By THOMAS M. MULHARE, CPA,
partner-in-charge of the Financial Services Group and Business Risk Consulting Group at Amper, Politziner & Mattia
Earlier this year, the Risk & Insurance Management Society Inc. published an executive report titled, "The 2008 Financial Crisis: A Wake-Up Call for Enterprise Risk Management," in which the authors wrote that "several key ERM behavioral attributes could have identified and mitigated these losses for many of these entities."
Further, according to the report, "from the board room to the trading floor, individuals on the front line who were taking--and trading in--these risks ostensibly were rewarded for short-term profit alone."
It is clear that while some companies have already begun implementation of ERM programs, there are many more out there that need such a program. Embracing an ERM program may mean a complete change in the way organizations think about risk. And this must be driven by the leadership of the company.
To set the stage for ERM implementation, an organization should have in place a board of directors that understands the risk model and sets a strong tone from the top that makes it clear that these controls are there to protect the enterprise. That board needs to have an understanding of the full inventory of risks and be able to look at all facets of the business. It must also support strong controls to prevent management overrides and a sustainable compensation system, established by the board and management, that rewards people for complying with the risk management policies and procedures.
Right now, most companies are dealing with the incredible challenge that our current economy presents, while simultaneously challenging themselves to either initiate or enhance stronger ERM programs. As this current crisis abates, more management time will be devoted to avoiding the next crisis--this is where we will see the emergence of the new risk manager model.
Given the collective knowledge of the organizations that make up our industry, the risk manager's role will continue to evolve and will help shape the next generation of ERM systems. Hopefully, these will be robust and effective ERM systems that, while perhaps not preventing all future unforeseeable problems, should certainly lead to them being minimized.
June 1, 2009
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