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LEGAL COSTS CAN RANGE FROM 3% TO 10% OF A BUSINESS'S ANNUAL REVENUES, SO COMPANIES NEED TO HAVE A GOOD METHOD FOR MANAGING LEGAL RISK.
EXECUTIVE SUMMARY This analysis presents a process for quantifying legal risk within the context of accountingbased controls. The value chain is used to define the firm's business model. With this framework, legal risks can be associated with respect to specific aspects of firm activities. The result is an organized, cost-effective way to assess a firm's legal risk and minimize litigation costs through planning and controls.
Return and risk are the two major dimensions of business decisions. While return is a wellidentified factor, risk is less understood. This analysis addresses risk management issues within a firm, specifically with respect to litigation because legal costs can range from 3% to 10% of businesses' annual revenues.1
Here is how the Committee of Sponsoring Organizations of the Treadway Commission (COSO) described enterprise risk management (ERM) in 2004:
"Enterprise risk management is a process, effected by an entity's board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives."2
This definition can be broken down into the following elements:
A process: A process is ongoing; it is something that has its own momentum but that must be supported by the decision makers in the firm and (if the process is useful) will become a part of the firm's culture. A process, however, is not merely a series of tasks, nor is it just a project (although it may be tested as a project). ERM can only become useful and successful if it is viewed as a process-a way of doing things-not just as a way to fix a problem (whether as a quick fix or a slow fix).
Effected by an entity's board of directors, management, and other personnel: The people who make the decisions in a firm must be involved in ERM and must actively support the plan. In addition, there must be deep support and involvement from throughout the firm. Just as making a profit is "effected by...