Key Risk Indicators

Chapter 12

Do not limit your discussion of the topics to the textbook. Use outside sources for examples.

Explain how Key Risk Indicators assist companies in identifying emerging risks. Select a company other than Intuit and provide examples of how KRIs would be useful.
Explain how Key Performance Indicators help companies to manage existing risks. Select a company other than Intuit and identify at least three KPIs unique to their business. Explain how the KPIs can assist the company in managing risks specifically related to their company/industry.
What is the effect of not measuring performance of an ERM program on the overall quality of the program?
How can the Board of Directors be confident in the information reported on management’s progress in responding to significant risks?

ANSWER

Key Risk Indicators

Risks are part of all business. That is why there are experts in risk management, compliance, and internal audit. These professionals are there to help organizations manage risks. Key risk indicators help the organization prepare for emerging risks, unlike key performance indicators which help organizations deal with the risks that are already in existence. Key risk indicators deal with issues such as merging competitors, merging products that will replace the product the organization is selling, and the rise in prices of commodities such as gasoline (Fraser et al., 2014). These are unseen changes that the organization needs to prepare for to ensure they do not fail. Key risk indicators would have worked well for General Motors. This is because they would have foreseen the risks in their product and this would have helped them solve the problem better without almost going bankrupt.

Key performance indicators can be used in risk management in the business. This is because, through the performance indicators, one can identify the risks in the business. Knowing the risks to expect helps one prepare ahead of time. It helps the organization plan to manage the risks. It also enables the people in the organization to take preventative measures to prevent the risks. For example, in the coffee industry, some of the risks could include delays in supplies. This means that the coffee shop can prepare for this and stock extra coffee in case there are delays in the next supply. Another use of KPI in risk management is that it helps the business to understand the actual risks that take place (Fraser et al., 2014). For example, the coffee shop understands that there are delays sometimes and thus, will be prepared. The frequency of the risks can also be identified using KPIs and this would help a business be better prepared.

Measuring performance in ERM programs is an important factor in risk management. This is because it provides insight into the areas where additional attention may be required or areas where opportunities exist. Failure to measure ERM in an organization puts the organization at the risk of failure. This is because key risk indicators and key performance indicators allow the organization to plan for the future. Failure to understand the emerging risks and the risks that are already in the organization means that the organization will not be prepared for the risks when they occur and thus, will lead to the organization going down (Fraser et al., 2014). This is not something that any organization wants to happen to it. Understanding the cause of poor performance in some areas and the reason going a certain way will lead to losses is an important factor in managing any business.

The board is an important tool in providing risk oversight. This ability is, however, determined by the quality of information they receive from the ERM programs. They can determine the quality of information that is getting to them by looking at the timeliness of the reports and how regularly they are delivered to them (Ballou et al., 2011). The board also needs to actively participate in these programs by helping the management to perform these programs that are in conjunction with the changing economic climate. This means actively linking risk information with the critical business drivers so that they identify where they are not getting the appropriate information. Board members also need to know about what is going on so they can assess the information given to them.

References

Ballou, B., Heitger, D. L., & Stoel, D. (2011). How boards of directors perceive risk management information. Management Accounting Quarterly, 12(4), 14.

Fraser, J. R., Simkins, B., & Narvaez, K. (2014). Implementing enterprise risk management: Case studies and best practices. John Wiley & Sons.