ISO 31000 Risk management internal auditor training

Courtesy: ISO 31000 Risk management internal auditor training

In addition to information technology audit, internal auditors play an important role in evaluating the risk-management processes of an organization and advocating their continued improvement. However, to preserve its organizational independence and objective judgment, Internal Audit professional standards indicate the function should not take any direct responsibility for making risk management decisions for the enterprise or managing the risk-management function.

Internal auditors typically perform an annual risk assessment of the enterprise, to develop a plan of audit engagements for the upcoming year. This plan is updated at various frequencies in practice. This typically involves review of the various risk assessments performed by the enterprise (e.g., strategic plans, competitive benchmarking, and SOX 404 top-down risk assessment), consideration of prior audits, and interviews with a variety of senior management. It is designed for identifying audit projects, not to identify, prioritize, and manage risks directly for the enterprise.

Current issues in ERM

The risk management processes of corporations worldwide are under increasing regulatory and private scrutiny. Risk is an essential part of any business. Properly managed, it drives growth and opportunity. Executives struggle with business pressures that may be partly or completely beyond their immediate control, such as distressed financial markets; mergers, acquisitions and restructurings; disruptive technology change; geopolitical instabilities; and the rising price of energy.

Sarbanes–Oxley Act requirements

Section 404 of the Sarbanes–Oxley Act of 2002 required U.S. publicly traded corporations to utilize a control framework in their internal control assessments. Many opted for the COSO Internal Control Framework, which includes a risk assessment element. In addition, new guidance issued by the Securities and Exchange Commission (SEC) and PCAOB in 2007 placed increasing scrutiny on top-down risk assessment and included a specific requirement to perform a fraud risk assessment. Fraud risk assessments typically involve identifying scenarios of potential (or experienced) fraud, related exposure to the organization, related controls, and any action taken as a result.

NYSE corporate governance rules

The New York Stock Exchange requires the Audit Committees of its listed companies to “discuss policies with respect to risk assessment and risk management.” The related commentary continues: “While it is the job of the CEO and senior management to assess and manage the company’s exposure to risk, the audit committee must discuss guidelines and policies to govern the process by which this is handled. The audit committee should discuss the company’s major financial risk exposures and the steps management has taken to monitor and control such exposures. The audit committee is not required to be the sole body responsible for risk assessment and management, but, as stated above, the committee must discuss guidelines and policies to govern the process by which risk assessment and management is undertaken. Many companies, particularly financial companies, manage and assess their risk through mechanisms other than the audit committee. The processes these companies have in place should be reviewed in a general manner by the audit committee, but they need not be replaced by the audit committee

ERM and corporate debt ratings

Standard & Poor’s (S&P), the debt rating agency, plans to include a series of questions about risk management in its company evaluation process. This will rollout to financial companies in 2007. The results of this inquiry is one of the many factors considered in debt rating, which has a corresponding impact on the interest rates lenders charge companies for loans or bonds. On May 7, 2008, S&P also announced that it would begin including an ERM assessment in its ratings for non-financial companies starting in 2009, with initial comments in its reports during Q4 2008.

IFC Performance Standards

International Finance Corporation Performance Standards focus on the management of Health, Safety, Environmental and Social risks and impacts. The third edition was published on January 1, 2012 after a two-year negotiation process with the private sector, governments and civil society organizations. They have been adopted by the Equator Principles Banks, a consortium of over 118 commercial banks in 37 countries.