Basics of Enterprise Risk Management (ERM): How to Get Started

The primary function of any business or enterprise is to add value in the form of income to its shareholders. This function is realized by careful planning and execution of the set-out objectives of an enterprise. During this continuous process, different types of risk may appear, which may threaten to derail the achievement of the objectives of the enterprise.

Here’s what we study in this article:

1. Advantages of ERM System
2. Aspects of Risk Management
3. ERM Process

Therefore, a comprehensive framework must be put together to guarantee that all objectives are achieved within a reasonable margin, even in the events of unforeseen risks. This framework is termed Enterprise risk management (ERM).

ERM system is a complete structure that provides a set of solutions for different types and grades of risks, which gives an enterprise the ability to manage the final value it produces. It is a management plan, which tries to isolate, define, and categorize all risks that may tend to shift the outcome of a process beyond the acceptable limits.

A well-established ERM system ensures a high level of consistency in the achievement of success, which is closely related to the company’s objectives and performance indicators.

In recent years, there has been a sharp need for the application of the ERM system in companies and businesses as more stakeholders have understood the importance of such systems. ERM has been shown to increase and maintain a healthy relationship between all the stakeholders of an enterprise, including clients.

Advantages of ERM System

For an enterprise to enjoy all the benefits of the ERM system, all its stakeholders must understand why the system is essential, and they must also work towards the same set of aims and objectives. Some of the benefits include the following.

• Development of a risk-conscious organization – ERM enables all the staff of an enterprise to be always conscious of risks while making decisions. This process makes for an excellent environment for the effective management of risk. It also increases the quantity and quality of the value-added factor of an enterprise.
• Standardize the method of risk reporting – it makes for an efficient framework that enables useful analysis and reporting of all types of risks. This process is crucial as it provides the management of an enterprise with the required information to make better decisions and adequately manage future risks.
• Competent regulation and compliance – many regulatory bodies and auditing agencies prefer data in the ERM system format. Therefore, enterprises that make use of ERM systems are more likely to reduce the amount of energy, resources, and effort that is required for such reviews and audits.
• Effective management of resources – since many individuals are required to carry out the daily work routine of an enterprise, the ERM helps to reduce the amount of time and energy that is required to assess and manage risk at each stage of operation. It makes the entire process consistent and adequate.
• Better risk perception and management – it helps to provide a better perception of the type and level of a risk, which simplifies the entire process and gives an early assessment of potential risks.

Aspects of Risk Management

The following are the main aspects of risk management.

• Hazard Management
• Internal Control and Audit
• Regulation and Compliance

Hazard Management

To effectively assess hazards, the administrator or manager must identify the risk, assess its severity, come up with many different management plans, choose the best plan, and continuously monitor and adjust the plan as required. The hazard management process can be used both in risk management and risk prevention.

Internal Control and Audit

Internal control is the process by which an enterprise monitors and ensures that all its internal procedures are working accordingly and are in line with its objectives. Internal control is used to ensure that all internal control measures are running according to the objectives of the enterprise. Both measures are used to increase the efficiency of the workflow within an enterprise.

Regulation and Compliance

To ensure smooth operation and prevent the likelihood of closure or penalties, enterprises usually pay a significant amount of attention to ensure that all their processes comply with regulations and rules that are prescribed by regulatory bodies.

ERM Process

The process of ERM involves five significant steps, which are:

• Definition of Objectives
• Identification of Risk
• Assessment of Risk
• Development of Risk Mitigation Strategy
• Monitoring of Strategy

Hazards, financial risks, strategic risks, and operations risks are all types of risks that can be mitigated through the ERM system.