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Leveraging Effective Risk Management and Internal Control for Your Organization

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Presentation by Vincent Tophoff, IFAC Senior Technical Manager, and J. Stephen McNally, Campbell Soup, on the pitfalls in current risk management and internal control practices and the new Internal Control-Integrated Framework from COSO (the Committee of Sponsoring Organizations of the Treadway Commission).

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Leveraging Effective Risk Management and Internal Control for Your Organization

  1. 1. 1IMA’s 94th Annual Conference © 2013 Institute of Management Accountants. and International Federation of Accountants All rights reserved. Leveraging Effective Risk Management and Internal Control for Your Organization Presenters: J. Stephen McNally, Campbell Soup Vincent Tophoff, IFAC
  2. 2. Learning Objectives 2 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Upon completing this session, you will be able to: 1. Summarize the most important pitfalls in current risk management & internal control (RM/IC) practice 2. Gain insight into current thinking about RM/IC 3. Understand key concepts contained in the most important RM/IC guidelines, including:  COSO 2013 Internal Control Integrated Framework  COSO 2004 ERM Integrated Framework  ISO 31000 Risk Management Standard 4. Better appreciate the impact of these developments & approaches on you & your organization
  3. 3. Today’s Agenda 3 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved.  The Pitfalls ‟ Setting the Scene  Current Thinking  The Frameworks:  COSO 2013 Internal Control Integrated Framework  COSO 2004 ERM Integrated Framework  ISO 31000 Risk Management Standard  Impact on You & Your Organization  Other Emerging Trends  Management Accountant “Call to Action”  Q&A
  4. 4. 4 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. The Pitfalls – Setting the Scene
  5. 5. 5 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Bad vs. Good RM/IC Practices There has been an overwhelming load of bad practice: RM/IC as objective in itself vs. RM/IC to achieve objectives Auditor / staff driven vs. Board and management driven Rules-based vs. Principles-based Of the shelf systems vs. Tailor made Focused on threats only vs. Also focused on opportunities Mainly hard controls vs. Social / human aspects Artificially implemented vs. Organically implemented Stand-alone / “bolt-on” vs. Integrated / ”built- in”
  6. 6. 6 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Global Crisis The Global Crisis, according to IMA & IFAC research, was caused by:  Ethical flaws  Governance, RM/IC in name, but not in spirit  Regulatory overload, leading to legalistic compliance  Risk & control systems too narrowly focused on only financial reporting controls Conclusions from the crisis:  Organizations should take a broader approach in risk management and internal control  Appropriate application of risk management and internal control standards and principles is often the problem
  7. 7. 7 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Current Thinking
  8. 8. 8 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Current Thinking About Risk The safest place for a ship… … is to stay in the harbor But that’s not what ships were made for…
  9. 9. 9 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Current Thinking About Risk … Instead, ships were made to transport people & goods to other destinations… … And that involves risk… So, what is risk? „ Risk is nowadays defined as “the effect of uncertainty on (setting and achieving) the organization’s objectives” (ISO 31000) „ No Objectives = No Risk. Therefore, risk should always be assessed in light of (setting and achieving) the organization’s objectives!
  10. 10. 10 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Current Thinking About Risk Mgt. Q: “How does your organization address uncertainty in achieving its strategic objectives?” A: “Through our strategic management system;” Line management engaged in plan-do-check-act cycle Focused on achieving the organization’s objectives Q: “How does your organization address risk?” A: “Through our risk management system;” (separate) risk and control system, staff functionaries, risk register Focused on mitigating risk
  11. 11. 11 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Current Thinking About Risk Mgt. What does this example tell us? „ That we, management accountants, have made great progress in the area of risk management & internal control… „ …But that we, in the process, lost the other people in our organization! Risk Management Rest of the Organization
  12. 12. 12 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Current Thinking About the Risk Mgr Biggest risk facing an organization: Disconnect between those responsible for achieving strategic objectives vs. those responsible for managing risk Solution: Making those responsible for achieving strategic objectives also responsible for managing related risks! Key objective for management accountants is to ensure that RM/IC is fully integrated in line management!
