CICA framework calls for boards to be more assertive in risk oversight
TORONTO, July 12, 2012 /CNW/ - Boards should take a more active and direct role in the oversight of enterprise risk according to a new publication from the Canadian Institute of Chartered Accountants (CICA).
Enterprise risk management focuses on how much uncertainty a company is willing to accept as it strives to grow. The need for enhanced board oversight comes with an economy that remains unsettled in the aftermath of the financial crisis.
The CICA's A Framework for Board Oversight of Enterprise Risk is unique in that it focuses specifically on the board's role in terms of risk. It goes beyond principles to provide valuable guidance and tools to help directors discharge their responsibilities. The framework was authored by John Caldwell, a chartered accountant, drawing on his extensive experience as a corporate director and CEO.
"While boards should not be involved in day-to-day risk management, the oversight role should not be passive or too reliant on management," said Caldwell. "In fact, risks associated with leadership and strategy are areas where a board should assert itself more directly, since management may not be able to objectively assess its own performance from a risk perspective."
The CICA framework encourages boards to take a more holistic approach to risk by understanding an organization's vulnerabilities and the interrelationships and interdependencies between risks. "Effective board oversight of risk requires rigour, objectivity, a heightened sense of risk's importance, and most importantly, the recognition that unforeseen events and circumstances can and often do occur," said Caldwell.
The framework provides a practical approach for boards to address risk. The goal is to help directors:
- Better identify and address critical risks
- Understand how risks are interconnected
- Recognize the potential compounding effect of risks should unfavourable events occur at the same time
- Develop appropriate risk tolerance and risk appetite levels
"Risk management and board oversight should not be strictly premised on risk avoidance," stressed Caldwell. "Every organization is exposed to and takes risks daily. Effective risk management involves balancing risks and rewards ultimately to improve performance and shareholder value."
Caldwell added that there is no single implementation model for risk oversight because of the unique circumstances of each organization and its board of directors. Each board must determine its own appropriate execution methodology.
The framework was commissioned by the CICA's Risk Oversight and Governance Board and is available online (www.cica.ca/riskoversight).
Chartered Accountants (CAs) are Canada's most valued, internationally recognized profession of leaders in senior management, advisory, financial, tax and assurance roles. Through their integrity, expertise, and internationally recognized qualification standards, Canada's 82,000 CAs sustain their influence and leadership position both in Canada and globally. As trusted business advisors to Canadian organizations of all sizes, Canada's CAs foster confidence in Canadian business and contribute to the health and sustainability of Canada's capital markets and economy. The Canadian Institute of Chartered Accountants (CICA) represents Canada's CA profession both nationally and internationally. The CICA is a founding member of the International Federation of Accountants (IFAC) and the Global Accounting Alliance (GAA).
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