Energy Trading & Risk Management: How to evaluate risk and improve decision-making capabilities.
James W. DeLoach is managing director, governance, at Protiviti, a provider of independent internal audit and business and technology risk consulting services. David M. Johnson is managing director, energy & utility industry, also at Protiviti.
In an effort to comply with Sarbanes-Oxley, many companies spent thousands of hours assessing controls around financial reporting. When all was said and done, their main complaint was that the efforts failed to focus on the key processes, reports, and systems the companies used to make daily operational decisions.
This is where enterprise risk management (ERM) enters the picture. ERM was a methodology that was discussed by many organizations several years ago. Some utilities even implemented certain aspects of ERM, but broader application of the concept was shelved as problems developed within the energy trading sector. The reality is, most utilities applied components of ERM to specific risks, namely commodity market risks and interest-rate risks. This was a great place to start but, unfortunately missed many other important risks within these companies, such as operational risks, integrity risk, compliance risk, strategic and reputation risk, .