are supposed to advice the board or senior management on the best way to manage specific risks (Seal et al. 2009, p. 12). This is because they should always be attentive and ready to identify risks in advance. In the process, they will be able to come up with the best solution.

They also play an important role in ensuring that effective risk management processes are identified (Borodzicz 2005, p. 28). This is because there are various processes that can be employed in risk management for sustainability. Management accountants are supposed to carry out an evaluation of all processes to settle on the best possible outcome (Seal et al. 2009, p. 19). Their work should cover all controls that are necessary in risk management. This controls involve operational, financial and compliance aspects of risk management.

Management accountants are supposed to be involved in the reconciliation of financial data. This enables them to source for various systems that are involved in risk management. Proper reconciliation of financial data will give them an opportunity to assess various risks in relation to their organization (Borodzicz 2005, p. 18). They are also supposed to provide an assurance about the quality of risk management processes that an organization will decide to use. This is based on the fact that a risk management process is supposed to be effective in the achievement of organizational goals as far as risk management is concerned.

It is the role of management accountants to enhance the expansion of financial information that will be used in the management of risks. Risks can only be effectively managed if there is proper and effective information sharing (Garrison et al. 2010, p. 43). This gives the true picture a given risk and helps in the identification of a risk management process. They are also supposed to measure the effectiveness of a risk management process in relation to a given organizations goals.

A risk management process is supposed to give a positive outcome. Therefore, it is the duty of a management accountant to evaluate if the chosen process has been successful. In abroad perspective, they are also supposed to manage the risk management team to ensure that everything is done as per the organizations expectations (Kaplan & Atkinson 1998, p. 45). Management accountants should always be ready to perform variance analysis.

Conclusion

There are various objectives of enterprise risk management in an organization. These objectives should be clearly understood for successful risk management. This means that a chosen risk management process should be clearly aligned to these objectives. The objective categories include; strategy, operations, financial reporting and compliance (Borodzicz 2005, p. 23).

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As much as there are typical risk functions, an organization should clearly identify the common challenges in the implementation of enterprise risk management. Such common challenges include, action plans, risk appetite, consolidated reporting and the monitoring of results. Companies need to continually employ risk management processes as time goes by to enhance their operations.

Reference List

Borodzicz, E., 2005. Risk, Crisis and Security Management. New York: Wiley.

Drury, C., 2008. Management and Cost Accounting. London: Thompson Business Press.

Garrison, R. Noreen, E. & Brewer, P., 2010. Managerial Accounting. New York: McGraw-Hill.

Kaplan, R. S., 2009. Risk Management and the Strategy Execution System, Balanced Scorecard Report, Vol. 11, No. 6, pp. 1-6.

Kaplan, R.S. & Atkinson, A., 1998. Advanced Management Accounting. New York: Prentice Hall.

Mikes, A., 2009. Risk Management and Calculative Cultures, Management Accounting Research, Vol. 20, No. 1, pp. 18-40.

Seal, W. Garrison, R. & Noreen, E., 2009. Management Accounting. New York: McGraw-Hill.

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