PORTFOLIO

Coordinating Risk Management and Performance Measurement (Portfolio 5308)

Organizations face increasing pressure from various stakeholder groups to manage business risks effectively and to report their performance transparently across such risk management initiatives.

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DESCRIPTION

Organizations face increasing pressure from various stakeholder groups to manage business risks effectively and to report their performance transparently across such risk management initiatives. This Portfolio links two areas of accounting, enterprise risk management (ERM) and performance measurement, traditionally treated separately. Based on this linkage, the Portfolio provides a model that should help organizations better understand and perform effective risk management, as well as communicate their risk management efforts to external stakeholders.
The Portfolio begins by surveying ERM and performance measurement, including corporate sustainability reporting (CSR)—also referred to as triple bottom-line (or TBL) reporting. This explanation draws upon two other BNA Tax and Accounting Portfolios (cited below) that examine ERM and TBL, respectively. The Portfolio then posits that limitations associated with ERM and CSR—most notably the lack of support from boards of directors and senior management and the lack of relevant and reliable measures—have prevented ERM and CSR from reaching their full potential. The Portfolio addresses these limitations by developing a methodology for applying performance measurement processes to ERM that the authors believe can lead to relevant and reliable measures of ERM effectiveness. These measures then can be utilized as catalysts to create improved mechanisms for developing, formatting, and issuing improved CSR reports. The Portfolio concludes by developing the Stakeholder Accountability Report, an evolved CSR report that incorporates a process for identifying, measuring, and reporting ERM performance that should help create firm value through enhanced corporate reputation and more transparent reporting to stakeholders.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5308, Ballou and Heitger, Coordinating Risk Management and Performance Measurement (Accounting Policy and Practice Series). Readers interested in more detailed information on intertwined subjects are encouraged to consult BNA Tax and Accounting Portfolios 5302, Taylor, Corporate Accountability and Triple Bottom Line Reporting (Accounting Policy and Practice Series); 5303, Shenkir and Walker, Enterprise Risk Management (Accounting Policy and Practice Series); and 5304, Frigo, Using the Balanced Scorecard Framework (Accounting Policy and Practice Series).


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AUTHORS

BRIAN BALLOU, PROFESSOR
Dr. Brian Ballou, Ph.D., Michigan State University (1996); B.S.B.A., Honors, Accounting, The Ohio State University (1988). Dr. Ballou specializes in business risk-based auditing. He has worked as a senior analyst for LEXIS/NEXIS (1991–92), senior associate for Ernst & Young, LLP (1989–1991), and postgraduate intern at the FASB (1988–89). As a public accountant, licensed in Indiana (not actively practicing), he leads seminars for KPMG interns throughout the United States and has served on the AICPA Risk Assessment Task Force. In addition to coauthoring a book on applying a global Enterprise Risk Management (ERM) approach to auditing, Dr. Ballou has published works on governance, risk management, and reporting (GRMR) in Harvard Business Review, the Journal of Accountancy, Issues in Accounting Education, and Management Accounting Quarterly. He has received GRMR-related grants from the Economic Development Administration, KPMG, and PricewaterhouseCoopers. Dr. Ballou is also a Professor of Accountancy and Co-Director of the Center for Governance, Risk Management, and Reporting at the Farmer School of Business, Miami University of Ohio, and co-instructs the only GRMR course series of its kind in the United States.

DAN L. HEITGER, ASSOCIATE PROFESSOR
Dr. Dan L. Heitger, Ph.D., Michigan State University (2000); B.S., Accounting and Mathematics, Indiana University (1993). Dr. Heitger worked for Ernst & Young, LLP as a staff associate (1993) and specializes in performance measurement issues and transparent sustainability reporting. He co-founded Indiana Executive Systems, an organization that provides executive education on topics related to governance, risk management, and reporting (GRMR) for large international organizations. His GRMR-related publications have appeared in Harvard Business Review, Behavioral Research in Accounting, the Journal of Accountancy, and Management Accounting Quarterly. Dr. Heitger has also received grants related to risk management and reporting from the Bureau of National Affairs. He is an Associate Professor of Accountancy and Co-Director of the Center for Governance, Risk Management, and Reporting at the Farmer School of Business, Miami University of Ohio, and co-instructs the only GRMR course series of its kind in the United States.

