Justification for an Internal Control System

Justification for an Internal Control System

Week 2

Lauralyn Forthman

ACC/544

Jacob Mathews

September 13, 2010

Justification for an Internal Control System

The principle purpose for internal controls is to control the risk to the business of financial loss or misstatement. The current method of internal controls is a combination of insurance and portfolio controls. Although adequate, the current method of internal controls does not fully capitalize on the resources and capabilities of a full internal control system. This paper will review the existing control scheme, and the benefits of the new internal control system compared to the existing control scheme.

Existing Control Scheme

The existing internal controls focus risk mitigation efforts on insurance and a distributer portfolio. Insurance risk mitigation recognizes that the best laid plans will sometimes fail. This failure is typically caused by unforeseen scenarios, such as accidents, natural disasters, injuries, and other such events. Any of these events can present significant financial losses for the company, and impair the company’s ability to conduct business after the loss. This risk is mitigated by insurance, in which a third party is brought in, and for a fee, assumes a portion of the risk is identified in the insurance policy (McCarthy, Flynn, & Brownstein, 2004). By its nature insurance is a reaction to a perceived risk, and unperceived risks can still leave the business exposed.

The Portfolio approach is a method of balances between risk and reward (McCarthy, Flynn, & Brownstein, 2004). With the portfolio approach, investments are made in groups where the risk of one investment failing is countered by investing in a second asset that would likely increase in value if the first were to fail. Although the portfolio approach is a systematic approach to risk management, it is not a comprehensive approach to risk management as it only manages risk associated with...