...Justification for an Internal Control System Companies must mitigate risk to achieve maximum profitability. Mitigating the risk can be accomplished by implementing controls. While insurance and portfolio approaches are important control strategies, they are only single components of an overall risk management plan. Implementing an internal control system will assist management in monitoring and deterring risk. Current Controls The current approaches of insurance and portfolio are valid controls. One way to mitigate risk is to transfer some of the risk to a third party. The third party willingly accepts the risk for a fee or premium. This approach is called insurance. However, this approach is limited and considered reactive as it does nothing to deter harm to company assets. In addition, there are only certain risks that insurance companies are willing to take on and others that simply cannot be insured (McCarthy & Flynn, 2004). With the portfolio approach, all departments are treated as one unit so that interrelated risks can be identified and put “in the context of all the other risks and the company’s business strategy” (McCarthy & Flynn, 2004, pg. 255). However, it does little to deter risk. Internal Control System An internal control system is an ongoing process that ensures compliance with laws and regulations, reliable financial reporting and efficient and effective operations of an organization. According to Ratcliffe and Landes (2009), “an effective system...
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...Internal Control System Justification Brandy Ritz ACC/445 May 5, 2014 Bunney Schmidt Internal Control System Justification Internal controls are a good way to keep records up to date and valid. Insurance and portfolio approaches are great to have set in place for risk management, but a system of controls would provide extra security with the books. Below is an overview of insurance and portfolio approaches along with why internal control systems would enhance the business. Risk Management Approaches Insurance Approach Insurance policies give financial protection to businesses in the event of any losses. These losses are unforeseeable and help with risk management ("Investopedia", 2014). The first step in this approach is to categorize the risk and find the policy for those risks. The losses can cover property, income, and liability ("Insurance and Risk", n.d.). This approach is valid because having the insurance to cover economic or natural events will help rebuild a company. This helps give the business security. Portfolio Approach The portfolio approach has parameters defined both on an individual and combined basis. The purpose of this approach is to help make decisions that are more certain (Thomas, 2002). The contents usually include objectives, risk tolerances and constraints, and developing and implementing strategies. The portfolio needs to be monitored and adjustments made when changes occur (Thomas, 2002). The portfolio approach is a valid tool...
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...Justification for an Internal Control System Crystal Spencer University of Phoenix ACC/544 Internal Control Systems Christina Yang May 14, 2012 The purpose of this brief report is to justify the need for the internal control system in any organization, when controls are in place with an insurance and portfolio approach. An internal control system in any organization is a way to regulate, to reduce lost, to minimize risks, and to accomplish the organizational goals and success (McCarthy, 2004). The majority of organizations depend on the insurance approach and the portfolio risk management approach. These approaches are used to manage a business risk, whereas some businesses depend on the benefits of an internal control system. I will now explain the two types of approaches insurance and portfolio used in an organization. Insurance approach The insurance approach is generally used to ensure the acquirement to transfer certain types of risks that could affect the business property, the business assets, and affect the employees (McCarthy, 2004). The insurance approach used as a tool to prevent business losses; in addition, it is more like a financial risk tool than management risk tool. This approach will diminishes the impact of the losses, protecting the business assets from potential losses, therefore, making the insurance approach more reactive, than proactive (McCarthy, 2004). Portfolio risk management The portfolio...
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...Justification for an Internal Control System It is the responsibility of the Controller to analyze company performance in operations, compliance and reporting, as well as aid management in the development of budgets and goals (McCarthy & Flynn, 2004, p. 265). It is also their responsibility to analyze and manage risks the company may encounter. To perform these tasks controllers and company financial officers establish internal controls. A system of internal controls ensures preparation reliable financial statements, compliance with financial regulations, reduce risks, and identify and achieve short and long-term goals. Management uses internal controls to adapt to economic changes (AICPA, 2011, p. 2). Insurance and portfolio theory are approaches to managing and analyzing risk and play an important part in an internal control system. Internal Control Systems An internal control system is composed of five inter-related components, 1) Control Environment, 2) Risk Assessment, 3) Control Activities, 4) Information and Communication, and 5) Monitoring. The control environment is the company’s fundamental values and directives, risk assessment is the identification and analysis of possible material misstatements, control activities are the policies and procedures used to identify and manage risks, information and communication involves the processing and distribution of information needed to meet company objectives, and monitoring “assesses the quality of the system’s performance...
