What does the 'three lines of defense' model represent in risk management?

The 'three lines of defense' model in risk management is fundamentally a framework designed to delineate responsibilities within an organization regarding risk management and internal control. This model clarifies the roles and accountability of different functions and levels within an organization, ensuring that there is a structured approach to managing risks.

The first line of defense typically consists of operational management and staff who own and manage risks directly in their day-to-day activities. The second line encompasses risk management and compliance functions that provide oversight and guidance to ensure effective risk management practices are being implemented. The third line represents internal audit, which provides independent assurance and evaluates the effectiveness of governance, risk management, and control processes.

By defining these distinct roles, the three lines of defense model promotes a comprehensive approach to risk management, enabling organizations to identify, assess, manage, and mitigate risks more effectively. This structured delineation enhances accountability and communication regarding risk throughout the organization.

The other options pertain to distinct areas that do not reflect the primary purpose of the three lines of defense. For instance, employee ranking and customer service improvement do not relate to risk management, and financial forecasting serves a different function concerning organizational planning rather than risk oversight.