Indicators And Metrics Used In Enterprise Risk Management-Books Download

Indicators and metrics used in enterprise risk management
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Emil Scarlat Nora Chirita Ioana Alexandra Bradea, An efficient management will implement a set of indicators or metrics in order to. monitor the changes in risk conditions and to identify new risks This approach. will allow a better management of risk events Risk management involves. attention a future oriented focus Implementation of key risk indicators is a. prerequisite to achieve goals, All businesses have the difficult task of developing KRIs offering. an early warning system of possible future problems KRIs are the cornerstone of. an effective risk management are a critical part of the risk management. process that is why it is necessary to allocate time in order to create a set. of reliable KRIs,2 Key risk indicators KRIs, Many researchers have been concerned lately with the problem of risk. indicators and how they help to detect and reduce the risk at an enterprise level It. have been developed many books and articles on this topic There were elaborated. a lot of definitions for this concept definitions that will be presented in this. A risk indicator provides a forward direction and information about risk. which may or may not exist and is used as a warning system for future actions. With a KRI it can be monitored a specific risk and can be undertaken mitigation. actions Metrics are used to provide an early warning sign for increased exposure. of risk in different aspects of the enterprise, An indicator is a key indicator if it serves a very important statement. and do it very well Jonathan Davies Mike Finlay Tara McLenaghen Duncan. Wilson 2006, Key risk indicators are Statistics or measurements that can provide a.
perspective into a company s risk position tend to be revised periodically. monthly or quarterly to alert the company about the changes that may indicate. risks Les Coleman 2009 Key risk indicators are metrics that are used by. management to show how risky an activity or investment project is. Response time to changes taking place in the risk profile is critical. The faster a change is detected the easier it is to take the necessary measures to. remedy the situation, Building a set of key risk indicators requires skill and expertise Every. person who is responsible with managing a risk must build a suitable set of KRIs. for it Those involved in collecting and aggregating data for KRIs must know all. the definitions conversions and standardization that will be used. If the risk management department is not sure of the compliance of the. measurements used the aggregate information will lose robustness and induce. unconfidence in the decision making It is not enough to assume that the data are. correct it must be validated, Determination of the risk varies from one enterprise to another from one. process to another and from one system to another It is important to take into. Indicators and Metrics Used in the Enterprise Risk Management ERM. account the events with low probability of occurrence which can be extremely. risky Another mistake which can be done is to focus only on the probability of. occurrence without considering the consequences Ann Bostrom Steven P. French Sara J Gotllieb ed 2008, The existence of a risk culture in the company represent the first step in. the process of risk prevention Implementation of key risk indicators is necessary. because any business is in continual change Obtaining current information offers. the management an enhanced ability to lead effectively and to prevent undesirable. In the U S the Risk Management Association RMA manages an. initiative that is designed for enterprises that want to improve their risk. management This project is called Library Services and Key Risk Indicators. and aims to achieve a degree of consistency and standardization to allow. comparison analysis and reporting of key risk indicators at the corporate level The. library contains over 2500 indicators that have been developed to measure and. monitor various types of risks When were created these indicators 50 financial. institutions from all over the world and numerous teams of specialists contributed. Using this library every person has the possibility to get specifications for. metrics to define customize indicators and to record observations on each. indicator RMA believes that this initiative will improve the efficiency of KRIs. Thus for a successful implementation of KRIs it must be ensured the. quantification of indicators the use of standards and methodologies available the. continuous monitoring of progress indicators the KRIs connection to business. objectives and the correctness of the formula, 3 KRIs must not be confused with KPIs Key performance indicators. The two types of indicators should be implemented by any enterprise that. wants to be effective in its management Often KPIs and KRIs are mistaken It is. very necessary for the risk manager to be able to distinguish between them. The key performance indicators focus especially on the historical. performance of the enterprise or its key operations are important for a successful. management On the other hand KRIs provide a real time indicators that offers. information about emerging risks KRIs can be the key relationships that locates. the emerging risks and opportunities that signals the need to act The differences. between KPIs and KRIs are that KPIs tell us if we will achieve our goals and KRIs. help us understand changes in risk profile impact and likelihood to achieve our. If the distinction is made between two types of key indicators will be. very clear about what types of questions we want to answer through these. indicators and how we define these indicators to improve management quality and. the clarity of results,Emil Scarlat Nora Chirita Ioana Alexandra Bradea.
