Corporate governance, risk management
New attention to corporate governance is boosting development of a managerial practice called enterprise risk management (ERM).
Important guidance on ERM is due soon from the Committee of Sponsoring Organizations of the Treadway Commission (COSO), an advisory council that sets US standards on internal financial controls.
Readers of Oil & Gas Financial Journal can warm up to the subject with articles on corporate governance and risk management in this inaugural issue.
Endorsement for ERM
ERM received high-level endorsement in mid-May during a speech by US Federal Reserve Board Gov. Susan Schmidt Bies.
"All organizations should consider embracing this discipline," she told the Institute of Internal Auditors Financial Services Conference in Arlington, Va.
"Indeed, the Federal Reserve is currently considering how enterprise-wide risk management can better be integrated into its management processes."
If the venerable Fed thinks ERM suits its cautious ministrations, risk-laden oil and gas companies might well find something enchanting in it.
As the name suggests, ERM identifies and analyzes risk from a company-wide perspective. Otherwise, there's no formal definition.
COSO hopes to change that with its comprehensive Enterprise Risk Management Framework, a draft of which circulated for 90 days last year.
COSO began life in 1985 as sponsor of the National Commission on Fraudulent Financial Reporting, chaired by James C. Treadway Jr., a former commissioner of the Securities and Exchange Commission.
The Treadway Commission involved five financial professional associations, all of them private. They're COSO's current members: American Institute of Certified Public Accountants, American Accounting Association, Financial Executives International, Institute of Internal Auditors, and Institute of Management Accountants (formerly National Association of Accountants).
In 1992, COSO published Internal Control-Integrated Framework, now a benchmark for financial controls and an important guide for compliance with Section 404 of the Sarbanes-Oxley Act.
The new framework will attempt to define essentials of ERM and the context of its implementation.
When it announced the study and the selection of PricewaterhouseCoopers to conduct it in January 2002, COSO noted "an abundance of literature on the subject" of ERM but cited the need for "a conceptual framework and detailed application guidance."
In July 2003, when it released the draft for public comment, COSO Chairman John J. Flaherty alluded to Congress's intervening crackdown on corporate governance.
"Although this project was initiated before the developments leading to the Sarbanes-Oxley Act," he said, "the framework speaks to many of the issues currently facing organizations: namely, how an organization determines the right amount of risk for the value it is trying to create for stakeholders and how it communicates its risk policy to stakeholders."
COSO posts the 152-page draft on its web site at www.coso.org.
A central idea of ERM, as the draft describes it, is a portfolio perspective. Traditional risk management occurs at the level of company divisions or subdivisions. ERM attempts to aggregate risks that occur at all levels and to manage them from the top level as a portfolio of risk.
COSO's final report is due this summer.
This issue
Related subjects receive thorough treatment in this issue of OGFJ.
Two articles deal with corporate governance. Richard S. Woodward of Deloitte Consulting LLP takes a close look at the interplay of investor expectations and the quality of companies' earnings reports. And Rick L. Burdick and Anthony J. Renzi Jr. of Akin Gump Strauss Hauer & Feld describe what oil and gas companies must do to restore confidence in reserves reports.
British consultant David A. Wood, meanwhile, kicks off a series on a subject closely related to ERM: portfolio risk assessment and management.
This issue also introduces Capital Perspectives, a regular department featuring commentaries by professionals on the capital-providing and capital-using sides of the business.
It includes the information-packed OGJ200 Quarterly and related analysis.
And it presents features on financing independent producers operating in Russia, master limited partnerships, reverse mergers, the value of options in drilling contracts, and more.
Let us know what you think about the first issue of OGFJ. Work on the second one is well under way.