Waves of Reform Impacting ERM Efforts

As Enterprise Risk Management (“ERM”) has evolved as a discipline over the last decade, it has been largely shaped by waves of reform efforts resulting from corporate fraud in the early 2000’s to economic catastrophes and widespread corruption in the latter half of the decade. According to a recent article by Mary Driscoll in Business Finance Magazine (a partner publication of The ERM Current), a new wave of ERM change and focus is at hand. Through several sources, Mary offers her view of the most recent wave and the one on the horizon.

The third wave, which is proving just as significant, came in early 2010 in the form of SEC Rule 33-9089, which “mandates disclosure of risk oversight and risk reporting lines, risk assessment by business unit, and assessment of the risk associated with compensation plans,” explains Paul Walker, Associate Professor of Commerce at the University of Virginia and a leading academic in the field.

“Furthermore, the recent Dodd-Frank Wall Street Reform and Consumer Protection Act has raised the risk bar by mandating risk committees and risk experts on those committees. Add to this the fiduciary duty pressure on boards and the potential risk-related lawsuits, and you end up with risk getting attention at every level of the organization,” adds Walker.

Now consider this twist. According to an article by Deloitte Financial Advisory Services LLP’s Toby Bishop, “The Dodd-Frank Act has created a large financial incentive for whistle-blowing in companies across all industries.” An area of particular concern relates to violations of the Foreign Corrupt Practices Act, and that could mean higher potential liabilities for companies moving aggressively into emerging markets where local officials expect to trade access for cash.

What has your company done to prepare for the potential impacts of these waves?  If you would like to learn more about practical, cost-effective solutions, let us know by emailing us at NavigateSuccessfully@WheelhouseAdvisors.com.


Holes in Risk Management & Compliance Programs

As the current recession continues into its seventh quarter, many companies are living on the edge when it comes to risk management and compliance.  To conserve cash in the short term, a company will often forego investments in risk management and compliance because it does not bear an immediate return to the bottom line.  While this may be true, the ultimate value of solid risk management and compliance  is in its ability to avoid catastrophic losses or major impacts to a company’s reputation.

Southwest Airlines is a case in point this week as its weak compliance practices have been brought to light through a faulty fuselage that imperiled a flight and its passengers.  On a flight from Nashville to Baltimore, the airplane suddenly developed a hole in its fuselage that caused the cabin to lose pressure and forced an immediate emergency landing.  Here is what was reported in the New York Times about the incident and subsequent investigation.

The National Transportation Safety Board has sent an investigator to the airport in Charleston, W.Va., where the 15-year-old plane landed, to inspect it and determine what caused the failure in the fuselage at cruising altitude. Representatives from Boeing and the Federal Aviation Administration are helping in the investigation. The event could have been catastrophic, and an F.A.A. spokesman, Les Dorr, said Southwest was being prudent to examine its airliners immediately. More sophisticated analysis will have to wait for details to emerge from the investigation, he said. “In the absence of any identified problem in the top of the airplane, that’s all you can do,” Mr. Dorr said.

In March, the agency ordered Southwest to pay a $7.5 million fine for a series of safety violations in which its jets were flying with undiagnosed fatigue cracks. The investigation against the airline, based in Texas, also uncovered efforts by managers at the F.A.A. to cover up reports of maintenance problems at Southwest.

As companies continue to sacrifice safety and reputation to protect the bottom line, more reports such as these will surface.  However, a proactive, cost-effective risk management and compliance program can help companies avoid “holes” in their approach and maintain a significant competitive advantage over the long-term.


Top Risks on the Horizon in 2009

In this final post of 2008, we look forward to a new year filled with uncertainty and risk.  Events of this past year will reverberate not only for the next few weeks or months, but throughout the coming year and potentially many years to come.  A year-end study completed by Ernst & Young highlights the top risks that companies across the globe will face in 2009.  Below are the rankings with results from the 2008 study in parentheses.  

The 2009 top 10 risk rankings

1. The credit crunch (2)
2. Regulation and compliance (1) 
3. Deepening recession (New) 
4. Radical greening (9) 
5. Non-traditional entrants (16) 
6. Cost cutting (7) 
7. Managing talent (11) 
8. Executing alliances and transactions (7) 
9. Business model redundancy (New) 
10. Reputation risks (22) 

Not surprisingly, credit related issues are the number one item on the list followed closely by regulation & compliance.  Companies of all sizes need to be prepared to address the rapid changes that may occur over the next year.  Having a solid framework to quickly understand changes in these risks and make quick adjustments will provide a significant competitive advantage.  Visit www.WheelhouseAdvisors.com to learn more.  

Keep Your Eye on Compliance

The primary focus of most CFOs these days is credit and liquidity.  However, during a crisis such as the one we are experiencing, it is easy to become distracted and lose focus in other critical areas.  Compliance is one of these areas and with the recent election results, it is sure to be an area of great risk in the months and years to come.  Here’s what Barry Bregman, a partner with CTPartners in New York, had to say about the topic at CFO.com.

That’s not to say compliance has fallen by the wayside, especially at a time when the government is looking even harder at the operations of financial-services companies. “CFOs should make sure they have their eye on that ball and that they have the right people managing those functions.”

Wheelhouse Advisors is equipped to help CFOs and their organizations maintain the proper focus on risk management and compliance with cost-effective solutions.  Visit www.WheelhouseAdvisors.com to learn more.