The purpose of this brief report is to explain the need for the internal control system within the 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. The company to manage a business risk is currently using these approaches. It is now being recommended that the company make a transition in order to capture the benefits of an internal control system. Explained below are the two types of currently used approaches, insurance and portfolio, that are used within the organization.
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 risk management is more structured and complex approach, which gives procedures and processes during the process of decision-making. The key goal of the portfolio risk management approach is to reduce risk while getting the most out of the business return on investment (McCarthy, 2004). This approach would help businesses to assess its risk tolerance while improving the business operations. The business that uses the portfolio risk management approach would be able to evaluate the risk in a broad and level way. Overall this combines the high risk with the low risk of the company to produce and overall risk portfolio of the company.
The two approaches that have been described can be very effective in many different business environments. However, we currently believe that an internal control system is the best fit for this company’s identity. Internal controls create procedures that the companies leadership will put into place to reduce losses in operations. Added risk management mechanisms will help employees implement the procedure-designed management, as well as unique departmental policies. Internal controls are the cornerstone of an effective risk management system because the company’s staff will create the first barrier against potential operating losses. With an overall purpose of internal control to provide assistance to departments when trying to achieve its missions. In order to do so, the internal control system has a framework that consists of 5 components, explained below.
* Control Environment: The foundation for all other components of internal control. The control environment is influenced by management’s philosophy, operating style, integrity, ethical values, and commitment * Risk Assessment: Risk assessment is the identification, analysis, and management of risks relevant to the achievement of the department’s goals and objectives. * Control Activities: Internal control activities are tools and procedure that help ensure management’s policies are carried out. Control activities help identify and prevent the risks that can obstruct the department’s objectives. * Communication and Information: Managers must be able to obtain reliable information to make informed business decisions while determining risks, and communicate policies and other important information to those who need it. * Monitoring: The department’s internal control system needs to be monitored to assess whether controls are effective and operating as intended.
An internal controls system will hold all employees of each department responsible, with the position determining the extent of their involvement. Internal control is people-dependent, as it guides people, it provides people with a means of accountability and people carry it out. While everyone in a department has responsibility for ensuring the system of internal control, it will still be the management duty to make the necessary decision and provide supervision. Now with the current procedures explained, and with an explanation of the recommended ne internal control approach, we believe the company can clearly see the benefits this change will bring. The companies internal control system will allow each department to operate more efficiently and accurately as a result of identify risks and overcoming them.
McCarthy, M. P. & Flynn, T. P. (2004). Risk from the CEO and board perspective: What all managers need to know about growth in a turbulent world. New York, NY: McGraw-Hill. (2012)
McCarthy, M.P., Flynn, T.P., & Brownstein, R. (2004). Risk from the CEO and Board Perspective (1st ed.). The McGraw-Hill Companies.
McCarthy, M. P. & Flynn, T. P. (2004). Risk from the CEO and board perspective: What all managers need to know about growth in a turbulent world. New York, NY: McGraw-Hill.