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RSK2601 ENTERPRISE RISK MANAGEMENT

RSK2601 ENTERPRISE RISK MANAGEMENT. Developed by Ms. S Maré. Overview. Introduction Topic 1: ERM in Context & Corporate Governance Topic 2: ERM process Topic 3: Internal Influences- Micro Factors Topic 4: External Influences- Macro Factors Eskom Case Study Barings Bank Exam guidelines.

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RSK2601 ENTERPRISE RISK MANAGEMENT

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  1. RSK2601 ENTERPRISE RISK MANAGEMENT Developed by Ms. S Maré

  2. Overview • Introduction • Topic 1: ERM in Context & Corporate Governance • Topic 2: ERM process • Topic 3: Internal Influences- Micro Factors • Topic 4: External Influences- Macro Factors • Eskom Case Study • Barings Bank • Exam guidelines

  3. Introduction “For those organisations that choose to weather this economic storm with the aid of ERM, the benefits of their efforts today will likely remain long thereafter” Grant Thornton

  4. Risk “Risk is the effect of uncertainty on objectives.” The effect may be positive, negative or a deviation from the expected. Risk is often described by an event, a change in circumstances or a consequence. (ISO 31000)

  5. Topic 1: ERM in context ERM aims to provide a coherent framework to deal with all risks that result from operating in the ever-changing economic environment. Image placeholder “We’ve considered every potential risk except the risks of avoiding all risks.”

  6. Elements for ERM

  7. Corporate Governance Definition “Corporate governance refers to the relationships among the management of an organisation, its board, its shareholders and other relevant stakeholders. It also refers to the specific responsibilities of boards of directors and management to maintain established relationships.”

  8. Corporate Governance cont... Good corporate governance contributes to shareholders’ wealth and a key factor in the investor decision-making process. • King I Report (1994) • King II Report (2002) • King III Report (2009) • Companies Act 61 of 1973 • Companies Act 71 of 2008

  9. King III Report • Leadership, sustainability & corporate citizenship • Integration of social, environmental & economic issues • Inclusive stakeholder approach • Integrated reporting • Emerging governance trends incorporated in the report

  10. Corporate Governance Collapses Corporate governance handbook, 2nd, JW Hendrikse & L Hefer-Hendrikse

  11. Corporate Governance Collapses cont... Corporate governance handbook, 2nd, JW Hendrikse & L Hefer-Hendrikse

  12. Corporate Scandals Corporate governance handbook, 2nd, JW Hendrikse & L Hefer-Hendrikse

  13. Enron Scandal View the video at http://www.youtube.com/watch?v=Mi2O1bH8pvw

  14. Enron ScandalGovernance failures • Enron’s leadership – its Board & senior executives, failed to protect all stakeholders in the company • Illegal activities & fraudulent reporting • Corporate culture failure & massive incompetence • Self interest and greed • Massive failures & internal culture of accounting earnings & self enrichment • Power trading fell between the cracks of many regulatory systems • Profits at all costs regime

  15. “Risk, return and responsibility are the three sides of the coin of business opportunity. The financial crisis, as we see it today, is not so much a crisis of greed or the failure of accounting standards. It is a failure of risk management systems” Accountancy SA – August 2009

  16. Top 10 Risk of Business Ernst & Young Business Risk Report of 2010 Corporate governance handbook, 2nd, JW Hendrikse & L Hefer-Hendrikse

  17. Top Ten South African Risks 2015 IRMSA Risk Report South Africa Risks 2015 Source: www.irmsa.org.za

  18. Additional Risks in the South African Context IRMSA Risk Report South Africa Risks 2015 Source: www.irmsa.org.za

  19. Governance of riskKing III 10 principles • Risk governance is the board’s responsibility. • The board should determine the risk tolerance & risk threshold for the company. • Risk committee/audit committee should assist the board. • It is management's responsibility to implement & control the risk management process.

  20. Governance of riskKing III 10 principles cont... 5. There has to be an ongoing risk assessment process. 6. There has to be an early warning & monitoring system to detect & anticipate unpredictable risks. 7. Management must control the response systems. 8. Management must control the risk monitoring systems.

  21. Governance of riskKing III 10 principles cont... 9. Management is to advice the board on the effectiveness of the risk management process & systems. 10.The board is to ensure that the company’s disclosure framework includes the reporting on the effectiveness of the risk management process. Note: Study the section on “King III at a glance” (Appendix A) in TL501

  22. Topic 2: ERM process Definition “The risk management process entails the planning, arranging and controlling of activities and resources to minimise the negative impacts of all risks to levels that can be tolerated by stakeholders whom the board has identified as relevant to the business of the company, as well as to optimise the opportunities or positive impacts of all risks.”

