Effective risk management systems have saved countless organisations from irreparable damages and collapses in the past. The role that these systems play in any organisation is highly invaluable, which is why many business owners invest time and money to ensure that risks are being managed well. Failure to deal with risks effectively can cost far more than the initial investment of setting up the risk management system.
Why Risk Management Matters?
An organisation cannot afford to undermine possible incidents or threats that could affect its operations. Many business owners learned the significance of risk management the hard way, damaging them financially, much more than the initial investment of establishing a solid risk management system.
In any business setup, risks are present. Even those who opt to stay within their comfort zones are taking risks, whether they are aware of it or not.
Due to the inevitability of risks, both internal and external, having an effective risk management system is imperative if an organisation is to thrive. With risk management in place, damages and losses can be prevented and considerable resources can be saved. Aside from protection and avoiding financial loss, risk management also allows businesses and organisations to scale growth and make informed decisions regarding expansion and operations.
Early determination and efficient management of risk puts you in a position to leverage time and reasonable resources to evade damages and losses.
Risk Management Three Lines of Defence Model
The Three Lines of Defence (3LOD) Model is a systematic framework used in dealing with threats and risks. It is adapted by countless organisations and institutions of varying nature around the globe. For years, it has guided countless decision-makers and managers to manage risks effectively for the benefit of their respective organisations.
These days, it is not uncommon to hear about risk and control professionals that provide support to organisations. Roles of internal auditors, compliance officers, enterprise risk management specialists, quality inspectors, fraud investigators and similar professionals are becoming highly significant positions. However, their presence does not necessarily guarantee effective risk management and control.
An effective and systematised framework is required to enable effective coordination by risk professionals to ensure there is sufficient coverage and no overlapping of tasks, open communication channels, and be up to date with implementing and adapting with operational shifts should the situation call for it. The 3LOD ensures this, given its efficient use and practice.
1.The First Line of Defence: Operational Management
The first line of defence in the 3LOD functions is who owns and manages risks. The professionals comprising this group are responsible for the implementation of corrective measures to address process and control damages.
Operational management ensures internal control of risks. They are the ones that identify, assess, control and mitigate risks and ensure that necessary procedures and policies to deal with risks are incorporated and practised in the day-to-day operations of the organisations. They make sure that these procedures and policies are consistent with the objectives of the organisation and which preserves and protects its interest.
Sufficient management and supervisory personnel form this defence group in order for it to function efficiently and deal with the situations effectively.
2. Second Line of Defence: Risk Management and Compliance
In the onset, the first line of defence may seem enough to effectively deal with risks. However, it can prove to be inadequate in the practical process of things. This is the reason why a second defence is required – to support the first line of defence and monitor their actions. The professionals needed in this group may vary depending on the type and nature of the organisation.
The second line may include a few or more of the following responsibilities:
- Provide support for management policies, setting goals for implementation, and define roles and responsibilities.
- Identify known and emerging issues and provide risk management frameworks.
- Provide assistance in the development of processes and controls for risks and issues management.
- Train and guide personnel on the risk management process.
- Facilitate and monitor operational management in the implementation of these processes.
- Monitor the sufficiency of internal control, correctness and completeness of reporting, laws and regulations compliance, and timely mitigation of damages.
An organisation may need additional functions and professionals aside from those mentioned, depending on their identity and the risk situation they are in.
3. The Third Line of Defence: Internal Audit
The third line of defence is the function of the internal audit which has the highest level of independence and provides comprehensive assurance. The first and second line of defence does not have this degree of independence and objectivity in the organisation. This group provides assurance on risk management, governance and internal control effectiveness. They assess and report on the performance of the first and second line of defence relative to their functions and the overall objective of the organisation.
This high level of function and comprehensive assurance makes internal auditing an integral part to any organisation. While they are usually utilised by large and medium sized organisations, smaller entities can also greatly benefit from it.
Three Lines of Defence Coordination
The Three lines of Defence can only be effective when they are coordinated well. While there is no one correct way, the functions and responsibilities of each line of defence should be considered carefully. Communication, the accuracy of information, and dedicated performance of functions are the keys to maximising the defence lines for the good of the organisation.
With the important roles that each line of defence play in risk management, all must be present in an organisation no matter how large or small it may be. Like all organisations who benefit from these lines of defences, your organisation can enjoy growth and be prepared for disruption by following these lines of defence.
To find out how cammsrisk can further help with your defence against risks, book a demo with us today!