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...Internal controls, controls the risk of companies financial loss or misstatements. Insurance and portfolio theory are the combined methods of internal controls. This paper will justify the need of internal control systems, insurance, and portfolio approaches, and why an internal control system is more beneficial. An internal Control system is responsibility of the Controller to analyze company performance in operations, compliance, and reporting as well as aid management in the development of budgets and goals (McCarthy & Flynn, 2004). Internal Control system is also responsibility to analyze and manage risks the company may encounter. An internal control system is composed of five interrelated components (AICPA, 2013): • Control Environment – the company’s fundamental values and directives. • Risk Assessment – the identification and analysis of possible material misstatements. • Control Activities – the policies and procedures used to identify and manage risk. • Information and Communication – the processing and distribution information needed to meet company objectives. • Monitoring- assesses the quality of the system’s performance over time. Insurance approach is a risk-financing tool for companies providing protection when a loss occurs. Most companies have insurance because not many organizations will be able to pay expenses following a loss. Even though insurance compensate losses it does not prevent any fraud in the company. Certain companies have a variety...
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...Internal Control Systems are very important for the risk management department of a company. This system helps keep the company protected from losing assets or incorrect use of assets. They also assist the company with keeping record and staying on track with objectives needed to be met. A controller’s duty would be to support management and the reporting of accounting and financial information. To start off, insurance and portfolios would complete the internal control system. Having a complete internal control system can further protect the company from risks. The controller is or can be an employee who’s job title is mainly to be the backbone for management when dealing with accounting and financial records that deal with the controls of organizations and organizational goals. If the main focus of the controller is financial controls and the financial process, along with the internal control system in play, the more genuine the information that the controller provides will be. Just having insurance does not guarantee that a company is protected from risks. Companies cannot ensure every risk. The insurance can cover things that happen to the company or facility and their equipment. Things that can be covered would be flooding, fires, or accidents that occur on their property. With insurance, the company is only expecting a small loss. A risk that is not protected by insurance would be a risk that can destroy the company’s reputation. It takes time to build a positive...
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...As the controller of this firm, it is my duty to re-evaluate the control systems of this company, both internal and external. As the current control system is working appropriately, there is a need for more, which further justifies the need for an internal control system. As previously indicated by the firm, there has also been the usage of external control systems and they appear to be more useful and cost effective, but the truth is that a properly operated internal control system is more beneficial to a company than an external one. The cost could vary and sometimes be more expensive, but the gain in the usage is worth the funds appropriated for the internal control system. Insurance and Portfolio Approach Many organizations tend to use the insurance or portfolio approach to manage the risks associated with controls of the organization, but other organizations tend to explore other options such as the internal control system. To assist in further providing justification for an internal control system, it is necessary to identify and explain the current controls that are in place with the insurance approach and the portfolio approach. The insurance approach is very valuable as it protects the company against loss due to fraud or even negligence. A popular insurance approach is the usage of surety bonds for the controller handling the finances and blanket bonds that could cover CEOs, Board members, and any other staff members that handle cash. The portfolio approach...
