XBRL and ERM: Increasing Organizational Effectiveness
Thomson, Jeffrey C., Iyer, Uma, Strategic Finance
The theme of this article is straight-forward, but its application in practice is a bit more complicated: Enterprise Risk Management (ERM) is becoming increasingly valued as a core business process within organizations, yet research directed to CEOs, CFOs, and boards of directors indicates that effective adoption is slow and arduous. XBRL (eXtensible Business Reporting Language), as you know from this column, is an open standard focused primarily on external financial reporting that is increasingly being turned "inward" to improve organizational effectiveness in risk management, internal controls, operational reporting, sustainability reporting, business intelligence, and more.
Let's start at the beginning. What is ERM? The Committee of Sponsoring Organizations of the Treadway Commission (COSO) defines ERM as: "A process, effected by an entity's board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives."
ERM generally encompasses a strategic and systematic approach to managing risks across the organization that includes a process for identifying and managing risks, the people involved in the process, and supporting technology for monitoring and managing risks.
And what about ERM's value for our profession? For some insights there, we turn to Robert Kaplan, one of the luminaries in our profession and a member of IMA[R]:
"Quantifying financial, operating, technological, and strategic risk is far from trivial, and much needs to be learned to make ERM more effective. Also, risk management requires effective systems for internal control and governance. Management accountants can play a leadership role in the design and effective implementation of these risk management systems. This area would be my highest priority for where increases in knowledge and professional expertise could add substantial value to an organization." Strategic Finance, March 2008.
IMA is a founding member of COSO, a committee of five accounting associations and a thought leader in delivering guidance, thought leadership, and research in the areas of internal controls, risk management, and fraud prevention. COSO's 2010 Report on ERM: Current State of Enterprise Risk Oversight and Market Perceptions of COSO's ERM Framework says: "The state of ERM appears to be relatively immature. Only 28 percent of respondents describe their current state of ERM implementation as systematic, robust and repeatable with regular reporting to the board. Almost 60 percent of respondents say their risk tracking is mostly informal and ad hoc or only tracked within individual silos or categories as opposed to enterprise-wide."
And a COSO-sponsored study by Protiviti, Board Risk Oversight: Where Boards of Directors Currently Stand in Executing Their Risk Oversight Responsibilities (December 2010), states: "We found there are mixed signals about the effectiveness of board risk oversight across organizations ... A strong majority indicate that their boards are not formally executing mature and robust risk oversight processes."
If ERM is viewed as important--especially in the wake of financial frauds and the recent global financial crises--then what is the problem? Put simply, recognizing ERM as a critical business process with longer-term, sometimes intangible benefits isn't the same as integrating it as a critical business process. Is this a systematic and comprehensive process by which enterprise risk is identified? How do we determine that risks aren't buried in silos? How do we determine that management and boards have frequent discussions on the top risks facing the enterprise--and whether they are being mitigated or managed to an acceptable level relative to objectives? How do we determine that risks identified in one part of the organization are rationalized with risks identified in another part of the organization (in some cases, the individual risks may not be material or probable, but, when "interacted" together, they may become material and/or probable)? …