Justification for internal controls
Justification for an Internal Control System
ACC 544
Justification for an Internal Control System
Introduction
According to A. A. Gramling in the Encyclopedia of Business and Finance, internal control can be described as “any action taken by an organization to help enhance the likelihood that the objectives of the organization will be achieved.” There are several approaches to risk management in an organization – the portfolio approach and the use of insurance are two. Both approaches provide internal controls that are essential to managing risk but have limitations in balancing and controlling risk factors. An internal control system will provide additional tools to identify and assess operating controls, financial reporting, and regulatory compliance processes, and formulate preventive actions where needed.
Portfolio and Insurance Approaches “The purpose of portfolio management is to provide a context and a process for decision making under uncertainty. It permits decisions to be made and resources to be allocated in a coordinated way. Portfolio management involves: (1) setting objectives for value preservation and enhancement in light of organizational and stakeholder requirements, preferences, risk tolerances, the need for liquidity, and other constraints; (2) developing and implementing strategies for allocating resources to existing and new businesses; and, (3) monitoring the portfolio and making adjustments to it by taking various organizational, operational, and financial initiatives to anticipate and respond to changes in the external and internal business environments” (Thomas, 2012, A Portfolio Approach, para.2). However, this approach does not provide protection assurance over the investment against risks; it merely organizes the decision-making process. For many organizations, risk management is handled simply by purchasing insurance to cover company assets in case an incident does occur. It is more of a
ACC 544
Justification for an Internal Control System
Introduction
According to A. A. Gramling in the Encyclopedia of Business and Finance, internal control can be described as “any action taken by an organization to help enhance the likelihood that the objectives of the organization will be achieved.” There are several approaches to risk management in an organization – the portfolio approach and the use of insurance are two. Both approaches provide internal controls that are essential to managing risk but have limitations in balancing and controlling risk factors. An internal control system will provide additional tools to identify and assess operating controls, financial reporting, and regulatory compliance processes, and formulate preventive actions where needed.
Portfolio and Insurance Approaches “The purpose of portfolio management is to provide a context and a process for decision making under uncertainty. It permits decisions to be made and resources to be allocated in a coordinated way. Portfolio management involves: (1) setting objectives for value preservation and enhancement in light of organizational and stakeholder requirements, preferences, risk tolerances, the need for liquidity, and other constraints; (2) developing and implementing strategies for allocating resources to existing and new businesses; and, (3) monitoring the portfolio and making adjustments to it by taking various organizational, operational, and financial initiatives to anticipate and respond to changes in the external and internal business environments” (Thomas, 2012, A Portfolio Approach, para.2). However, this approach does not provide protection assurance over the investment against risks; it merely organizes the decision-making process. For many organizations, risk management is handled simply by purchasing insurance to cover company assets in case an incident does occur. It is more of a
References: Gramling, A.A. (2001). Internal Control Systems. In B. S. Kalinski (Ed.), Encyclopedia of Business and Finance (Vol. 2, pp. 487-490), New York: Macmillan Reference USA. Retrieved from http://go.galegroup.com.ezproxy.apollolibrary.com/ps/i.do?id=GALE%7CCX3402700260&v=2.1&u=uphoenix&it=r&p=GVRL&sw=w&asid=8ee479f5bb27291c1561592c30d85cd2 Thomas, B. (2012). Transurance services. Retrieved from http://www.transuranceservices.com/Articles/PORTFOLIOAPPROACHTORISKMANAGEMENT.pdf University of California Office of the President. (2010). Retrieved from http://www.ucop.edu/ucophome/businit/boi/docs/03-understanding_internal_control.pdf VanBaren, J. (2014). eHow. Retrieved from http://www.ehow.com/list_7529733_internal-control-system-objectives.html