  13. 13. 13 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Current Thinking About Internal Control Hindering the organization Enabling the organization Good internal control = The Invisible Hand From To
  14. 14. 14 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. The Frameworks (COSO 2013 Internal Control Integrated Framework)
  15. 15. 15 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. The Original Framework COSO Internal Control Integrated Framework • First published in 1992 • Gained wide acceptance in the early 2000’s w/ passage of SOX • Most widely used Internal Control framework in US • Widely used around the world
  16. 16. 16 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Key Concepts Are Timeless „ A Process „ Effected by People „ Provides Reasonable Assurance „ Geared to Achievement of Operational, Financial Reporting & Compliance Objectives „ Consists of Five Components:  Control Environment  Risk Assessment  Control Activities  Information & Communication  Monitoring
  17. 17. 17 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Why Update What Works? ICIF Works Well Today COSO’s Internal Control‟Integrated Framework (1992 Edition) COSO’s Internal Control‟Integrated Framework (2013 Edition) Reflect changes in business & operating environments Updates Context Expand operations and reporting objectives Broadens Application Articulate principles to facilitate effective internal control Clarifies Requirements Enhancements Refresh Objectives ICIF Will Work Better Tomorrow
  18. 18. 18 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Project Deliverable #1 „ Consists of 3 volumes: − Executive Summary − Framework & Appendices − Illustrative Tools for Assessing Effectiveness of a System of Internal Control „ Sets out: − Definition of internal control − Categories of objectives − Components of internal control − Requirements for COSO Internal Control Integrated Framework (2013 Edition)
  19. 19. 19 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Project Deliverable #2 „ Approaches & examples on how principles are applied in preparing financial statements „ Considers changes in business & operating environments during past two decades „ Relevant for variety of entities ‟ public, private, non-profit & government „ Consistent w/ updated Framework Internal Control over External Financial Report: A Compendium…
  20. 20. 20 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Summary of Updates Update Expected to Ease Use & Application What is not changing... What is changing... 1. Core definition of internal control 2.Five components of internal control 3.All components are necessary for effective internal control 4.Important role of judgment in designing, implementing & conducting internal control & in assessing its effectiveness 1. Changes in business & operating environments considered 2.Operations & reporting objectives expanded 3.Fundamental concepts underlying the five components now articulated as principles 4.Additional approaches & examples relevant to operations, compliance & non-financial reporting objectives added
  21. 21. 21 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. 2013 COSO Cube Environmental changes ... … have driven Framework updates Expectations for governance oversight Globalization of markets & operations Changes & greater complexity in business Demands & complexities in laws, rules, regulations & standards Expectations for competencies & accountabilities Use of, and reliance on, evolving technologies Expectations relating to preventing & detecting fraud 2013 COSO Cube
  22. 22. 22 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Internal Control Principles Control Environment Risk Assessment Control Activities Information & Communication Monitoring Activities 1. Demonstrates commitment to integrity & ethical values 2. Exercises oversight responsibility 3. Establishes structure, authority and responsibility 4. Demonstrates commitment to competence 5. Enforces accountability 6. Specifies suitable objectives 7. Identifies and analyzes risk 8. Assesses fraud risk 9. Identifies and analyzes significant change 10.Selects and develops control activities 11. Selects and develops general controls over technology 12. Deploys through policies and procedures 13. Uses relevant information 14. Communicates internally 15. Communicates externally 16. Conducts ongoing and/or separate evaluations 17. Evaluates and communicates deficiencies Update Articulates Principles of Effective Internal Control
  23. 23. 23 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Points of Focus Control Environment Principle 1: The organization demonstrates a commitment to integrity & ethical values Update Also Describes Important Characteristics of the Principles Related Points of Focus • Sets the Tone at the Top • Establishes Standards of Conduct • Evaluates Adherence to Standards of Conduct • Addresses Deviations in a Timely Manner There is No Requirement, However, to Separately Assess Them
  24. 24. 24 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Requirements „ Effective internal control provides reasonable assurance regarding the achievement of objectives & requires that: Each component & each relevant principle is present & functioning The five components are operating together in an integrated manner „ Each principle is suitable to all entities & all principles are presumed relevant „ Components operate together when aggregated deficiencies do not result in one or more major deficiencies „ A major deficiency represents an internal control deficiency or combination thereof that severely reduces Update Clarifies Requirements for Effective Internal Control
  25. 25. 25 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Controls to Effect Principles • The Framework does not prescribe specific controls to be selected, developed & deployed • An organization’s selection of controls to effect relevant principles and associated components is a function of management judgment based on factors unique to the entity • Understanding how controls effect principles can provide persuasive evidence supporting management’s assessment of whether components & relevant principles are present & functioning Controls to Effect Principles Subject to Management Judgment
  26. 26. 26 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Transition & Impact • Users encouraged to transition as soon as feasible to benefit from the 2013 edition’s enhancements & clarifications • The 2013 Framework will supersede the original at the end of the transition period (i.e., 12/15/14) • During the transition period, external reporting should disclose whether the original or 2013 Framework was used • Impact of adopting the 2013 Framework will vary by organization COSO’s Updated Framework Released May 14
  27. 27. 27 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. The Frameworks (COSO 2004 ERM Integrated Framework)
