Journal of Accounting Auditing & Finance · 2014 · 111 citations · 25 references
ManagementRisk ManagementCorporate StrategyRisk AnalysisRisk AssessmentEnterprise Risk ManagementOperational RiskEnterprise Risk AssessmentEnterprise Risk FrameworksEnterprise Risk IdentificationExploratory Case StudyOrganizational Risk ManagementPrincipal ComponentsValue Creation Potential
Enterprise risk management (ERM) has gained popularity as a response to organizational pressure to manage risk holistically, yet multiple implementation frameworks create uncertainty about its essential components, leading to inconsistent measurement methods and inconclusive empirical evidence on value creation. This study explores ERM to determine its integral components based on how firms actually implement ERM dimensions. The study uses an exploratory design to identify ERM components from firms' implementation practices. The study identifies four discrete ERM components—two prerequisite internal environment and control activities, one risk‑management activity, and one defining attribute—requiring all four for effective ERM, with only the risk‑management component distinguishing ERM firms from non‑ERM firms, thereby challenging existing frameworks and informing more accurate measurement and value‑creation studies.
There is a general consensus that enterprise risk management’s (ERM) popularity has resulted from a response to pressure on organizations to holistically manage risk. Multiple frameworks for implementation of ERM contribute to an overall uncertainty regarding the essential components of ERM. This uncertainty carries forward to empirical studies of ERM where results regarding value creation are inconclusive. There exists no real consensus about what the principal components of ERM are; this has led to identification and measurement methods that are inconsistent. By using inconsistent indicators and measures of ERM implementation, it is impossible to compare “apples to apples” and arrive at conclusive and convincing results regarding ERM’s ability to create value. This is an exploratory study of ERM aimed at determining the integral components of ERM based on how firms actually implement ERM dimensions. The result is the identification of four discrete components, or pillars, of ERM implementation; two prerequisite components related to the general internal environment and control activities of the firm, one component identifying risk management activities of the firm and one component with the defining attributes of ERM implementation. All four components must be implemented to have well-implemented ERM, but only one separates ERM firms from non-ERM firms. The resulting four components challenge existing frameworks to adapt to better reflect how firms implement ERM and can have a valuable impact on identifying and measuring ERM, leading to more informative empirical studies on the value creating abilities of ERM.
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Sample size in factor analysis.
Robert C. MacCallum, Keith F. Widaman, Shaobo Zhang et al. · Psychological Methods · 1999 · 4.8K citations