Key Risk Indicators
The COSO Application Techniques volume touches on the topic of key risk indicators (KRIs), but use of KRIs has continued to evolve. In recent years, along with key performance indicators (KPIs), which focus primarily on past performance, more organizations have incorporated forward looking key risk indicators into their ERM processes, further enhancing effectiveness. To provide additional guidance, COSO recently issued Developing Key Risk Indicators to Strengthen Enterprise Risk Management—How Key Risk Indicators Can Sharpen Focus on Emerging Risk, which explains KRIs and how they can be of benefit. A couple of simple examples are illustrative:
- One deals with customer credit, where a common KPI includes data about customer delinquencies and write-offs. KRIs are developed to help anticipate future collection issues, focusing on analysis of reported financial results of a company's 25 largest customers or general collection challenges throughout the industry to see what trends might be emerging among customers that could potentially signal challenges related to collection efforts going forward.
- Another involves a chain of family-style restaurants where management sought to avoid a negative earnings event that could arise with unexpected market conditions. Recognizing that restaurant traffic is directly affected by customers' discretionary income—where as discretionary income levels fall off, customers are less likely to dine out—management establishes as a KRI ...