  28. 28. 28 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. The COSO ERM Framework COSO ERM Framework • Published in 2004 • Provides guidance to help businesses & other entities develop & apply their ERM activities • Identifies & describes 8 interrelated components necessary for effective ERM • Complements COSO’s updated ICIF
  29. 29. 29 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. COSO ERM vs. ICIF Frameworks COSO ERM Addresses Strategic Objectives and … … Expands “Risk Assessment” Into 3 Components
  30. 30. 30 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Additional Considerations on ERM „ Internal control is an integral part of ERM… While ERM is part of the overall governance process „ ERM is applied in setting strategies as well as in achieving operational, reporting & compliance objectives „ The ERM Framework expands the COSO ICIF’s “Risk Assessment” component into “Event Identification”, “Risk Assessment” & “Risk Response” „ COSO’s ERM Framework introduces the concepts of risk appetite & risk tolerance
  31. 31. 31 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. The Frameworks (ISO 31000 Risk Management Standard)
  32. 32. 32 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. ISO 31000 „ International Standards Organization (ISO) developed the standard ISO 31000:2009 Risk Management „ ISO’s Rationale: o All of an organization’s activities involve risk o Organizations need to manage this risk o ISO 31000 describes how to do this in a systematic & logical way o ISO 31000 offers a series of principles, a framework & a process to manage risk effectively ISO 31000 can be used by any type of entity… … And can be applied to any type of risk
  33. 33. 33 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. ISO 31000 Risk Management Principles, Framework & Process
  34. 34. 34 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. ISO 31000 Risk Management Principles „ Creates Value „ Integral Part of Organizational Processes „ Part of Decision-Making „ Explicitly Addresses Uncertainty „ Systematic, Structured & Timely „ Based on “Best Available Information” „ Tailored „ Considers Human & Cultural Factors „ Transparent & Inclusive „ Dynamic, Iterative & Responsive to Change „ Facilitates Continuous Improvement
  35. 35. 35 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. ISO 31000 Risk Management Framework
  36. 36. 36 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. ISO 31000 Risk Management Process To be applied in every decision making process and subsequent execution!
  37. 37. 37 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Benefits of ISO 31000 Implementing ISO 31000 Enables Your Organization To: • Be aware of the need to identify & treat risk throughout the organization • Improve the identification of opportunities & threats • Establish a reliable basis for decision making & planning • Increase the likelihood of achieving its objectives • Improve operational effectiveness & efficiency • Enhance health & safety performance as well as environmental protection • Comply with relevant legal & regulatory requirements • Improve mandatory & voluntary reporting
  38. 38. 38 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. COSO ERM vs. ISO 31000 COSO ISO 31000 Lengthy vs. Short Focused on ERM vs. General approach to managing risk One cube vs. Framework and process Skewed to negative vs. Risk can be positive or negative Risk already exists vs. Risk tied to achieving objectives Risk & opportunities vs. Opportunities also source of risk More sequential process vs. More iterative process Many entities use both COSO ERM & ISO 31000… … Biggest challenge is that concepts not aligned Too short, however, to really understand
  39. 39. 39 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Impact on You & Your Organization
  40. 40. 40 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Guidance to Avoid or Overcome Pitfalls Good internal control should: • Support the organization’s objectives • Define clear roles and responsibilities • Foster a motivational culture • Link to individual performance • Ensure sufficient competency • Respond to risk • Be communicated regularly • Be monitored and evaluated regularly • Provide for accountability and transparency
  41. 41. 41 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. The Management Accountant’s Role - #1 Champion importance of good risk management: • Many management accountants are in leadership positions • Attitude and behavior of management accountant sets tone for good RM/IC in the organization • Integrating RM/IC into line management of an organization! • Most important element: making risk management part of every decision making process in the organization (SWOT)
  42. 42. 42 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. The Management Accountant’s Role - #2 Support line management by providing high-quality information: • Decisions should only be taken with explicit understanding of related risks and their potential consequences for achieving an organization’s objectives • Therefore, decision makers require relevant and reliable information for their decision making and control processes • Management accountants often responsible for providing high-quality information produced through the finance & control systems
  43. 43. 43 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. The Management Accountant’s Role - #3 Establish RM/IC for the finance function: • Management accountants usually are specifically accountable for finance and control • Therefore, management accountants should make RM/IC part of every decision related to achieving the organization’s finance objectives • Management accountants also usually involved in analyzing and reporting on the organization’s (RM/IC) achievements
  44. 44. 44 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Other Emerging Trends
  45. 45. 45 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Emerging Trends An IFAC Global Survey on Risk Management & Internal Control recommended the following : „ Emphasize the benefits of (more integrated) risk management and internal control „ Bring various risk management and internal control standard setting organizations (e.g., COSO, ISO 31000, the Risk Oversight & Governance Board, etc.) and their guidelines closer together „ Collaborate with experts on developing practical application guidance for (integration of) risk management and internal control
  46. 46. 46 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Integrated RM/IC Maturity Matrix • Crisis managemen t • Internal control now complement ed with risk mgt • But performed in a silo… • Integrating risk management & I/C in the governance & management of organizatio n Level 1: Non-existent or ad hoc Level 2: Internal control only Level 3: RM/IC as a silo Level 4: Integrated RM/IC •Formal internal control •Mainly focused on external financial reporting We Are Now Here!
