In the current enterprise functionality, it has become necessary for diverse teams to work together to manage organizational risks. Be it risk management specialists, internal auditors, compliance officers, quality inspectors, internal control specialists, or fraud investigators, all these professionals must combine their efforts to provide a combined GRC security to the enterprise.
Each of the GRC security specialists has their specific skills and unique perspectives, and the combination of their efforts becomes necessary due to the department and division silos in the enterprise. It is essential for the organization to assign specific roles to these specialists and coordinate them effectively to reduce gaps in control and unnecessary duplication of work.
Various practices are emerging now that help enterprises to delegate and coordinate the risk and compliance management duties through a systematic approach. The three lines of defense model is a straightforward and effective way to improve communications and role defining between the employees. It provides a better eye on the operations and helps in assuring the success of GRC initiatives, regardless of the size and complexity of the enterprise.
The Three Lines of Defense Model
The three lines of defense model is distributed between various functionalities of an organization. Starting from management control to internal and external audit, every part of a business model is divided into the smaller function. Moreover, the duties of senior management and the board are also available in the model. The above outline distinguishes the defense model amongst three groups, which are:
- Functions that manage and own the risks
- Functions that oversee risks
- Functions that provide independent advice
1. First Line: Operational Management
The first line of defense consists of operational managers who own risks. They are responsible for the implementation of corrective actions to find and control deficiencies. The managers are responsible for maintaining effective internal controls and for executing control and risk procedures on a daily basis. The operational management addresses, controls, and eliminates risks, guiding the implementation and development of internal procedures and policies. They also ensure that the activities performed are consistent with the objectives and goals of the enterprise. Therefore, there must be an adequate amount of supervisory and managerial controls in place to ensure compliance and to pinpoint unexpected events and control breakdowns and inefficient processes.
2. Second Line: Risk Management and Compliance Functions
To protect an organization, a single line of defense is not enough, which is why management must establish various compliance and risk management functions to monitor the first line of defense controls. The typical functionalities of the second line of defense include:
- A risk management committee that monitors and facilitates the effective implementation of risk management practices and assists risk owners in defining the risk exposure.
- A compliance function that can monitor different risks like non-compliance with applicable regulations. In this, different functions report to the senior management and in some enterprises directly to the governing bodies. There are multiple compliance functions in a single enterprise, and every compliance needs specific monitoring.
- A controller function that can monitor the risks on financers and report them to the related authorities.
Governing bodies must establish these functions to ensure that the first line of defense is in place and operating adequately. Each of these functions can intervene directly in developing and modifying the internal control and risk systems.
3. Third Line: Internal Audit
Internal auditors provide comprehensive assurance to the senior management and governing bodies based on the level of independence and objectivity in the organization. The assurance is on the effectiveness of risk management, governance, and internal controls that include the working methods through which the first and second line of defense achieve risk control and management objectives. The scope of assurance covers:
- A wide range of objectives that include effectiveness and efficiency of operations, integrity and reliability of reporting, compliance of laws, contracts, and safeguarding the assets of the enterprise.
- All elements of the internal control framework and risk management that include the transfer of information, communication, and monitoring of the management framework.
- The complete organizational entities, including different business processes like production, sales, safety, marketing, and operations, as well as supporting processes like purchasing, budgeting, payroll, and expenditure accounting.
The establishment of an internal audit function must be a governance requirement for all enterprises. It is important for large as well as a small-scale enterprise to ensure the effectiveness 0f GRC security management processes.
By implementing these three lines of defense in enterprises’ GRC security, one can enhance security as well as the smooth flow of organizational business processes. Businesses that are looking forward to thriving in the market with the increasing threats must integrate these practices to achieve their business goals.
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