Page 487 - COSO Guidance

Risk Appetite — Critical to Success | 15

This approach encourages management and the board It is, however, usually a mistake to focus only on senior
to clearly prioritize objectives and associated appetite. In levels of management and overlook those engaged in day-
addition, various scenarios can be discussed to explore how to-day activities.
the appetite would influence decision-making throughout
the organization.
We suggest organizations include in
The possible disadvantage of this approach, however, is that the development of appetite both
it may capture only some views from across the entity as senior levels of management and those
engaged in day-to-day activities.
there are often resource constraints limiting the number of
people who directly engage. It may also be challenging to
manage bias, which requires an adept facilitator.
Developing performance contexts
Some organizations use quantitative measures to express
We suggest organizations keep the appetite. They may arrive at these measures through
organization’s strategic plan, including business modeling. With the increasing availability of data
mission and vision, at the forefront and data analytic tools, organizations may develop data-
of facilitated discussions on appetite. rich contexts that provide insight into the impact of various
Avoid biasing discussions toward only strategic and operational decisions on entity performance.
one or two lines of the business.
For instance, an organization may focus on its production
cycle. The focus might identify the current production path
Discussions related to strategy and objectives and key quality assurance points and consider the effect of
Appetite often becomes more evident when management product rework on time and cost. At an operational level,
considers major issues facing the organization, such as management may use the context to assess decisions
innovation, new product lines, acquisitions, or joint ventures. on improving production time through innovation or by
Organizations with a lower appetite will usually react eliminating quality assurance points. At a more strategic
differently to innovation, acquisition, expansion, competition, level, the context might be used to assess how introducing
and market volatility than those with a higher appetite. a new product line would affect overall production time and
Reviewing and assessing these reactions can provide cost. Understanding appetite helps when considering how
insight into the organization’s current appetite. Integrating these decisions may be viewed in terms of the overall risk
considerations of appetite with strategic planning will likely relating to timely product production and quality.
provide the most timely understanding of the type and
amount of risk sought by the board and management. The proliferation of data and evolution of technology has
allowed for greater use of modeling and analytics at a
Appetite statements can also help to form the boundaries more reasonable cost. However, there are usually business
that keep the organization focused on strategy and goals—and risks—that are difficult to quantify with
discouraging sometimes subtle but important decisions precision. For that reason, modeling is typically just one part
that pull the organization off course. Having clarity on of the process of developing appetite.
appetite assists the board in having healthy discussions
that challenge management’s depiction of appetite. In
turn, management gains a sense of the board’s appetite We suggest organizations debate and
for specific strategies that can be incorporated into a risk discuss with management and the
management process. These boundaries can also help hold board the levels of risk that seem too
high or low.
management back from chasing fads.

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