Managing Risk

The private sector failed to prevent the financial collapse. Can agencies do better?

Many of the financial firms that saw their foundations crack during the past two years had extensive risk management programs in place. Using a variety of processes developed by risk management professionals, the firms identified problems that could threaten their business plans. They had procedures to ensure those risks were factored into the decisions of top executives.

In 2007, a video that was posted on FederalERM.com, a Web site for enterprise risk management professionals in government, showed one executive explaining his firm's rigorous risk management process. He sounded impressive, but it turns out the executive was from Freddie Mac, the government-sponsored enterprise that made very risky financial decisions that led to the worst crisis in its existence in 2008. Obviously, something was wrong with a process that failed to identify and prevent a giant management catastrophe.

Now that the feds have started a variety of programs to reverse the economic meltdown caused by Freddie Mac and other financial firms' imprudent decisions, the government's risk managers get to see if they can do a better job than their private sector counterparts.

Government risk management professionals will hold their second national conference later this year. They also gather at FederalERM.com to discuss ways to prevent public sector risks from becoming public sector catastrophes. And they are contemplating forming an association. "All agencies manage some level of risk, but usually the traditional approach is to carry out the process in silos and within specific functional areas and not across the entire organization," says Karen Hardy, a federal enterprise risk management analyst. ERM brings "all those risk management activities within an organization under one umbrella, cutting across silos and managed within a strategic setting," she says.

Financial firms tended to follow a dot-the-i and cross-the-t approach to risk management. They complied with financial control requirements in the federal 2002 Sarbanes-Oxley Act, set up committees and shuffled papers purporting that risk was indeed being managed.

The federal government doesn't fall under Sarbanes-Oxley, but agencies do follow Office of Management and Budget Circular A-123 to demonstrate the internal controls they maintain to reduce financial risks.

But that kind of compliance-based model did not prevent major failure in the private sector, so it won't avert management disasters in the government. Instead, federal risk professionals are trying to develop management models that identify all sorts of systemic threats to their agencies' missions.

The Troubled Asset Relief Program and the economic stimulus program will be major tests of agencies' ability to identify and manage risk. Both involve massive amounts of money that must be spent quickly. Lots of money and not much time are ingredients for waste, fraud and mismanagement. Most of this money is being doled out to private firms, state and local governments, contractors and other third parties. Federal managers could quickly lose control as the money moves further away from them. Risk management professionals in government are just now formally organizing, but they're already facing a giant test.

Brian Friel covered management and human resources at Government Executive for six years and is now a National Journal staff correspondent.