Building an Effective Risk Framework: The Three Lines of Defense

Advancing technology, increasing regulation, and shifts in societal norms pave the way for new or unforeseen risks to appear at any minute

With each passing day the world of business becomes ever more complex and dynamic. Advancing technology, increasing regulation, and shifts in societal norms pave the way for new or unforeseen risks to appear at any minute.  Organizations are being exposed to new risks nearly every day and the growing burden of managing these risks are quickly becoming too much to handle. Fortunately, organizations are not alone in the fight as there are several tools and strategies that can greatly improve an organization’s effectiveness when it comes to risk management.

Risk management can no longer be seen as an isolated practice.  Businesses and the business world are more interconnected than ever before and in response organizations must also establish an interconnected risk management framework across the entire enterprise.  Making one simple change in one department could greatly impact another, or what may appear to be a negligible risk could cascade into a storm of problems for the organization.  With this in mind it is pivotal to have a 360-degree situational awareness of the entire risk landscape as well as understand the interconnectedness of the issue.  

Building a CohesiveStrategy

The goal of risk management is to establish an effective risk framework that can provide agility, efficiency, transparency, and operational effectiveness while helping the organization achieve its goals.  As previously mentioned, this requires that the entire enterprise be interconnected, provide better communication, creation of effective solutions, and to ensure that controls are followed through every level of the organization.  This coordination can be difficult to achieve which is why many organizations are turning to the assistance of an information and technology architecture that can monitor risks, improve capabilities of communicating controls, and establish clear objectives for the entire company to see.

Three Areas of RiskManagement

Risk is everywhere, there is no single department or or only a handful of people that are required to identify and manage risk.  Because of this organizations must identify how risk impacts the three following areas and what controls need to be in place to establish effective risk management.

1.  Front Line. Risk can occur in many different forms, some larger and more dangerous than others, however, front office employees are forced to make risk management decisions every day regardless of the size or scope.  What is important to consider is that these front-line managers may be making decisions that have larger effects than are initially perceived.  Because of this it is essential that at the very least front-line managers are well trained and well equipped with current risk management policies and procedures.

2.  Second Line. The second line deals with individuals who are responsible for analyzing and communicating current risk management practices.  The second line must examine current policies and procedures to ensure that they are effective and up to date.  Once this is done these individuals are responsible for ensuring that the front line is properly trained and has open communication for any concerns or questions. The second line will also define risk and policy ownership.

3.  Back Line. The back line is often composed of audit and assurance professionals in which their main goal is the creation, management, and communication of established policies across the entire organization. These individuals must uphold the highest level of integrity while reliable achieving business objectives.

4.  Creativity. Risk management can often be thought of and practiced through an analytical approach, while compiling data and creating risk management models is a key aspect of effective risk management. Organizations often fall short on creative solutions for some of their most abstract risks.  To combat this organizations should integrate creative thinkers into their risk management team to better allow for the organization to identify creative solutions for complex risks.

The business world and all its risks are becoming more complex and dynamic by the day.  It has come time for organizations to seriously reconsider their risk management framework and devise a strategy that bolsters interconnectedness and communication.  One of the best ways of achieving this is to incorporate an information and technology architecture to improve data analysis, policy management, and communication throughout the entire enterprise.

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