4 Risk metrics, Metrics are a gauge Risk metrics can be considered KRIs which help to. determine the direction from where the risks are coming so they are extremely. useful in any enterprise A key risk indicator is a measure which indicates the level. or trend of risk, The metric can identify the deviation or likely deviation from the target. for a strategic objective of the enterprise By measuring the value of metrics risk. metrics are used to warn in advance that the next strategic objective metric is. unfavorable, It is very important to choose the right number of metrics If an enterprise. implements too many metrics managing these will steal from the time allocated for. other tasks and will provide too much information to shareholders They will end. up not to distinguish critical information and the system will provide information. of limited value On the other hand if too few metrics are implemented the. decision making process will be difficult since there are no critical information. Any metric requires a goal a target an interpretation and reporting. structure Metrics can not provide value only if are measured because you can not. control what you can not measure,5 Measuring and monitoring risk. Risk indicators monitor the risk exposure as early warning systems. performing actions to minimize losses Monitoring risk in the enterprise is done. through a Dashboard interface, The purpose of dashboard is to display all of the required information on.
a single screen clearly and without distraction in order to be understood by every. user Using Dashboards for Risk Management assumes that it is clear what is being. measured especially the key risk indicators, Indicators and Metrics Used in the Enterprise Risk Management ERM. The risk is generated by uncertainty It must be monitored using key risk. indicators that do this while running the strategy chosen Thresholds were set for. KRI in order to trigger actions to adjust the chosen strategies to combat the risk. When strategies are reviewed there are established new risk indicators and new. trigger points This procedure increases the chance of achieving the objectives and. strategies chosen by management Mark S Beasley Bruce C Branson Bonnie. V Hancock 2010, KRI reflects what is accepted or not and the inclination to risk of the. enterprise Since KRI can be measured they help to communicate expectations to. The frequency of the measurement is an important factor Generally the. more frequently an indicator is revised the more representative information will be. obtained There will be cases where frequent measurements of an indicator will. show small changes in risk profile In these situations it is important to consider the. trend before drawing conclusion The trend indicates if the exposure to a risk. decreases or increases, If a threshold was exceeded the risk manager automatically receives a. message through which is ordered to undertake urgent remedial actions The. exceeding of thresholds is indicated by the yellow light of the monitoring risk. semaphore The threshold is the limit or the boundary that once passed alert the. enterprise about the possibility of a significant change in the risk exposure The. risk management need attention when establish the thresholds. When the risk is in the green or yellow area risk management must take. action to prevent that risk If the situation is extremely unfavorable and the risk is. Emil Scarlat Nora Chirita Ioana Alexandra Bradea, in the red zone the enterprise records significant losses and risk management have. to take actions in order to control these losses as possible. It is very important to generate accurate information through KRI Any. indicator must find a balance between speed and accuracy of reporting If reporting. system generate delays it is preferable to sacrifice some accuracy for the sake of. When it is implemented a system of KRIs is necessary to consider the. enterprise s objectives and the stakeholders It is important to build KRIs for all the. important risks that a company can face KRIs must be continuously reviewed to. provide value especially because there are changes in environment in processes in. risks and data sources that can affect the relevance of KRIs. 6 Benefits of using an efficient ERM, This paper reflects the benefits which are acquired by the enterprise when.
it is implemented an efficient risk management Next are presented the main. advantages, Improving Key Business Relationships The early warning system of. risk management may perceive and react in time to the conditions that cause major. risks which rests the operation of a small and medium sized enterprise financial. operational technological and regulatory This will cause further the improvement. of satisfaction and engagement across customers employees and partners By. measuring the level of risk in different parts of the enterprise using the introduced. Indicators and Metrics Used in the Enterprise Risk Management ERM. metrics will be possible to form a comprehensive picture of the interdependencies. that form between the feedback processes that takes place in the enterprise and can. generate different types of risks Decisions will be monitored by the indicators. calculated in the system and will be able to be evaluated in terms of their effects on. the risks arising or likely to occur Decision makers may under these. circumstances to act in those points where decisions are most effective and to. assess using Dashboard the medium and long term effects of these decisions on. the level of business risk Thus by controlling and risk reduction in the enterprise. they will be able to make business plans which have much lower associated risks. Increasing