In an increasingly globalized and dynamic world, companies face ever-growing challenges. New regulations, legal requirements, and continuous changes have become an integral part of business operations. To maintain long-term resilience, the three lines of defense (3LoD) play a crucial role. But what exactly must a company protect itself against?
At its core, it is about minimizing risks that could jeopardize a company’s stability and success. These include compliance with legal regulations, fraud prevention, early detection of deviations and anomalies, and the avoidance of errors in business processes.
To help businesses address these challenges, SAP SE has developed SAP Risk and Assurance Management (SAP RAM). But before we explore how SAP RAM can strengthen your lines of defense, it is essential to understand the three lines of defense model in more detail.
The Three Lines of Defense
*This diagram represents a high-level version of the updated IIA 3 Lines of Defense model. In reality, the implementation of the model varies significantly for all companies, especially in the 3rd line. SAP RAM provides suitable risk-based control management and wider benefits covering these variations.
1st LoD: The First Line of Defense – Operational Management
Operational management forms the first line of defense, consisting of executives responsible for day-to-day business operations. Their primary role is to implement internal risk management policies and monitor business activities to identify and mitigate risks early. Additionally, they are responsible for ensuring compliance with and continuous improvement of the Internal Control System (ICS).
Since both the ICS and the company itself are subject to constant changes, new requirements, and external influences, a key task of operational management is to identify, analyze, and adjust process and control deviations as needed to ensure that the ICS meets current regulatory requirements.
Furthermore, operational management plays a critical role in active risk management. Through preventive measures and proactive business process management, it significantly contributes to the company’s long-term stability and efficiency.
2nd LoD: The Second Line of Defense – Framework Management
The framework management of the second line of defense is primarily responsible for establishing company-wide standards to systematically and comprehensively implement risk management. This includes critical business areas such as compliance, IT, controlling, and others.
These standards include internal policies, corporate guidelines, and Standard Operating Procedures (SOPs) that ensure consistent adherence to legal requirements.
Another key aspect is the proactive adaptation to external changes, such as new legal requirements or regulatory demands from external audits. Framework management is responsible for evaluating these changes, deriving appropriate measures, and ensuring their implementation.
Additionally, the second line of defense plays an essential role in collaborating with specialized departments such as IT or market research to ensure that defined standards are not only theoretically sound but also practically feasible and effective. This has a direct impact on the first line of defense, as operational processes rely on the structures established by the second line.
3rd LoD: The Third Line of Defense – Internal Audit
The internal audit represents the third line of defense, consisting of independent auditors who review business processes, frameworks, and control mechanisms from the first and second lines of defense. Their primary goal is to assess the effectiveness and efficiency of the internal control system (ICS) and uncover potential weaknesses.
Internal audit functions not only as a control body but also as a supporting element for the first and second lines of defense. Its findings serve as a basis for optimizing frameworks, business processes, and risk management strategies.
A crucial factor is the independence of internal audit. Only through an objective and neutral evaluation can meaningful improvement suggestions be derived, ensuring a realistic assessment of the company’s situation.
The results of the internal audit are reported directly to executive management, which can then make strategic decisions and adjust corporate objectives accordingly. The implementation of these measures is then carried out by the first and second lines of defense.
SAP Risk and Assurance Management in the Context of the Three Lines of Defense
SAP Risk and Assurance Management (SAP RAM) is SAP’s cloud-based GRC solution for risk-based control management. It serves as an enterprise-wide platform that supports a variety of application areas—including the three lines of defense.
SAP RAM provides a standard role collection, specifically developed for compliance management. Additionally, a flexible role concept allows for customization to meet the specific needs of various departments. For example, a customized role for internal audit can be created, enabling auditors to access their own controls and data separately from other departments. This ensures a clear separation of responsibilities and independent reporting for each line of defense. Auditors can submit their reports directly to executive management, just as compliance and IT teams can submit their respective reports.
Controls as Central Elements of SAP RAM
Within SAP RAM, controls serve as central points where all established regulations—such as processes, corporate hierarchies, and legal requirements—converge. Through automated and manual procedures, digitalized and auditable results can be generated.
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Automated controls detect anomalies in ongoing business processes and provide relevant data for further investigation. This actively supports the first line of defense, allowing operational teams to quickly identify risks and correct errors. At the same time, SAP RAM serves as an effective risk management tool, enabling a rapid response to identified deviations. All processes are documented in a digital, auditable system.
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Manual controls can be performed at self-determined intervals to monitor the efficiency and effectiveness of existing control measures. These can be consolidated into a central control unit and managed by a designated control officer. Results, adjustments, and optimizations are also fully digitalized and archived, allowing for separate reporting for each defense line.
Tailored Solutions for Internal Audit
As previously mentioned, SAP RAM allows for the creation of customized roles and specifically developed automated and manual procedures to support internal audit. Auditors have exclusive access to the controls assigned to them, ensuring independent evaluations. Moreover, dedicated company areas can be set up within the corporate hierarchy that are explicitly assigned to audit controls, ensuring a clear separation between auditing and operational processes.
With SAP RAM, companies gain an integrated, digital solution that strengthens their three lines of defense, enhancing transp arency, efficiency, compliance, and risk management.
