Perspectives on Internal Control and Enterprise Risk Management

Abstract

Grounded on the literature review on Enterprise Risk Management (ERM) this paper aims to analyze the extent and the effectiveness of internal control as well as ERM and to explore their connection with the value creation. A theoretical lens is used to discuss whether effective internal control and ERM enhance performance and increase value creation ability. ERM is most frequently defined with the reference to the 2004 Guidance document published by Committee of Sponsoring Organizations of Treadway Commission (COSO). Proponents of COSO’s ERM Integrated Framework describe this framework as “a world-level template for best practice”, and claim that ERM used by management to enhance an organization ability to manage uncertainty and to consider how much risk to accept as it strives to increase stakeholder value. Additionally the Internal Control—Integrated Framework is a viable and suitable framework for designing, implementing, conducting and assessing the effectiveness of internal control and for reporting. The relationship between value creation and ERM is widely investigated in academic literature. Empirical studies on the value creation abilities of ERM and internal control suggest that there is a positive relation between value creation, internal control and ERM. These studies reveal that firm performance and value are enhanced by high-quality ERM adoption and implementation. Using different identifier of ERM such as Standard and Poor’s risk management ratings or presence of a Chief Risk Officer, the findings of empirical studies reveal that higher ERM quality is associated with less resource constraint, better corporate governance and better accounting performance. Additionally academic studies indicate that the risk-based communication is reinforced with ERM implication.