ERM in a CPA Practice
Diaz-Garrastacho, Denise, Dickins, Denise, The CPA Journal
Enterprise risk management (ERM) describes an entity's process for assessing, controlling, and monitoring risk across lines of businesses and functions. It is viewed as critical to an entity's success, so much so that pubhcly traded companies are now required by SEC rules to specifically disclose the role of the board of directors in risk oversight (SEC Release 33-9089, adopted December 2009). Specific disclosures include describing the board's role in monitoring the company's risk identification, risk tolerance, and risk management processes. Further, the New York Stock Exchange (NYSE) explicitly requires its listed companies' audit committees to discuss guidelines and policies that govern the way risk is handled, including major financial risk exposures and the steps management takes to monitor and control risk. Beyond compliance, the independent rating agency Standard & Poor's assesses companies' ERM as part of its rating process, and the International Organization for Standardization has issued standards for assessing risk (ISO 31000 and 31010, both issued in 2009).
CPA firms can also benefit from implementing a robust ERM process - and they may even have already partially implemented ERM in their practices in connection with the peer review process. By more fully understanding and implementing ERM in their practices, CPAs can boost performance at their own firms and may also be better equipped to consult with clients about the process and benefits to be derived from it Below, the authors describe how we recently implemented ERM in a CPA firm of 1 1 partners and 30 employees and how the firm benefitted from the process.
Primer on ERM
At its core, ERM is an integrated framework for assessing, controlling, and monitoring risks, across lines of business and operating functions, to provide reasonable assurance that an entity will be able to meet its business and financial objectives. In a CPA firm, those lines of businesses could include auditing, tax, client accounting, and consulting (e.g., litigation support, internal auditing, and financial planning). Functions can be described as chent acceptance and retention, personnel hiring and review, quality assurance, and finance.
According to the Committee of Sponsoring Organizations of the Treadway Commission (COSO), the developer of the ERM framework, the foundation for an effective system of internal control - one responsive to the risks that could hinder an entity's ability to achieve its objectives - is a strong internal environment or appropriate "tone at the top." The primary characteristic of a strong internal environment is having management - or the partners in a CPA firm - committed to competence, integrity, and appropriate internal control.
Once a strong internal environment has been established, the second step of ERM is setting organizational objectives or business outcomes, which should be closely tied to the organization's overall business strategy. For example, management may establish goals of growing revenues or increasing rettun on investment complying with laws and regulations, giving back to the community, developing a reputation as being a "best place to work," or being recognized as having a neutral carbon footprint Objectives are a function of an entity's industry (regulated versus unregulated), organizational structure (privately held versus publicly traded), and tax status (for-profit or nonprofit), among otiier things. Most CPA firms will have growth objectives; many may also wish to build a specific reputation within their communities.
After setting objectives, the next step in ERM is to identify events - or risks - that could prevent the entity from achieving its objectives (e.g., regulatory changes, changes in technology, unforeseen entrants into the market and unanticipated quality issues). Management then develops its response to identified risks, described as either avoiding the risk (e.g., deciding not to implement new software), reducing the risk by establishing internal controls, sharing the risk (e. …