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Justification for Internal Control System

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Justification for an Internal Control System Pamela Kaminski ACC/544 April 25, 2011 Adriane Treasure Justification for an Internal Control System Insurance and portfolio approaches are good controls, but they are not enough to protect the company from risks. As a controller I encourage you and your leadership team to increase the internal controls in the company. The insurance and portfolio approaches will be discussed and explained how they work. Also an explanation of why more internal controls are needed and how it will benefit the company. Insurance Approach Insurance is a way of looking at the risk, and knowing that an acceptance of loss is present, but it is not as large as it could be. Companies carry insurance policies to prevent obtaining a large liability from an accident or damages from acts of nature. By insuring the company, assets, or even the employees, management is saying that they accept there will be a loss, and the only gain is the company is insured, therefore, a claim can be made to replace or receive monies for the loss (McCarthy, p. 75). Portfolio Approach The portfolio approach is beneficial in measuring the type of risk he/she may want to take on and the likelihood of making a positive return. The focus is mainly on short-term risks. This causes any future risks to be overlooked and all the energy is set toward the risk at hand. Future risks are unnoticed and are growing because no other controls are in place to prevent or stop the risk from becoming damaging (McCarthy, p. 80). An Internal System is More Beneficial The insurance and portfolio approach are successful but more controls would incorporate all aspects that need attention regarding fraud, management oversight, risks, segregation of duties and compliance. The need for more internal controls will provide assurance and assist in reaching the objectives set for the company. Not only will more controls provide efficiency and reliability but also will offer checks and balances (Jones, pp. 39-41). Internal controls can be effective when training is involved and planning how and who handles what control. Segregation of duties will confirm that one person is not performing two jobs that conflict. Enforcing the segregation of duties will ensure checks and balances, which will prevent fraud in the company. A risk that can be taken for granted by people you would never suspect because you trust that they know right from wrong. Fraud is a costly risk that insurance and the portfolio approaches cannot handle by themselves. Another risk that should be addressed is compliance. Insurance definitely needs to be in compliance in order for it to be effective, but other areas other than insurance have to be in compliance as well. If a lapse in compliance is exposed, multiple risks could arise. The portfolio approach can fall into the category of reporting, but like insurance, it does not cover all aspects. Different types of budgets and audit processes should be performed and committee members and board members should review these reports. The different controls allow no errors or fraud to be detected, which results in compliance and expansion in the company (Floch, pp. 10-11). Conclusion Additional internal controls are an important part of a company’s reliability and effectiveness. Although, the insurance and portfolio approaches do provide some risk management strategies and plans, they are not enough to protect the company and its employees and investors. I strongly recommend implementing more internal controls. While the costs to train and time to plan out strategies will increase, it will benefit the company to pay for prevention rather than permit fraud and inaccuracy.

References Floch, J., & Olson, C. (2003). Trust is not an internal control: Certified public accountant New York State Society of Certified Public Accountants. Retrieved from http://search.proquest.com/docview/212275406?accountid=35812 Jones, D. (2000). Strengthing internal controls American Society of Military Comptrollers. Retrieved fromhttp://search.proquest.com/docview/194760345?accountid=35812 McCarthy, M. P., Flynn, T. P., & Brownstein, R. (2004). Risk from the CEO and Board Perspective. Retrieved from http://www.ecampus.phoenix.edu/content/ eBookLibrary2.

References: Floch, J., & Olson, C. (2003). Trust is not an internal control: Certified public accountant New York State Society of Certified Public Accountants. Retrieved from http://search.proquest.com/docview/212275406?accountid=35812 Jones, D. (2000). Strengthing internal controls American Society of Military Comptrollers. Retrieved fromhttp://search.proquest.com/docview/194760345?accountid=35812 McCarthy, M. P., Flynn, T. P., & Brownstein, R. (2004). Risk from the CEO and Board Perspective. Retrieved from http://www.ecampus.phoenix.edu/content/ eBookLibrary2.

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