Justification for an Internal Control System

Over the past years many organizations have fallen because of inadequate financial reporting and ineffective controls. To overcome this dilemma, the creation of the Sarbanes Oxley Act (SOX) of 2002 requires corporations to take full control over its financial reporting and accounting by placing internal controls within its organization. Internal controls not only establish the foundation of reasonable assurance for meeting company objectives but also provide functions in achieving other objectives. These objectives are operational effectiveness and efficiency, relevant and reliable financial data, and verify law and regulation compliance. As a controller of this company one believes that internal controls are important for these areas to be successful. Although this business uses the insurance and portfolio approaches as controls to manage the association of risks with activities, one believes an internal control system would be more beneficial for this company. Current Approaches Insurance Approach Insurance is not as large as it can be for a company because it is a way of looking at the risk along with knowing that an acceptance of loss is present for a company. Companies basically carry insurance policies to prevent and cover large liabilities from natural disasters or accidents. Under this approach management is stating an acceptance of a loss is present for a company when insuring the company, assets, or its employees. For a company using this approach protection is the only gain in knowing the company has insurance to make a claim to replace or receive monies for the loss (McCarthy & Flynn, 2004, p. 75). However, the insurance approach is more of a tool for risk financing than a tool for risk management. This is because this approach is reactive in mitigating the impact of a loss rather than preventive in protecting the company from a loss. This approach can be beneficial for the company if a company can find affordable insurance with deductibles the company feels comfortable with. This is because the company would only be responsible for paying the deductible and the insurance company would pay the rest in the event of a catastrophic disaster. Portfolio Approach Unlike, the insurance approach the portfolio approach has more structure and complexity. This is because during the process of decision-making it gives more procedures and processes in making a decision (Thomas, 2002, para. 23). The main idea behind this approach is to maximize investments of a company while minimizing the risks of the company. Even though this approach organizes to an extent the decision-making process it does not provide protection assurance for the investment against risk. The portfolio approach is beneficial for a company when the company wants to measure the type of risk it wants to take on along with the likelihood of making a positive return on that risk. Internal Control System To an organization a vital component to risk management procedures is a reliable internal control system. This system helps regulate, reduce lost, and minimize risks along with accomplishing the organizational goals and success of a company (McCarthy & Flynn, 2004, p. 249). Benefits of an Internal Control System Generally the insurance approach is necessary for a company to overcome the risk of a loss. The portfolio approach is an effective approach but is more reactive than preventive. Even though a business may have insurance and portfolio approaches in place these approaches are not efficient and cost-effective enough to protect the company from risks like an internal control system can. Internal control systems are unlike the insurance and portfolio approaches because these systems are proactive tools in risk management. This type of system ensures the protection of company assets through a system of policies and procedures. In addition, this system establishes reliability in financial data along with establishes compliance with laws and regulations set forth from regulations like the SOX Act. These types of systems also help to improve internal and external communication processes within a company. Recommendation As a controller of this company, one recommends that management incorporates an internal control system into the company. This is because this system will be more beneficial to the company in the long-run than the current approaches the company already has in place. One believes an internal control system will help protect the company from uncertainties as well as ensuring the company is operating in proper accordance with its mission and goals. Justification for an Internal Control System The internal control system has been used since the company was in need of the system and until this day it has been working to its fullest potential. Internal control plays an important key in making sure that the accounting information, financial data, meeting the targets, and ensuring that the management policies are getting followed. There are two elements in making an internal control system successful. These elements are portfolio approaches and insurance. Even though they both help the internal controls, they are somewhat different.Portfolio approach is used in different ways, this helps make investments decisions easier. It also balances the risk against the routine of the company. When discussing portfolio management it is known that there are two types of management: active and passive. Active management can be only one manager or a team but regardless if it one or more. They all have the same idea in mind, which is to get a better market return and they do this by constant ly checking the funds portfolio. A passive management just checks the market index; it does not necessarily say that the passive management is less capable of doing its job.â€Å"Every company's risk management â€Å"solution† will be unique because the exposures and risk appetites all differ. The key is to have a reasonable under-standing of how each treatment option works, alone, and in combination with others, so that decisions are informed and results are less influenced by luck than by reason (McCarthy, Flynn, & Brownstein, 2004). The appetite for risk will always depend on the management team. We will need to understand every risk and think of the options before continuing. A great return is always good but a big loss will hurt more.Insurance is another element that was put in place with the internal controls. Insurance will protect the company in case of an error occurs. There can always be risks in a company, but it is the way we handle them, what is important. When they add insurance it is for a peace of mind, a company wants to be cover in case something did happen. Weather risks can happen anytime and any day. It can be challenging thinking best option for the business. Due to the fact that no one can know what will happen tomorrow but is it better to be protected. As the controller some of the aspects to look into is what do we need.There hasn’t been a tornado in this area for more than 50 years, the question to think is, and do we need tornado insurance? The company was built once but if a risk strikes, it would be really hard to restart the company without developing a financial plan. The company will continue to grow every day, and we need to keep that in mind with the insurance. When the insurance was first put in place, the management team covers everything they thought was needed. However, we may not need certain things that are currently been covered by the insurance. That is why it is very important to do a six month or even a year checkup on the insurance plan.As the controller of the company there are tasks to be completed such as compliance, reporting, budgets, analyzing, and goals. The internal controls help the company and especially the controller achieve all these tasks and stay up-to-date with them. Having internal controls can prevent any losses due to fraud and minimize the loss in assets. It also helps with everyday business activities and what to do in a situation in which a risk is encounter. For the previous reasons that were discuss the company’s success will be much better off having the internal controls with a combination of insurance and portfolio approaches.