Session 8: Risk Management, Assurance and AuditClaire Lea, Thursday 2 November 2017, 4pm

My microphone is currently muted

Session 8: Risk Management, Assurance and Audit

Claire Lea, Thursday 2 November 2017, 4pm

Today’s plan

• Principles and significance of risk management

• Effective risk management systems

• Board of director responsibilities for internal control

• Audit Committee and external audit

• Sample exam question

• Concluding remarks

Risk management

Effective risk management can be

likened to that of the survival of a living

organism.

In Darwin's Theory of Evolution many

people interpret this with the phrase

‘the survival of the fittest’

However the most important element

is ‘the capacity of adaptation’.

Effective risk management is therefore

not only a system of processes but it

is also a series of behaviours.

FRC Guidance on risk management, internal control and related business reporting

Snappy title for the latest guidance (2014) on risk management! However, it

introduces a step change –

• New strategic report in corporate sector – require boards to report

annually on their principal risks

• Challenge is to include behavioural and organisational risk

• Risk has a higher profile in the NHS with work of Audit Committee and

the Board Assurance Framework

• Need to consider downside and upside risk

Board’s responsibilities

• Ensuring design/implementation of risk management and internal control

systems that identify risks and enables a robust assessment of the

principal risks;

• Determine the nature/extent of the principal risks faced and risks which

the organisation is willing to take to achieve its strategic objectives

(determining its ‘risk appetite’);

• Ensuring that culture and reward systems have been embedded

throughout the organisation;

• Agreeing how principal risks are managed/mitigated to reduce the

likelihood or impact;

Board’s responsibilities

• Monitoring and reviewing the risk management and internal control

systems, and the management’s process of monitoring and reviewing,

and satisfying itself that they are functioning effectively and that

corrective action is being taken where necessary; and

• Ensuring sound internal and external information and communication

processes and taking responsibility for external communication on risk

management and internal control.

Types of risk

What types of risks can you name?

Types of risk

• Financial risk

• Operational risk

• Reputational risk

• Behavioural risk

• Third-party or competition risk

• External risks

Risk management system

• Risk registers and risk identification

• Risk evaluation and scoring

• Risk management measures and mitigation

• Risk control and review

Risk management and governance

Internal controls

• Financial controls

• Operational controls

• Compliance controls

Elements of an internal control system

• Control environment – awareness & attitude

• System for identifying risks

• Controls which eliminate, reduce or control risks

• Information to employees to fulfil task of risk management

• Monitor effectiveness regularly

COSO Framework

Assurance

Performance reporting

• Single Oversight Framework

• CCG Improvement & Assessment Framework

Quality Governance

• CQUINs

• Quality Accounts [& Quality Report (FTs)]

• CQC rating

Financial reporting

• Annual report and accounts

• Monthly reporting

• Directors duties and responsibilities – break even and going concern

Assurance statements

• Going concern statement

• Corporate governance statement [FT compliance with FT Code]

• Annual governance statement

• Board Assurance Framework

• Integrated reporting, performance dashboards, board committee reports

• Head of Internal Audit Opinion

• External Audit post audit report

Types and levels of assurance

Verbal, written, empirical

Level 1 – operational (management)

Level 2 – oversight (committees)

Level 3 – independent (audit/reviews/inspections etc.)

The role of audit

• Function and scope of external audit – external scrutiny, true and fair

view, unqualified opinion.

• Independent

• Function and scope of internal audit – independent review of risk

management and internal control processes.

• Directors still responsible for preventing and detecting fraud and for the

information in the annual report and accounts.

Independence of external audit

• Self-interest threats:

• Self-review threat:

• Advocacy threat:

• Familiarity threat:

• Intimidation threat:

Debate:

Should non-audit work be prohibited or restricted?

How do they protect the independence of the auditors?

Audit Committee

• HFMA Handbook for NHS Audit Committees extends role beyond

financial controls

• Membership is solely non-executive directors

• Chair is not allowed to be a member

• Training, induction and remuneration of members

• Appointment and removal of auditors

• Assessment of independence

• Non-audit work

• Whistleblowing/raising concerns/Freedom to Speak Up

Concluding remarks

• Risk management is a key board responsibility

• Assurance is a key mechanism for holding management to account.

• It also provides a regular assessment on progress towards an

organisation’s strategic objective.

• Assurance should be forward looking as well as backward looking.

• Audit Committee – key governance role for NEDs, independent, direct

access to third parties, e.g. auditors

Sample exam question – November 2016

Beevor NHS Foundation Trust (‘Beevor’) has been discussing its strategy and vision in light of

the board’s role for defining long-term strategy. It is planning a board development session

next month, which will look at strategy and the associated risk management in further detail.

The first part of this day will allow the board to consider its principal risks, such as financial

sustainability and insufficient paediatric consultant recruitment, in the light of its strategic

discussions thus far.

Required

As an introduction to the board development session, the Chair has asked you to:

(a) Prepare slides for a presentation, with notes, which define business risk and analyse four

categories of business risk, giving examples of each in the health sector. (16 marks)

(b) Prepare a briefing paper which discusses the importance of risk appetite, risk capacity

and risk tolerance for Beevor. (9 marks)

Examiner comments

Question 3 was also a very popular question and there was a very wide range of

responses from a Grade C Fail to Merit. It was poorly answered with 43% of those

attempting it, failing to pass. Good scripts demonstrated an understanding of

business risks and did not confuse them with internal control risks. They also

addressed the role of the board in risk management, the concept of principle risks

and set out clear source guidance for their responses. Similar questions have

been set for the exam before and the generally poor responses seem to highlight a

lack of preparation in this area and a limited review of past papers. Average score

13.3.

Sample answer

FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting 2014

UK Corporate Governance Code

Business risks:

• are risks that occur and arise in the business environment

• may also be referred to as strategic risks

• will differ between organisations

• can be positive (upside) or negative (downside)

• are the responsibility of the Board to determine

Remember mark available for layout as slides

Sample answer

Business risks can be categorised as

• Financial risk

• Operational risk

• Reputational risk

• Behavioural risk

• Third-party or competition risk

• External risks

Business risks are not the same as internal control risks, which are risks that arise

because of weaknesses in its systems, procedures, management or personnel

that are in place within the trust. These are risks that the trust has within its

control and it needs to have a comprehensive system in place to manage.

The controls for these risks are ‘internal controls’ and internal controls

are applied within an internal control system.

Sample answer

Application to the scenario?

Risk appetite and tolerance – decided by the Board

Risk appetite is the desire/willingness to take on risk

Risk tolerance is the amount of risk which is tolerated to achieve the strategic goals

Following this session

• Session slides and content

• Results of Task 2 will be available from Monday 13th November.

• Exam strategy webinar – Thursday 9 November 4pm

• Exam – 30 November 2017 – Good luck!

Thank you