Revenues Between income derived by an enterprise and its. operational risk there is an inverse relationship meaning that a company earns. greater revenue to how the risks affecting different parts or activities are lower. Risk monitoring and reporting the causes of them will make the enterprises able to. focus their resources and creativity on the important issues that require the. development of different internal or environmental activities This leads on to a. growth of revenue from safest business, Reduce Defection and Bankruptcy A key risk in any enterprise is. bankruptcy risk This risk is however consisted of the appearance of different. types of risks that are signaled in time If in the bankruptcy risk treatment were so. far used data and information from past activities the early warning system will. provide the management tools with which not only this risk will be able to be seen. in time but will indicate the reasons that determines the risk of bankruptcy or. defection failure in some business, Prioritizing Decisions A main source of enterprise risk is the decisions. that are either insufficient based or too late adopted Using Dashboards we may. enter an order in adopting important decisions in relation to the seriousness. reported risks and the need to remove them Prioritization of decisions will have. beneficial effects on the efficient use of enterprise resources meaning that they. will be directed to those processes or business that take place under low risk. avoiding processes that may be affected by major risks that if occur leads to waste. of a large amount of enterprise resources, Optimizing Critical Points Performance measurement in real time in. key points of an enterprise will optimize the flow of information and knowledge. that formed within it will enable storage processing sharing and efficient use of. each information which is formed within the network connections and feedback. processes of the company This will lead to an improvement of methods of risk. management in the enterprise by the emergence and development of more effective. ways of action on the conditions that can lead to risks Optimal distribution of these. key points will make possible the intervention of management exactly where it is. needed to eliminate or reduce the developing conditions of risk. Creating a Risk Culture Every enterprise that is going to implement. ERM will acquire a risk culture that will prevail within the organization The risk. culture can be highly conservative highly aggressive or essentially neutral They. create a situation in which promises are made obligations are undertaken and. expectations are set However when we do not satisfy those obligations. Emil Scarlat Nora Chirita Ioana Alexandra Bradea, operationally then we create a situation of great dissatisfaction for customers.
These situations can be avoided if the enterprise acts within the criteria of the risk. culture that has been established In other words they will adhere to the established. guidelines for promise dates and lead times Whenever they depart from this. pattern of behavior they create a risk subculture that is unacceptable When the. risk culture is clearly established everyone lives by the same rules and no. exceptions should be allowed, 6 Correlated risks Building a risk map and a Dashboard. Risk management activities are gaining more and more ground today Early. detection of risks in the enterprise risks that are producing negative effects in. chain resulting in other new risks is a huge challenge for risk managers Doing so. illustrates the experience professionalism and a good implementation of a risk. culture within the organization as well as a significant reduction of the probability. of bankruptcy establishment Risk culture assumes responsibility identify and. transmission of the problem and risks assumption, Next we will sketch a map of risks that may affect the business from. specific risks of every department of the company accounting treasury tax legal. HR IT business planning purchasing sales and marketing operations production. planning control engineering receiving inventory control quality assurance. manufacturing departments pick pack stage shipping logistics financial. debts Gregory H Duckert Practical Enterprise Risk Management Wiley 2010. We will choose a significant risk from each department and will perform. correlations among them,No Department Key Risk Indicator Risk. 1 accounting Unreconciled Balances Manipulation of. accounting data,2 treasury Interest rate on debts Credit costs. 3 tax Revaluation Accuracy of,accounting records, 4 legal Number of litigation actions brought Number of litigation.
trend actions,5 HR ETO employee turnover Employee turnover. 6 IT Network downtime Old technology,7 business Return on investments Bad investments. 8 purchasing Excess inventories Excess materials, 9 sales and Customer complaints lost Lost customers. Indicators and Metrics Used in the Enterprise Risk Management ERM. 10 production Percent of idle capacity Percent of idle. planning capacity, 11 engineering Warranty claims average useful Complaints. life customer complaints, 12 receiving Unanticipated stock outs in raw Bad receiving.
materials shortages, 13 inventory Obsolete and slow moving stockouts Poor stock rotation. 14 quality Market share Loss of market share, 15 manufacturing Net quantity produced versus shop order Producing an. departments requirements uncorrelated quantity,with demand. 16 pick pack Expenditures for damaged goods Expenditures for. stage damaged goods, 17 shipping Expenditures for damaged goods in Expenditures for. logistics transit damaged goods in, 18 financial Average unit sales price declining Price declining.