TABLE OF CONTENTS

Detailed Analysis

I. Purposes, Role, and Scope of Portfolio

II. Enterprise Risk Management From an External Perspective

Introductory Material

A. Frameworks of ERM

1. Traditional ERM Frameworks-Financial Reporting

a. Financial Reporting Measurement Techniques

b. COSO 1992 (i.e., Internal Controls)

2. Business Risk as the Driver of Control and Risk Management

3. Summary of COCO 1995 Components

a. Purpose

b. Commitment

c. Capability

d. Monitoring and Learning

e. Utilization of COCO 1995

4. Summary of COSO 2004 Components

a. Internal Environment

b. Objective Setting

c. Event Identification

d. Risk Assessment

e. Risk Response

f. Control Activities

g. Information and Communication

h. Monitoring

5. Crisis Management ERM (Low Probability/High Financial Impact Risks)

a. Avoidance

b. Preparation

c. Recognition

d. Containment

e. Resolution

f. Reputation Advancement (i.e., Profiting)

B. Challenges to Effective ERM

1. Barriers to Effectively Implementing COSO 2004

a. Board of Directors or Senior Executive Resistance

b. Improper Understanding of the Need for Top-Down Buy-In

c. Overly Narrow Perceptions of ERM

d. Rushing the Implementation of a Framework

e. Use of ERM as a Dynamic Process

f. Poor Understanding of Formal Risk Measurement Tools

2. Developing a Risk Portfolio Perspective

3. Moving From Risk Assessment to Risk Management

4. Monitoring and Improving ERM Framework

C. Summary

III. Performance Measurement From an Internal and External Perspective

Introductory Material

A. The Relationship Between Internal and External Performance Measurement

1. The Changing Business Environment

2. External Nonfinancial Information Reporting

B. Measuring and Communicating Performance Internally

1. Understanding Business Processes (vs. Functional Departments)

a. Business Process Identification

b. Process Owner Selection

c. Harmonizing Core Processes and Organizational Management Structures

d. Potential Benefits of a Business Process Orientation

2. Coordinating Performance Measurement With Organizational Strategy

a. Balanced Scorecard

b. Beyond the Balanced Scorecard: Performance Measurement Models

(1) Strategy Maps

(2) Causal Models

C. Reporting Performance Externally

1. External Pressure to Report Transparent Performance Measurement Information

a. Opposing Viewpoints Concerning Increased Information Reporting

b. The Demand for More Transparent Reporting

c. Financial Reporting to Shareholders

(1) Economic Value Added

(2) Pro Forma Reporting

(c) Limitations of Financial Reporting

d. Incorporation of Nonfinancial Performance Measures

e. Reporting to Stakeholders Other Than Shareholders

(1) Companies as Countries Analogy

(2) Stakeholder Concerns vs. Shareholder Concerns

(2) New Public Demands for Accountability

(a) Case Study: Coca-Cola

(b) Case Study: Wal-Mart

(c) Case Study: Gap Inc.

2. Corporate Sustainability Reporting (CSR)-a.k.a. Triple Bottom Line (TBL)

a. Frameworks for CSR/TBL

(1) Global Reporting Initiative

(2) Other Frameworks

(a) Social Reporting

(b) Environmental Reporting

c. Economic Reporting

3. Limitations of CSR/TBL

a. Board of Director or Senior Management Resistance

b. Lack of Reliable Measures

c. Lack of Agreed-Upon Standards/Framework

d. Lack of Independent Assurance

IV. Benefits of Linking ERM and Performance Measurement

Introductory Material

A. Transparency as a Reputation Driver for Companies

1. ERM More Transparent Than Traditional Financial Reporting

2. Performance Measurement Critical for Relevant and Reliable ERM Reporting

3. Linking ERM and CSR Through Effective Performance Measurement Enhances Perceived Value to Boards of Directors and Senior Management

