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System of Risk Management and Internal Control
This mind map is designed to explore the interconnected concepts of risk management and internal control within organizations. Effective risk management and internal control practices are essential for safeguarding an organization's assets, maintaining financial integrity, and achieving strategic objectives while ensuring compliance with relevant laws and regulations. By visually representing these concepts and their interrelationships, the mind map aims to provide a comprehensive overview of how organizations can effectively identify, assess, and manage risks while implementing robust internal controls to safeguard their operations and assets.
Edited at 2023-07-29 14:11:53- System of Risk Management and Internal Control
This mind map is designed to explore the interconnected concepts of risk management and internal control within organizations. Effective risk management and internal control practices are essential for safeguarding an organization's assets, maintaining financial integrity, and achieving strategic objectives while ensuring compliance with relevant laws and regulations. By visually representing these concepts and their interrelationships, the mind map aims to provide a comprehensive overview of how organizations can effectively identify, assess, and manage risks while implementing robust internal controls to safeguard their operations and assets.
- Risk Structures, Policies, Procedures Compliance
Risk management involves the identification, assessment, and prioritization of risks that may affect an organization's ability to achieve its objectives. It is a proactive process that involves identifying potential risks and developing strategies to mitigate or manage them. Internal control, on the other hand, is the system of policies, procedures, and processes that an organization implements to achieve its objectives. It provides reasonable assurance that an organization's operations are effective, efficient, and compliant with applicable laws and regulations.
- Remuneration of Directors and Senior Executive
The remuneration of top-level executives is a critical aspect of corporate governance and has a significant impact on an organization's performance, culture, and stakeholder relationships. This interconnected web of ideas explores the various components, considerations, and challenges associated with remunerating directors and senior executives.
System of Risk Management and Internal Control
- System of Risk Management and Internal Control
This mind map is designed to explore the interconnected concepts of risk management and internal control within organizations. Effective risk management and internal control practices are essential for safeguarding an organization's assets, maintaining financial integrity, and achieving strategic objectives while ensuring compliance with relevant laws and regulations. By visually representing these concepts and their interrelationships, the mind map aims to provide a comprehensive overview of how organizations can effectively identify, assess, and manage risks while implementing robust internal controls to safeguard their operations and assets.
- Risk Structures, Policies, Procedures Compliance
Risk management involves the identification, assessment, and prioritization of risks that may affect an organization's ability to achieve its objectives. It is a proactive process that involves identifying potential risks and developing strategies to mitigate or manage them. Internal control, on the other hand, is the system of policies, procedures, and processes that an organization implements to achieve its objectives. It provides reasonable assurance that an organization's operations are effective, efficient, and compliant with applicable laws and regulations.
- Remuneration of Directors and Senior Executive
The remuneration of top-level executives is a critical aspect of corporate governance and has a significant impact on an organization's performance, culture, and stakeholder relationships. This interconnected web of ideas explores the various components, considerations, and challenges associated with remunerating directors and senior executives.
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- Outline
Risk Management & Internal Control - System of Risk Management & Internal Control
Corporate Governance, Risk & Internal Controls
The management of risk in an organisation is considered as part of corporate governance
Requires the devt. of structures, policies & procedures which when operationalised effectively, should create a culture that leads to a better performing organisation
The board as part of its role in governing an organisation has a responsibility to manage the risk that the organisation is prepared to take in achieving the strategic objectives it has set itself
Part of the risk management process is to develop an internal control system
Corporate governance best practice refers to a board’s responsibility for ensuring the effectiveness of the organisation’s risk management and internal control systems
Risk
Intro
Possibility that something unexpected or not planned for will happen
This could be something bad happening, which in many cases is the perception, but it could also be that things turn out better than expected
These two situations are referred to as downside risk and upside or opportunity risk respectively
Many org plan for downside risk but fail to take into account upside risk in their decision-making processes
For an org to manage risk effectively it should have processes in pace to manage both downside & upside risk
Downside and upside risks
Business risk V governance risk
Internal Controls
Intro
Made up of all of the structures, policies & procedures within an organisation related to the management of financial, operational and compliance risks, often known as business risk
Internal controls form that part of the internal control system which manages business risk
3 types
Preventative controls intended to prevent an adverse risk event from occurring, e.g. fraud by employees
Detective controls for detecting risk events when they occur, so that the appropriate person is alerted, and corrective action taken
Corrective controls for dealing with risk events that have occurred and their consequences
Internal Control Risk
Risks that internal controls will fail to achieve their intended purpose, & will fail to prevent, detect or correct adverse risk events
Can occur because
Badly designed, and so not capable of achieving their purpose as a control
Well-designed, but are not applied properly, due to human error/oversight/deliberately ignoring or/circumvention of the control (a form of operational risk event)
Elements of a Risk Management & Internal Control System
Financial controls
internal accounting controls that are sufficient to provide reasonable assurance that
transactions are made only in accordance with the general or specific authorisation of management
transactions are recorded so that financial statements can be prepared in accordance with accounting standards and generally accepted accounting principles
Operational controls
controls that help to reduce operational risks or identify failures in operational systems when these occur.