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...Justification for Internal Control Paper Sharmain Carthan ACC/544 September 1, 2014 Professor Fred Johnson Justification for Internal Control Paper A system of internal controls ensures preparation reliable financial statements, compliance with financial regulations, reduce risks, and identify and achieve short and long-term goals. Management uses internal controls to adapt to economic changes (AICPA, 2011, p. 2). Although there are controls in place with insurance and portfolio approaches, an efficient and cost effective internal control system is still needed. Insurance and portfolio approaches that manage and analyze risk and both plays an intricate part in the internal control system. It is important to have an effective internal control system because with Sarbanes-Oxley Act the responsibility to ensure that the financial reporting is done accurately and efficiently. The Chief Executive Officer (CEO), Chief Financial Officer (CFO), and other upper level of management have this responsibility and are considered fiduciary. They have responsibilities to safeguard the assets of the company and can be held personally liable. Part of their responsibilities includes plan administration functions such as maintaining the financial books and records of the plan, and filing a complete and accurate annual return/report for your plan. Fraud and errors can occur at any point in the system. That is why it is important to establish safeguards to ensure the fiduciary responsibilities...
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...Justification for an Internal Control System Justification for an Internal Control System Internal controls are key elements toward risk reduction for any organization. Although additional controls (insurance and portfolio approach) are currently in place, this paper will focus on the internal system, other approaches to risk management, and how internal controls will be beneficial for the organization overall. While current approaches also assume certain potential risk protection, internal controls can minimize financial loss by widening the scope of understanding amongst mid to senior level leadership. Within this paper, another risk protection technique (insurance) will also be discussed and compared to the proposed internal controls to measure the effectiveness of both. Internal control systems are good to use along with system wide interrelated approaches to managing risk. The more management involvement in the process the better and creates a since of understanding in the organization. Some senior level leaders believe that insurance creates the only safety net should they be in a potential loss situation. Although insurance does play a major role, prevention is the goal. Preventing a potential risk puts those processes in place that regularly identifies any deficiencies in the policy that can be corrected before any material misstatements occur to financial reporting. Portfolio and Other Approaches Companies often times use this approach...
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...Justification for an Internal Control System Juanita R. Martin ACC/544 December 3, 2012 Robert J. Cornett Justification for an Internal Control System The internal control system plays an important part in a company’s management function. Internal controls keep a company from loss of assets while maintaining objectives, which helps keep the company on track with its mission. The controller’s role is to be a supportive mechanism in helping the management teams in their reporting and financial information. This paper will take a look at the insurance and portfolio approach as it relates to risk. It will also justify why an internal control system is needed to protect the company from further risks. Insurance manages risk by pooling risks to minimize the cost of rare events to any one person. Insurance is very effective for risks with low likelihood and high impact, but it fails to work if the risk changes from low likelihood to extremely widespread. Insurance companies make educated guesses regarding the likelihood of paying out on the insurance policies they issue, which is called the level of risk. Companies purchase insurance not only to protect themselves, but to also reduce any out of pocket costs associated with that risk. Insurance is a good tool to have to prevent the unforeseen from damaging your company. For example, does the risk affect one division or does it affect the company as a whole. Insurance allows a way to put the risk on someone else other than the company...
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...Justification for an Internal Control Daniel R Rojas ACC/544 November 11, 2013 Fred Johnston Justification for an Internal Control In a business, any control system is great for a company. Insurance and Portfolio Approaches are good to have, however they’re not a guarantee as they fall under the category of being risky. The best way to lower the risk in a company is to invest more into internal controls. Having security on the perspective of being on the “inside” is less of risk oppose to just having external security. Internal controls, along with insurance and portfolio approaches will be discussed below. Take into consideration the pros and cons. There are a host of benefits and reasons why to comply with business insurance requirements imposed by both financial and government agencies. Financial service providers, especially banks and investors, may tie-up access to capital and financing when insurance requirements are not met. So it is of great benefit and importance to get the types and levels of coverage that meet their specifications. Government agencies (federal, state, and local) can impose fines, restrictions, and cancel required licenses that could virtually shut operations down. Second only to its employees, a business's structure, warehouse, products and property are important to insure. Business owners should make it a point to check out insurance companies that specialize in commercial property and casualty insurance. These companies know how to assess...
