Enterprise Risk Management and the Financial Reporting Process: The Experiences of Audit Committee Members, CFOs, and External Auditors

Abstract

The recent financial crisis has brought to the forefront the need for companies to effectively manage their risks. In this regard, one approach that has gained prominence is enterprise risk management (ERM). Importantly, little is known about the link between ERM and the financial reporting process. This link is critical, because it is imperative that financial reporting adequately depicts the financial status (e.g., valuations, estimates) and associated risks of a company as revealed by ERM. Additionally, from an auditing perspective, ERM affects the risks of misstatement, which should impact audit planning. Accordingly, the objective of this study is to examine the experiences of audit partners, CFOs, and audit committee (AC) members ("the governance triad") on the link between ERM and the financial reporting process. To determine whether members of the governance triad focus on monitoring, strategy, or both, we also examine their definition of and experiences with ERM with respect to agency and/or resource dependence theory. To address these issues, we conduct semistructured interviews of experienced individuals that form the governance triads from 11 public companies. There are three major findings from our study. First, importantly, all three types of participants see a strong link between ERM and the financial reporting process. Second, despite recognition of the broad nature of ERM, the predominant experiences of the actual roles played by triad members center on agency theory, while resource dependence may be relatively underemphasized by all triad members. Finally, CFOs and AC members indicate that auditors may be especially underutilizing ERM in the audit process, suggesting an "expectations gap." Gestion du risque d'entreprise et processus d'information financi ere : exp eriences des membres du comit e d'audit, des directeurs financiers et des auditeurs externes R ESUM ELa r ecente crise financi ere a port e a l'avant-sc ene la n ecessit e pour les soci et es de g erer le risque avec efficacit e. A cet egard, une m ethode a gagn e en importance : celle de la gestion du risque d'entreprise (GRE). Il importe de noter que les connaissances sont limit ees quant au lien While prior research has examined ERM practices (e.g., Beasley et al. 2014), to our knowledge there has been no investigation of the link between ERM and the financial reporting process, which encompasses management reporting, internal controls, and auditing. The objective of this study is to investigate how ERM affects the financial reporting process based on the experiences of three key parties involved in this process: CFOs; audit committee members; and audit partners (henceforth referred to as the "governance triad").

Enterprise Risk Management in Accounting Research: A Literature Review

“…Top management is also important (Arnold, Benford, Canada, & Sutton, 2011;Barton & MacArthur, 2015;Lundqvist, 2014;2015;Meidell & Kaarbøe, 2017;Tekathen & Dechow, 2013;Viscelli, Hermanson, & Beasley, 2017). Top management affects the formation of risk cultures because it influences the adoption of specific risk management procedures (Meidell & Kaarbøe, 2017), accountability within the organization (Cohen, Krishnamoorthy, & Wright, 2017), and organizational flexibility (Arnold et al, 2011;2015). Cohen et al (2017) found a strong relationship between ERM implementation and the financial reporting process based on a survey of CFOs, audit partners, and audit committee members of US companies.…”

An Ontological and Semantic Foundation for Safety and Security Science

“…Also, in the first decade of this century, and due to a number of scandals-similar to ENRON-there was ever-increasing attention for corporate governance and the role of operational risk management. This resulted in the first internationally used comprehensive corporate standard on risk management, the COSO Enterprise Risk Management Integrated Framework (2004) [42,43]. Enterprise Risk Management (ERM), similar to ORM in the military and aviation sectors, is the more organization-wide approach that is needed to cope with the complex realities and awareness of risks for the corporate world in the 21st century.…”

An Ontological and Semantic Foundation for Safety and Security Science

“…Also, in the first decade of this century, and due to a number of scandals-similar to ENRONthere was ever-increasing attention for corporate governance and the role of operational risk management. This resulted in the first internationally used comprehensive corporate standard on risk management, the COSO Enterprise Risk Management Integrated Framework (2004) [42,43]. Enterprise Risk Management (ERM), similar to ORM in the military and aviation sectors, is the more organization-wide approach that is needed to cope with the complex realities and awareness of risks for the corporate world in the 21st century.…”