Enterprise Risk Management, Financial Reporting Outcomes, and Auditor Behavior

Abstract

Enterprise risk management (ERM) offers a new framework for organizations to take a portfolio view of risk management with a goal to minimize the occurrence of enterprise-wide risks to achieve organizational objectives. This paper investigates whether the implementation of a quality ERM program reduces the risk of financial statement manipulations by companies, and whether it influences external auditors’ assessments of the risk profile of companies in the conduct of an audit. Using a set of ERM scores published by Standard & Poor’s on insurance companies to measure the quality of ERM adoption, results show that high-quality ERM programs contribute to improving the quality of financial statement reporting, and influence auditors’ actions in the conduct of an audit.