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FCW : June 30, 2015
HOW IT WORKS services — and balancing resources against performance objectives and risks across that portfolio of products and services — serves to maximize long-term organizational stakeholder value. Evolution of ERM in the federal government Although the concepts of ERM outlined above have been maturing in the pri- vate sector for the past two decades, their introduction into the public sec- tor is more recent. What is believed to have been the first enterprisewide implementation of ERM in the federal government happened at the Office of Federal Student Aid (FSA) in the Edu- cation Department. In 2004, FSA hired a chief risk officer (CRO), Stan Dore, who is believed to have been the first person in the fed- eral government to fill such a position. FSA formally approved the creation of a dedicated ERM office early in 2006. Since those initial efforts, FSA has con- tinued to mature its ERM processes and organization. In 2008, Doug Webster, a co-author of this report, was serving as the chief financial officer at the Labor Depart- ment. With a strong belief in the value of ERM, he reached out to other fed- eral executives who shared that inter- est. Early in 2008, this informal group established itself as the Federal ERM Steering Group and joined with George Mason University to convene the first Federal ERM Summit. That annual event has been held every year since and has become the key event for bringing together those interested in ERM in the federal gov- ernment. In 2011, the Federal ERM Steering Group was formally incorpo- rated as the aforementioned AFERM. Despite the impetus provided by AFERM and its annual summits, progress in the federal government was initially slow. In the Association of Government Accountants’ annual Federal CFO Survey in 2010, five fed- eral executives were noted as having a formal risk management process at their agencies, including the designa- tion of a CRO to facilitate ERM. Although that certainly represented progress from FSA’s initial appointment of a CRO, the surveyed organizations represented a small portion of the fed- eral government. Moreover, meaningful progress was impeded because con- flicting messages were being sent about the true meaning of ERM. For example, in the Association of Government Accountants’ 2011 Federal CFO Survey, 50 percent of respondents indicated that they believed that ERM was adequate at their organizations. However, one respondent said, “We have risk management committees of senior executives and subject-matter experts aligned with each portion of our financial balance sheet. They rec- ommend actions to a national risk com- mittee to evaluate the risks.” That statement reflects a common misunderstanding of the differences between a functional risk (e.g., finan- cial reporting) and meaningful ERM. Although the principles of ERM may be applied within a functional area to manage risk (such as impacts to reliability in a balance sheet), that approach does not represent the princi- ples of ERM applied across an agency. In that same study, only 29 percent of respondents said there was a designat- ed risk management office or operation at their agencies. Given the lack of a central coordi- nating risk management office, this begs the question of whether a mean- ingful ERM program was in place. As the authors of this report have sought to explain in describing ERM, there is a need for a central office or function generating centralized risk manage- ment policy, establishing cross-func- tional risk management processes, facilitating collaborative risk manage- ment discussions and prioritizing risks. The Risk and Insurance Management Society has identified seven characteristics that yield insight into what constitutes enterprise risk management: • Encompasses all areas of organizational exposure to risk (financial, operational, reporting, compliance, governance, strategic, reputational, etc.). • Recognizes that individual risks across the organization are interrelated and can create a combined exposure that differs from the sum of the individual risks. • Prioritizes and manages those exposures as an interrelated risk portfolio rather than as individual silos. • Evaluates the risk portfolio in the context of all significant internal and external environments, systems, circumstances and stakeholders. • Views the effective management of risk as a competitive advantage. • Provides a structured process for the management of all risks, whether those risks are primarily quantitative or qualitative in nature. • Seeks to embed risk management as a component in all critical decisions throughout the organization. Those characteristics clearly distinguish ERM from practices that are sometimes incorrectly understood to be ERM. — Douglas W. Webster and Thomas H. Stanton Distinguishing characteristics of ERM 18 June 30, 2015 FCW.COM 0630fcw_012-025.indd 18 6/10/15 9:40 AM
June 15, 2015
July 15, 2015