Enterprise Risk Management and the Financial Reporting Process: The Experiences of Audit Committee Members, CFOs, and External Auditors
61 Pages Posted: 2 Jun 2014
Date Written: May 30, 2014
The financial crisis has brought to the forefront the need for companies to effectively manage their risks. One approach that has gained prominence is enterprise risk management (ERM), but little is known about the link between ERM and the financial reporting process. This link is important, because it is imperative that the financial reporting process adequately depict the performance and associated risks of a company. Additionally, ERM affects the risks of misstatement and potential lack of adequate risk disclosures, which impact audit planning. Accordingly, the objective of this study is to examine how audit partners, CFOs, and audit committee (AC) members (“the governance triad”) view ERM as it relates to the roles of governance parties, financial reporting quality, internal controls, and external auditing. To address these issues, we conduct semi-structured interviews of experienced individuals from 11 public companies that form 11 governance triads. Results suggest that across all three types of participants, respondents emphasize risk assessment/identification and operational efficiency/effectiveness when defining ERM. However, there is substantial variation in responses which suggests that there is still lack of consensus among key players on what constitutes ERM. Interestingly, only a minority of auditors mention strategy or strategic risks in their definition of ERM. To the extent this is reflective of auditors not fully leveraging the strategic elements of ERM, auditors may be underutilizing ERM in the audit process. This concern is further corroborated in a number of comments made by CFOs and AC. Moreover, participants perceive that the audit committee and the CFO play a large role with ERM and auditors are perceived to play a lesser role. Additional analysis of the responses indicates that while participants view ERM and its effect upon the financial reporting process from both an agency and resource dependence perspective, there is a greater focus on the agency framework. In all, resource dependence may be under-emphasized by all members, but especially by CFOs and auditors. Implications for practice and research are discussed.
Keywords: Enterprise risk management, qualitative research, risk management, COSO, financial reporting process, audit committee, CFO, audit partner, resource dependence theory, agency theory
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