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...Justification for an Internal Control System ACC/544 Internal Control System Relying on the insurance and portfolio approach are acceptable for maintaining organizational risk, however, for optimum protection there must be internal controls in place. This report will focus on justifying why implementing internal control is better than relying on the insurance and portfolio approach. Although the insurance and portfolio approaches will be explained, the report justifies why an internal control system is vital to successfully managing risk. As a result management will be able to identify why an internal control system works best. Insurance Approach Insurance in terms of risk management is the process of preparing for the possibility of an event happening that might cause harm to the business. By using the insurance approach, an organization prepares in advance for what might go wrong, plan preventive measures, and protecting investments. The drawback to the insurance approach is that it suggestes an organization will fail and will need to be prepared for that possible failure. Management basically attests to accepting a loss. This realization is not a positive aspect for the company and management should consider a new approach. Portfolio Approach The portfolio approach is a good way to quantify risk while maintaining certain levels of adequate investments. When using this approach, management tends to combine risk so that the organization looks better on financial...
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...Justification for an Internal Control System ACC/544 The Controller is responsible for analyzing a company's performance in compliance and reporting, operations and assist management in developing its goals and budgets. They are also responsible for analyzing and managing risks companies may encounter. Performing these tasks require the controllers and financial officers to establish internal controls. The internal control system ensures that financial statements are reliable and are compliant with financial regulations; risks are reduced, and short and long time goals are identified and met. Internal controls are systematic measures (such as reviews, checks and balances, methods and procedures) instituted by an organization to (1) conduct its business in an orderly and efficient manner, (2) safeguard its assets and resources, (3) deter and detect errors, fraud, and theft, (4) ensure accuracy and completeness of its accounting data, (5) produce reliable and timely financial and management information, and (6) ensure adherence to its policies and plans (Business dictionary.com). Internal control systems are improved ways of controlling organizations with minimize risk, loss reduction, and also to achieve goals. Justifying the need for the internal control system can be done by using the insurance and political approaches. Asset allocation, security valuation, performance, and optimization are considered with the approaches. Companies acquire insurance...
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...The analysis of logistics and supply chain management cases Given by Yang Cheng Assistant Professor, PhD chengyangxy@gmail.com Purposes • This talk is o To outline a framework for analysing supply chain situations o This is not a prescriptive approach that can be applied without thought to all situations, rather it provides a series of checklists of factors to consider • Cases o Some deal with the full scope of an organisation’s supply chain from raw material supplies through to delivery of a finished product to the end user o Others deal with one part of the supply chain such as retailing or manufacturing o Advisable to set the specific problem in the context of the overall supply chain system Defining logistics and supply chain management The process of planning, implementing and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods and related information from pointof-origin to point of final consumption for the purpose of conforming to customer requirements ---US Council of Logistics Management in 1986 Key features of logistics • It is concerned with movement and storage of materials • It is concerned with managing the information flows that underpin the flow of materials • Its scope ranges across the whole supply chain from point of origin of raw materials to final consumption of finished products • It requires a single logic to plan and organise this flow of materials throughout the supply...
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...those without a readily need to know to perform organizational business functions. Unauthorized access to information can have a detrimental impact on an organization from a legal and operating perspective. One of the primary preventive controls that provide an organization with many operational benefits is continuous log management policies. In addition to helping solve network security related issues, logs can be extremely beneficial in identifying unauthorized access and behaviors. Security logs assist in identifying policy violators, fraudulent behavior, real time operational problems, and provide necessary data to perform auditing, transaction back tracking and forensic analysis. In addition to the many benefits of having policies in place for continuous log analysis, standards and regulations have increased business awareness of the requirements for archiving and reviewing system logs as part of daily continuity. Some of the influential regulations that reference log management and other information security task include the following. • Federal Information Security Management Act of 2002 (FISMA) requires entities to ensure the development and execution of organizational processes and internal controls designed to secure information systems. Health Insurance Portability and Accountability Act of 1996 (HIPAA) encompasses information security benchmarks for protecting consumer health information. Violation Penalties can range from $100-$1.5 million per violation and 1year-10year...
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