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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
Learning Objectives
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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
Today’s Agenda
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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
IMA’s 93rd Annual Conference
© 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved.
The Pitfalls – Setting the Scene
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”
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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
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IMA’s 93rd Annual Conference
© 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved.
Current Thinking
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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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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)
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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
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
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
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
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
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
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
IMA’s 93rd Annual Conference
© 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved.
ISO 31000 Risk Management Framework
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
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
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
IMA’s 93rd Annual Conference
© 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved.
Impact on You & Your Organization
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
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
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
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
IMA’s 93rd Annual Conference
© 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved.
Other Emerging Trends
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
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
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
IMA’s 93rd Annual Conference
© 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved.
Management Accountant
“Call to Action”
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
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
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
IMA’s 93rd Annual Conference
© 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved.
Q&A
53
IMA’s 93rd Annual Conference
© 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved.
Back-Up Materials
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
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
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
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
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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Leveraging Effective Risk Management and Internal Control for Your Organization

  • 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. 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. 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 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 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 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 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Current Thinking
  • 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Other Emerging Trends
  • 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 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 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 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 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 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 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 IMA’s 93rd Annual Conference © 2012 Institute of Management Accountants and International Federation of Accountants. All rights reserved. Q&A
  • 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 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 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 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 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 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