They are designed to prevent failures in operational procedures, or to detect and correct operational failures if they do occur
Operational failures may be caused by
machine breakdowns
human error
failures in IT systems
weaknesses in procedures
poor management
Compliance controls
concerned with making sure that an entity complies with all the requirements of relevant legislation and regulations
Compliance controls are concerned with making sure that an entity complies with all the requirements of relevant legislation and regulations
The potential consequences of failure to comply with laws and regulations vary according to the nature of the industry and the regulations
For a manufacturer of food products, for example, food hygiene regulations are important
For a bank, regulations to protect consumers against mis-selling and regulations for detecting and reporting suspicions of money laundering are important
Developing a Risk Management System
Risk Identification
The board has ultimate responsibility for determining the nature and extent of the principal
Some risks are easy to recognise as they are always present
Other risks are more difficult to identify and anticipate
An organisation’s ability to deal with these types of risks is often what gives it competitive advantage
Risk Categories
Method of Identifying Risk
Risk Assessment
Procedures
the likelihood or probability of the occurrence
the potential size of the impact of the occurrence
In the simplest forms of assessment, criteria should be developed to assess likelihood as high, medium or low and impact as significant, moderate or minor
Should consider
Risk Appetite
Level of risk that an organisation is willing to take in the pursuit of its objectives
Risk Tolerance
Amount of risk that an organisation is prepared to accept in order to achieve its financial objectives
Risk Response
Selecting a Response, Board should consider
The ‘exposure’ to the risk
Any negative consequences of the response(s)
Whether they are adding responses to existing ones rather than formulating new response to the risk
Risk Monitoring
A process for monitoring the effectiveness of the responses to the risks should be established
Eg
Stress Testing
Developing measures to monitor
Use internal audit
Risk Reporting
Management to the Board
The board needs information from management on the principal risks and the effectiveness of how they have been managed. This enables the board to evaluate the effectiveness
The Board to Shareholders
The company’s strategic report must contain a description of the principal risks and uncertainties facing the company, together with an explanation of how they are to be managed or mitigated
Benefits of Risk Management
For operational performance
Increases (reduces) the likelihood of (not) achieving business objectives
Uses incidents to highlight the risk environment and helps management to enhance risk awareness
Facilitates monitoring and mitigation of risk in key projects and initiatives
Provides a platform for regulatory compliance and building goodwill
For financial performance
Protects and enhances value by prioritising and focusing attention on managing risk across an organisation
Contributes to a better credit rating, as rating agencies are increasingly focusing on the risk management of org
Builds investor, stakeholder and regulator confidence and shareholder value
Reduces insurance premiums through demonstrating a structured approach to risk
For decision-making
Shares risk information across the organisation, contributing to informed decisions.
Facilitates assurance and transparency of risks at board level.
Enables decisions to be made in the light of the impact of risks and the organisation’srisk appetite and tolerance
The role of the Board in Risk Management & Internal Control
Deciding the organisation’s risk appetite
Ensuring that management manage risk within the board’s guidelines for risk appetite
Monitoring the performance of management, to ensure that the business is being managed within the risk guidelines set by the board
Monitoring the risk management system to ensure that it is effective and achieves its purpose
Common Failures of Boards
Failure to take responsibility for risk at the board level
Failure to see the importance of risk to the organisation as a whole
Failure to capture the major risks of the organization
Failure to consider the integrated nature of risk
Failure to put in place the appropriate control or other mitigants for riskk
Failure to manage reputational risk
Failure by the board to map out clearly who has responsibility
Failure to consider, decide or articulate effectively the risk appetite for the org
Failure to obtain and share timely and good quality information
Risk Management & Internal Control - System of Risk Management & Internal Control
Corporate Governance, Risk & Internal Controls
The management of risk in an organisation is considered as part of corporate governance
Requires the devt. of structures, policies & procedures which when operationalised effectively, should create a culture that leads to a better performing organisation
The board as part of its role in governing an organisation has a responsibility to manage the risk that the organisation is prepared to take in achieving the strategic objectives it has set itself
Part of the risk management process is to develop an internal control system
Corporate governance best practice refers to a board’s responsibility for ensuring the effectiveness of the organisation’s risk management and internal control systems
Risk
Intro
Possibility that something unexpected or not planned for will happen
This could be something bad happening, which in many cases is the perception, but it could also be that things turn out better than expected
These two situations are referred to as downside risk and upside or opportunity risk respectively
Many org plan for downside risk but fail to take into account upside risk in their decision-making processes
For an org to manage risk effectively it should have processes in pace to manage both downside & upside risk
Downside and upside risks
Business risk V governance risk
Internal Controls
Intro
Made up of all of the structures, policies & procedures within an organisation related to the management of financial, operational and compliance risks, often known as business risk
Internal controls form that part of the internal control system which manages business risk
3 types
Preventative controls intended to prevent an adverse risk event from occurring, e.g. fraud by employees
Detective controls for detecting risk events when they occur, so that the appropriate person is alerted, and corrective action taken
Corrective controls for dealing with risk events that have occurred and their consequences
Internal Control Risk
Risks that internal controls will fail to achieve their intended purpose, & will fail to prevent, detect or correct adverse risk events
Can occur because
Badly designed, and so not capable of achieving their purpose as a control
Well-designed, but are not applied properly, due to human error/oversight/deliberately ignoring or/circumvention of the control (a form of operational risk event)
Elements of a Risk Management & Internal Control System
Financial controls
internal accounting controls that are sufficient to provide reasonable assurance that
transactions are made only in accordance with the general or specific authorisation of management
transactions are recorded so that financial statements can be prepared in accordance with accounting standards and generally accepted accounting principles
Operational controls
controls that help to reduce operational risks or identify failures in operational systems when these occur.
