In the context of the Three Lines of Defense (3 LoD) approach, SAP's Enterprise Governance, Risk, and Compliance (GRC) solutions play a crucial role in enabling organizations to effectively manage risks, ensure compliance, and strengthen governance practices across the enterprise. For get more information about GRC, do the Education Course Exploring the Principles of SAP Governance, Risk and Compliance in the SAP S/4HANA Public Cloud.
Lets start with a common understanding of 3LoD Model.
The Three Lines of Defense is a risk governance framework that splits responsibility for operational risk management across three functions operations, risk management and compliance, and audit.
The 3LoD Model is applicable across all business objectives and all risks. It supports companies:
- To establish clear responsibilities, accountabilities and oversight roles for managing risks, compliance, and control across the enterprise.
- To establish compliance and control frameworks to evaluate, test, and continuously monitor risks, business controls, and related compliance to avoid unnecessary duplication of activities.
- To optimize the internal audit process with high volume, real-time data analysis, and shared data across the 3LoD.
Why is 3LoD important?
The current economic environment and significant risk events over the last few years have caused companies to have a renewed focus on the effectiveness of risk management. Many companies now feel overwhelmed with the amount of risk management activity and have failed to reap the benefits of the investment in risk management.
Here's how SAP's GRC solutions align with 3LoD:
- First Line of Defense (Operations)
SAP Process Control and SAP Risk Management support the first line of defense by empowering operational management to identify, assess, and manage risks in their day-to-day activities. Through functionalities such as risk assessment tools, control monitoring dashboards, and automated compliance checks, both solutions helps operational teams proactively address risks, ensure compliance with policies, and achieve business objectives.
- Second Line of Defense (Risk Management and Compliance)
For the second line of defense, SAP's GRC solutions (SAP Process Control and SAP Risk Management) provide robust risk management and compliance functionalities. These include tools for establishing risk and control frameworks, conducting risk assessments, defining compliance policies, and monitoring regulatory changes. It provides a centralized repository for managing risks, automated processes, and the ability to generate real-time reports. Furthermore, it empowers risk management and compliance teams to offer support, supervision, and assurance to operational management.
- Third Line of Defense (Internal Audit)
SAP Audit Management support the third line of defense by facilitating internal audit activities. With features such as audit management, issue tracking, and continuous monitoring, SAP helps internal audit teams conduct independent assessments of risk management practices and internal controls.
Through customizable audit plans, automated testing procedures, and comprehensive audit trails, internal auditors can assess the efficacy of risk management practices and offer assurance to senior management and the board of directors.
Integrated Approach
SAP's GRC solutions promote an integrated approach to governance, risk management, and compliance, aligning with the principles of the 3LoD model. By providing a unified platform for managing risks, controls, and compliance activities, SAP enables organizations to streamline their GRC processes, improve collaboration between different lines of defense, and enhance overall governance practices. This integration ensures that risk management efforts are coordinated, transparent, and effective across all levels of the organization, ultimately helping organizations achieve their strategic objectives while maintaining regulatory compliance and minimizing risks
Let's explain Three Lines of Defense Model with a business scenario.
Watch this video to see how the Three Lines of Defense (3LoD) model is implemented through SAP's GRC Solutions within an organization.