  47. 47. 47 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Guidance for Integrating Risk & Control „ Risk management & internal control are means to an end… … Making sound (SWOT) decisions to achieve the organization’s objectives without surprises! „ RM/IC guidance provides management accountants principles & insight on how to support… … Integration of risk management & internal control into their organization’s overall governance & management systems
  48. 48. 48 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Management Accountant “Call to Action”
  49. 49. 49 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Management Accountant “Call to Action” Management accountants should play important roles in implementing good RM/IC: • Build subject-matter-expertise regarding COSO’s 2013 Internal Control Integrated Framework, COSO’s 2004 ERM Framework, ISO 31000 & other guidance • Educate the audit committee, C-suite, operating unit & functional management • Champion the importance of good RM/IC • Support line management through the provision of high-quality information • Establish RM/IC for the finance function
  50. 50. 50 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Key Take Aways „ Risk is the effect of uncertainty on (achieving) the organization’s objectives „ Strategic (risk) management is primarily about achieving the organization’s objectives, while addressing risk „ There are many flaws in current risk management and internal control practice „ Management accountants support strategic (risk) management in their organizations in various ways „ IMA and IFAC support management accountants „ However, no matter the guidance provided…
  51. 51. 51 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. There will always be some … … who do it their own way!
  52. 52. 52 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Q&A
  53. 53. 53 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Back-Up Materials
  54. 54. 54 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Other Resources „ COSO publications at www.coso.org: o “Internal Control Integrated Framework” (2013 Edition) o “Internal Control over External Finance Reporting: A Compendium of Approaches and Examples” (2013) o “Enterprise Risk Management ‟ Integrated Framework” (2004) „ IFAC publications free-of-charge at www.ifac.org: o “Evaluating & Improving Governance in Organizations” o “Evaluating & Improving Internal Control in Organizations” o “Integrating Governance for Sustainable Success” „ IMA publications at www.imanet.org: o “The 2013 COSO Framework & SOX Compliance: One Approach to an Effective Transition” (Strategic Finance June 2013) o The Master Guide to Controllers’ Best Practices • “ISO 31000 Risk Management Standard”
  55. 55. 55 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. COSO ICIF Refresh Project Timeline Assess & Survey Stakeholders Design & Build Public Exposure, Assess & Refine Finalized & Issued 2010 2011 2012 2013
  56. 56. 56 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. COSO ICIF Refresh Project Participants COSO Board of Directors COSO Advisory Council • AAA • AICPA • FEI • IIA • IMA • Public Accounting Firms • Regulatory observers (SEC, PCAOB, GAO, FDIC, etc.) • Others (IFAC, ISACA, etc.) PwC Author & Project Leader Stakeholders • Over 700 stakeholders in Framework responded to global survey during 2011 • Over 200 stakeholders publically commented on proposed updates to Framework during first quarter of 2012 • Over 50 stakeholders publically commented on proposed updates in fourth quarter of 2012
  57. 57. 57 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. International Federation of Accountants • Global organization of the accountancy profession • Supports management accountants in following areas: Governance and ethics Risk management and internal control Sustainability and corporate responsibility Financial and performance management Business reporting Promoting and contributing to the value of management accountants • All areas of critical importance to management accountants
  58. 58. 58 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. IMA & IFAC Support Mgt Accountants Together, IMA and IFAC support management accountants by: • Collaborating with regulators and standard setters in the areas of governance, risk management and internal control • Developing additional guidance for management accountants • Bringing together resources for management accountants • Levering knowledge for management accountants through various channels, such as this IMA conference

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