Smart Companies Integrating ERM with SOX

Steven Minsky | Sep. 2, 2014

In Malcolm Gladwell’s “Blink,” he examines a hospital whose team had learned that to diagnose heart attacks, it’s more beneficial to gather a few key indicators than to try and take every measure into account. I’ve found that to judge the health of ERM programs, there are also a subset of characteristics that seem to immediately indicate success.

  1. Does the ERM program engage the front lines?
  2. Can the program analyze information across silos?
  3. Has the program engaged, or integrated, with at least one other governance function?

If I’m developing a three question test of ERM effectiveness, that’s where I’d start. This blog will focus on the third question, especially when it comes to matter of financial reporting compliance.

A Brief History

Financial Reporting Compliance and its many iterations (SOX, JSOX, NAIC Model Audit Rule, etc.) has been adopted by more than just large public institutions, as effects of SOX implementation have been shown to improve internal processes, streamline testing, and has even reduced the uncertainty in the pricing of IPOs.

The evolution of SOX compliance, from industry fear that the mandate would reduce levels of risk taking and suppress investment, to a recognition that the mandate provides value when implemented effectively, mimics the emergence of ERM as a core business discipline. It’s ironic that of successful ERM programs, many turn to SOX teams when beginning to standardize risk management across an enterprise.

How SOX is integrated with ERM

Internal Controls over Financial Reporting has many overlays with ERM, as it’s simply the management of the risk of misstatement. Analysis by process and sub-process, documentation of controls and objectives, and testing required to validate controls are all subsets of ERM practices. While an automated GRC tool can assist in testing documentation and data management, ERM offers the additional capability of prioritizing and streamlining the SOX process by pointing organizations to their area of greatest vulnerability.

How is that accomplished? In 2002, SOX gained a horrible reputation for wasting time and resources. That reputation started to change in 2007, when the concept of ERM, or more specifically what is called a Top Down Risk Assessment (TDRA), was introduced as a way to prioritize an organizations key controls and tests by linking them to risk. TDRAs are a formalized recognition that a risk-based SOX approach is more valuable and more cost effective. Enterprise Risk Management Software can assist in this process by integrating these types of assessments with the current ERM risk assessment process. Instead of adding work for your process owners, they’re simply accomplishing multiple goals with the same consolidated assessment, and allowing the financial controls analysts to prioritize their work to only material risks.

Similar to Internal Controls over Financial Reporting, other governance functions can benefit with cost savings and efficiency by adoption risk management practices. Integration of this kind is how organizations are able to turn ERM from another compliance activity to a framework for overall governance. Just as ERM can prioritize SOX controls for Finance teams, it can similarly prioritize vendors, IT assets, regulatory compliance and a whole host of otherwise costly governance activity. And moreover, this prioritization can be done across silos, providing value not just for front line managers, but the business as a whole.

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