  23. Topic 2: ERM process

  24. Stage 1: Establishing the context • Foundation for all the other stages. • To acquire accurate data & information about the whole business. • Will assist in determining the sources of risks & the participants in the risk identification process.

  25. Stage 1: Establishing the context cont...

  26. Stage 1: Establishing the context cont... • To acquire accurate data and information about the whole business. • A risk breakdown structure must be constructed These activities include: • Clarifying & recording business objectives • Understanding the business plan • Examining the industry (business operates) • Establishing business processes

  27. Stage 1: Establishing the context cont... • Evaluate financial statements • Identify resources available • Change management • Marketing plan • Compliance system • Evaluate financial statements • Identify resources available

  28. Stage 2: Risk identification • Identification of the risks/risk events & opportunities (upside & downside) • Understanding how they fit into the overall business. • As a business grows, expands or improves, the exposure to risk will also change. • Assist in formulating a business strategy.

  29. Stage 2: Risk identification cont...

  30. Stage 2: Risk identification cont... • Activities to capture & record the risks: • Clarify business objectives • Reviewing the business analysis of Stage 1 • Need for risk & opportunity identification • Risk and opportunity identification • Facilitation (interactive workshops) • Consensus on risks, opportunities & interdependencies

  31. Stage 3: Risk analysis • Provides info on the likelihood of risks & opportunities occurring & impact. • Assess all the risks identified in the risk register. • To separate the minor, acceptable risks from the major risks.

  32. Stage 3: Risk analysis cont...

  33. Stage 3: Risk analysis cont... Likelihood & impact of potential risks

  34. Stage 3: Risk analysis cont... Risk map example

  35. Stage 3: Risk analysis • Tasks necessary to capture the likelihood of risk occurring and impact are: • Casual analysis • Decision analysis & influence diagrams • Pareto analysis • CAPM analysis • Defining risk evaluation categories & values

  36. Stage 4: Risk evaluation • Evaluate the financial impact (loss or gain) of a risk. • Assessment & measurement of the risk exposures with the aim to manage & control the risks that can negatively influence the business strategy/objectives. • Understand the combined effect of a group of risks & opportunities.

  37. Stage 4: Risk evaluation cont...

  38. Stage 4: Risk evaluation cont... Risk attitudes

  39. Stage 4: Risk evaluation cont... • Activities in risk evaluation: • Basic concepts of probability • Sensitivity analysis • Scenario analysis • Simulation • Monte Carlo simulation • Latin hypercube sampling • Probability distributions

  40. Stage 5: Risk Treatment • Designing of a specific action plan to address the risks and opportunities. • Response strategies must be implemented effectively in the business. • Commonly it is not possible to remove a risk in its entirety.

  41. Stage 5: Risk Treatment cont...

  42. Stage 5: Risk Treatment cont... • Activities to construct the priority list of risks into a concrete action plan is: • Understanding risk appetite • Risk response strategies • Risk reduction (mitigate) • Risk removal (avoid) • Risk transfer (third party) • Risk retention (accept)

  43. Stage 5: Risk Treatment cont... Mapping of losses

  44. Stage 6: Monitoring & Review • Ever changing environment. • Review all the previous stages (continuous process). • Early warning system in order to identify areas which could potentially lead to risk exposures & financial losses. • Business is constantly reacting, registering, reviewing & reporting.

  45. Stage 6: Monitoring & Review cont...

  46. Stage 6: Monitoring & Review • Activities necessary to ensure this stages is managed proactively to execute responses are the following: • Executing actions to respond to risks • Monitoring the progress • Controlling for decision making

  47. Stage 7: Communication & Consultation • Used across all the other ERM stages. • How effective each stages is communicated & understood by decision makers. • Effectively communicated to all levels of employees? • Support the implementation of a risk management culture in a business.

  48. Stage 7: Communication & Consultation cont..

  49. Stage 7: Communication & Consultation cont... • Activities to ensure the overall risk management process is effective: • Internal communication • External communication • Key risk indicators • Key performance indicators Note: Study the additional information on Study Unit 3 under additional resources on MyUnisa

  50. Case Study: EskomBackground • ESKOM CASE STUDY.pdf • Power outages caused by incidents. • Loss of income & human life, dented reputation as a reliable electricity supplier. • Questions risk management culture?? • Downgrading of credit rating. • Management lack of awareness of problems.

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