19 debt Overall solvency ratio,Insolvency,20 management Managerial capacity Weak managers. Emil Scarlat Nora Chirita Ioana Alexandra Bradea, Indicators and Metrics Used in the Enterprise Risk Management ERM. We can easily make correlations between risks previously chosen. However most correlations are made between the only one selected qualitative. indicator management quality and other indicators that is why the importance of. focusing on qualitative risk indicators during ERM process is essential. Most dashboards are created in Excel The dashboard puts the managers. in touch with the business in real time The CEO of Verizon Communications said. that The more eyes that see the results we re obtaining every day the higher the. quality of the decisions we can make Ron Person p 108. Further we will present a dashboard built for some indicators which. reflect the financial state of an enterprise which has as object of activity the gas. transport international transit for gas gas dispatching and research. design gas transport In this dashboard we will present the company status and the. likelihood of bankruptcy using scoring methods, 1968 is a critical year point for predicting bankruptcy thanks to Altman. who introduced the first method of scoring to separate the solvent enterprises from. the companies at risk of bankruptcy For developing this rating system Altman. introduced a statistical function using discriminant analysis and financial. performance After applying this method on a large sample of companies Altman. observed that he could predict more than 75 of bankruptcies in analyzes. conducted two years prior to bankruptcy This percentage reaches 95 in case of. analysis conducted a year earlier and gradually decreases to 70 for those with. five years before the onset of bankruptcy, Another model is the scoring of Conan and Holder appeared in 1978. offering the possibility to identify the probability of introducing short term. bankruptcy,Altman Conan and Holder,The Z 3 3 x1 1 0 x2 0 6 Z 0 16 x1 0 22 x2 0 87 x3.
description x3 1 4 x4 1 2 x5 0 10 x4 0 24 x5,functon of. the model x1 Current result x1 partial solvency ratio. before tax Total asset x2 the rate of financial stability. x2 Turnover Total x3 financial expenses ratio,asset x4 remuneration of staff ratio. x3 Market x5 the share of gross operating,capitalization Loans surplus in value added. x4 Reinvested,earnings Total Assets,x5 Current assets. Emil Scarlat Nora Chirita Ioana Alexandra Bradea,Total Assets.
Z 1 8 bankruptcy Z 0 04 The financial situation is. Scoring Z 3 good financial difficult,situation the company 0 04 Z 0 0 9 The financial. is solvent situation is uncertain,1 8 Z 3 The Z 0 09 good financial situation. financial situation is the company is solvent, According to our calculations there were obtained for each method. applied a score reflecting a good financial situation of the company placing it. away from the risk of bankruptcy The score Z for Altman Method is 4 1053 and. for Conan and Holder is 0 42901, Indicators and Metrics Used in the Enterprise Risk Management ERM. It can be seen from the above tables that the total score places the. company in a good position This is indicated too by the green flag from the box. 7 Conclusions, When we implement a system of KRI it is necessary to consider the.
enterprise s objectives and stakeholders It is important to build KRI for the. important risks that a company can face KRI must be continuously reviewed to. provide value, The use of metrics offers multiple benefits for the company among. which are the following early identification of trends and issues represents a. source of critical information for control provides information about the likelihood. of achieving target sites if there is a sign of improvement or contrary a worsening. of the situation helps to make decisions based on information helps in evaluating. performance leads to a proactive management improves future estimates and. performance evaluates success and failure and improves customer satisfaction. Businesses are constantly changing like this modifying risk exposures It. may be that certain key risk indicators which were relevant last year but they might. not be this year as well The measurement of the risk indicators will provide added. value to the company if they are implemented in accordance with its operations. they will be reviewed and will be updated continuously. Emil Scarlat Nora Chirita Ioana Alexandra Bradea,REFERENCES. 1 Ann Bostrom Steven P French Sara J Gotllieb 2008 Risk Assessment. Modeling and Decision Support Springer Publishing Berlin. 2 Jonathan Davies Mike Finlay Tara McLenaghen Duncan Wilsonm 2006. Key Risk Indicators Their Role in Operational Risk Management and. Measurement Risk Business International Limited, 3 Gregory H Duckert 2010 Practical Enterprise Risk Management A. Business Process Approach John Wiley Sons USA p 145 154. 4 Les Coleman 2009 Risk Strategies Dialling up Optimum Firm Risk. Gower e Book Publishing Burlington USA, 5 Mark S Beasley Bruce C Branson Bonnie V Hancock 2010 Developing. Key Risk Indicators to Strengthen Enterprise Risk Management Research. Commissioned by COSO December, 6 Ron Person 2009 Balanced Scorecards and Operational Dashboards with.
Microsoft Excel Wiley Publishing USA, 7 Gabriela Munteanu 2010 Metode de analiz a riscului de faliment. Romanian Statistical Review no 12, 8 Scarlat E Popovici I F Bolos M 2011 Decision Model on Financing a. Project Using Knowledge about Risk Areas Economic Computation and. Economic Cybernetics Studies and Research ASE Publishing issue 2 vol 45.


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