They are designed to prevent failures in operational procedures, or to detect and correct operational failures if they do occur
Operational failures may be caused by
machine breakdowns
human error
failures in IT systems
weaknesses in procedures
poor management
Compliance controls
concerned with making sure that an entity complies with all the requirements of relevant legislation and regulations
Compliance controls are concerned with making sure that an entity complies with all the requirements of relevant legislation and regulations
The potential consequences of failure to comply with laws and regulations vary according to the nature of the industry and the regulations
For a manufacturer of food products, for example, food hygiene regulations are important
For a bank, regulations to protect consumers against mis-selling and regulations for detecting and reporting suspicions of money laundering are important
Developing a Risk Management System
Risk Identification
The board has ultimate responsibility for determining the nature and extent of the principal
Some risks are easy to recognise as they are always present
Other risks are more difficult to identify and anticipate
An organisation’s ability to deal with these types of risks is often what gives it competitive advantage
Risk Categories
Method of Identifying Risk
Risk Assessment
Procedures
the likelihood or probability of the occurrence
the potential size of the impact of the occurrence
In the simplest forms of assessment, criteria should be developed to assess likelihood as high, medium or low and impact as significant, moderate or minor
Should consider
Risk Appetite
Level of risk that an organisation is willing to take in the pursuit of its objectives
Risk Tolerance
Amount of risk that an organisation is prepared to accept in order to achieve its financial objectives
Risk Response
Selecting a Response, Board should consider
The ‘exposure’ to the risk
Any negative consequences of the response(s)
Whether they are adding responses to existing ones rather than formulating new response to the risk
Risk Monitoring
A process for monitoring the effectiveness of the responses to the risks should be established
Eg
Stress Testing
Developing measures to monitor
Use internal audit
Risk Reporting
Management to the Board
The board needs information from management on the principal risks and the effectiveness of how they have been managed. This enables the board to evaluate the effectiveness
The Board to Shareholders
The company’s strategic report must contain a description of the principal risks and uncertainties facing the company, together with an explanation of how they are to be managed or mitigated
Benefits of Risk Management
For operational performance
Increases (reduces) the likelihood of (not) achieving business objectives
Uses incidents to highlight the risk environment and helps management to enhance risk awareness
Facilitates monitoring and mitigation of risk in key projects and initiatives
Provides a platform for regulatory compliance and building goodwill
For financial performance
Protects and enhances value by prioritising and focusing attention on managing risk across an organisation
Contributes to a better credit rating, as rating agencies are increasingly focusing on the risk management of org
Builds investor, stakeholder and regulator confidence and shareholder value
Reduces insurance premiums through demonstrating a structured approach to risk
For decision-making
Shares risk information across the organisation, contributing to informed decisions.
Facilitates assurance and transparency of risks at board level.
Enables decisions to be made in the light of the impact of risks and the organisation’srisk appetite and tolerance
The role of the Board in Risk Management & Internal Control
Deciding the organisation’s risk appetite
Ensuring that management manage risk within the board’s guidelines for risk appetite
Monitoring the performance of management, to ensure that the business is being managed within the risk guidelines set by the board
Monitoring the risk management system to ensure that it is effective and achieves its purpose
Common Failures of Boards
Failure to take responsibility for risk at the board level
Failure to see the importance of risk to the organisation as a whole
Failure to capture the major risks of the organization
Failure to consider the integrated nature of risk
Failure to put in place the appropriate control or other mitigants for riskk
Failure to manage reputational risk
Failure by the board to map out clearly who has responsibility
Failure to consider, decide or articulate effectively the risk appetite for the org
Failure to obtain and share timely and good quality information