a. Case Study: Wal-Mart

b. Case Study: Costco

B. Need to Report ERM Performance Externally

C. Unresolved Issues

V. A Model Linking ERM and Performance Measurement

Introductory Material

A. Adapting COSO 2004 for Performance Measurement Application

1. Specifying Measures for Residual Risks Within an ERM Framework

a. Internal Environment

b. Objective Setting

c. Event Identification

d. Risk Assessment

e. Risk Response

f. Control Activities

g. Information and Communication

h. Monitoring

2. Measuring Costs of Risk Responses

3. Assessing Costs Versus Benefits of Risk Management Strategies

a. Accepting a Risk

b. Avoiding a Risk

c. Sharing a Risk

d. Reducing a Risk

e. Wendy's Chili Crisis

B. Linking Actions to Value

1. Quantifying Performance Measurement

2. Actions to Value Model

a. Time Horizon

b. Applying the Actions-to-Value Model to a Risk Management Scenario

C. Preparing to Communicate ERM Performance

1. Assessing Validity and Reliability of ERM Performance Metrics

2. Assessing Risks of Publicly Releasing ERM Performance Metrics

D. Evolving CSR/TBL-Reporting ERM Performance Through the Stakeholder Accountability Report

1. Format of the Stakeholder Accountability Report

a. Identifying Stakeholders

b. Identifying and Mapping Issues

b. Linking ERM Performance Measures to Stakeholder Concerns

2. Sample Stakeholder Accountability Report

VI. Conclusions

Working Papers


WORKING PAPERS

TABLE OF WORKSHEETS

Worksheet 1 COSO 1992 Internal Control Framework

Worksheet 2 COCO 1995 Control Framework

Worksheet 3 COSO 2004 ERM Framework

Worksheet 4 ROSECO's Core Business Processes

Worksheet 5 Mobil Corporation, U.S. Marketing and Refining, Balanced Scorecard

Worksheet 6 St. Mary's / Duluth Clinic Health System's FY 2002 Strategy Map

Worksheet 7 The Revised Model: The Employee-Customer-Profit Chain

Worksheet 8 Comparison of Revenue of Top 10 U.S. Publicly Held Companies to Gross Domestic Product of Various Countries

Worksheet 9 Typical Stakeholders for U.S. Publicly Owned Organizations

Worksheet 10 GRI 2002 Guidelines - Suggested Social Performance Measures

Worksheet 11 Excerpt From ExxonMobil's 2005 Corporate Citizenship Report (p. 25)

Worksheet 12 Excerpt From ExxonMobil's 2005 Corporate Citizenship Report (p.68)

Worksheet 13 GRI 2002 Guidelines - Suggested Environmental Performance Measures

Worksheet 14 Auditors' Report of Starbucks' Corporate Sustainability Report

Worksheet 15 General Electric's Corporate Governance Commitment to Transparency

Worksheet 16 Benefits of Transparency Commitment at General Electric

Worksheet 17 Hypothetical Examples of Balanced Scorecard Measures for COSO ERM Framework Risk Categories for Wal-Mart

Worksheet 18 Example of Integrated Balanced Scorecard and ERM Framework for Supply Chain Management

Worksheet 19 Excerpts From Al Gore and David Blood's Wall Street Journal Op-Ed on Accounting and Reporting on Environmental Costs

Worksheet 20 Excerpts From USA Today Cover Story on Starbucks

Worksheet 21 Stakeholder Engagement at General Electric

Worksheet 22 Wendy's Wall Street Journal Opinion Editorial

Worksheet 23 General Electric's Approach to Stakeholder Engagement

Worksheet 24 Excerpt From GE 2006 Citizenship Report on Stakeholder Engagement

Worksheet 25 2005 CSR Report for Shell

Worksheet 26 Student Example - Stakeholder Accountability Report for Pfizer

Worksheet 27 Student Example - Stakeholder Accountability Report for Timberland

Worksheet 28 Student Example - Stakeholder Accountability Report for Ben & Jerry's

Bibliography

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UNOFFICIAL

Books and Articles