Risk Management

FINANCIAL MANAGEMENT

Final Report

ENTERPRISE RISK MANAGEMENT

Submitted By: GEETA KHIANI

ABSTRACT

Risk is inherently, not a bad thing while it may keep management awake at night, profit would not be possible without it.

The main concern of this Research report is Enterprise Risk Management-which is broadly characterized as system of managing risk across an entire company. This report includes the foremost explanation on Enterprise Risk Management, its importance in business finance, along with the risk and its implications in businesses and in turn it is focusing on ERM's significance overseas in comparison with Pakistan to have a clear depiction of the implementation if any, its outcomes and the development. The report contains the findings from different sources, mostly from articles.

CONTENTS

Page no.

1. Introduction ... 4

2. ERM-Integrated Framework ... 6

3. Driving forces behind ERM ... 9

4. ERM in Financial Services Industry ... 11

5. Introduction to Risk ... 13

6. Internal and External factors of Risk ... 16

7. Risk Management ... 20

8. Analysis of Risk Management in Foreign

Countries and Pakistan ... 24

9. Conclusion ... 29

10.Biblography ... 30

INTRODUCTION TO

ENTERPRISE RISK MANAGEMENT

The traditional risk management approach has been characterized as a highly disaggregated method of managing firm risks. Under this approach, various categories of risk are managed in separate units within the firm. Financial firms often manage market, credit, liquidity, and operational risk separately in individual risk silos. Traditionally, non-financial firms have followed a similar approach to hazard, financial, operational, and strategic risks.

(®Risk Management and Insurance Review)

Enterprise Risk Management (ERM) represents a fundamental shift in the way businesses must approach risk. An enterprise-wide approach to risk management treats each of these risk classes as part of the firm's overall risk portfolio that is managed holistically.

ERM can be defined as :

"Enterprise risk management is 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". (COSO - ERM, Integrated Framework- Sept 2004)

* Source : Strategic Finance " Outsourcing at your own risk", by mar Beasley, Marianne bradford,

and don pagach. (July 2004)

Enterprise risk management (ERM) has captured the attention of risk management professionals and academics worldwide. Unlike the traditional "silo based" approach to corporate risk management, ERM enables firms to benefit from an integrated approach to managing risk that shifts the focus of the risk management function from primarily defensive to increasingly offensive and

Strategic.

As the economy becomes more service driven and globally oriented, businesses cannot afford to let new, unforeseen areas of risk remain unidentified. Currency fluctuations, human resources in foreign countries, evaporating distribution channels, corporate governance, and unprecedented dependence on technology are just a few of the new risks businesses must assess. Many organizations are choosing to implement an Enterprise Risk Management process to ensure that a uniform approach to risk identification, measurement and treatment is utilized across the organization. By adopting this proactive approach to managing risk, companies can move from a "silo" management approach to a deeper integration of its various businesses. ( AON- Risk Management)

ERM-INTERGRATED FRAMEWORK

The underlying premise of Enterprise Risk Management is that every entity exists to provide value for its stakeholders. All entities face uncertainty and the challenge for management is to determine how much uncertainty to accept as it strives to grow stakeholder value. Uncertainty presents both risk and opportunity, with the potential to erode or enhance value. Enterprise Risk Management enables management to effectively deal with uncertainty and associated risk and opportunity, enhancing the capacity to build value.

Here we can conclude that ERM represents a very