Posted at 11.26.2018
Before we start answer this question, why don't we understand what this is of interior control is. Interior control is designed and put in place by an entity's management, those charge with governance of the entity, and other personnel to provide sensible assurance about the achievement of goals. In addition, inner control is also can be make reference to an activity wherein the framework of the organization, the information system and authority are designed so that it can helps the organization achieve its aims and goals. (Bhattacharyya, August 2010) Internal control performs an important role in how management matches its stewardship or organization responsibilities. For instance, inside control for a lender is the systems, procedures, procedures, and functions effected by the table of directors, management, and other employees to safeguard bank or investment company assets, limit or control risks, and achieve a bank's aims (Internal Control Comptroller's Handbook January 2001). Something of strong inside control is the backbone of the association's management program. Strong internal control may helps a firm to meet their targets and goals, and to maintain a healthy, successful operations. For your bank, Good interior control can help a bank to avoid surprises and achieve its objectives.
After we understand the inner control, why don't we start to see the management's incentives for establishing and maintaining strong 'internal control'. You can find few management incentives such as provide guard of investments and company documents, effectiveness and efficiency of operations, prevention and detection of fraud and error, compliance with applicable law and regulation, avoid wastage of resources, risk management systems work and decreased threat of harm to the association's reputation.
First, the management's incentive for establishing and preserving strong 'inside control' is to ensure company information and belongings can be properly guard. A strong internal control can ensure that asset was not been stolen and certificates or company data are proper keeping. Then, a proper safeguard of company files and investments can create reliable information for the business because the files will not easily be manipulated. Besides, Management also needs reliable information to ensure the fairness of financial record. It can reduce the situation between the primary and agent. So, what's mean by principal and agent? Actually, main is referring to absentee owner such as shareholder and agent refers to manger who's working in company. 60 information asymmetry and conflicts of interest are occurring between themselves. It is because manager has more info about "true" financial position than shareholder. In addition, they are different targets in sometimes, so it will lead to turmoil of interest. For example, the purpose of shareholder is to acquire higher dividend from the business which they invest. However, the goal of administrator is to maximum the revenue of the business. Therefore, they will be a issue such as whether using the excess earning to maximum the dividend for each and every of the shareholder or increase their market share by escalates the advertising. It will lead to the challenge between shareholder and administrator, because the shareholder did not know if the manager did the correct or win-win decision. Then, they didn't know the financial statement have incurred error or fraud or not. However, a strong interior control may ensure a safeguard of company's documents and assets and it'll raise the trustiness to the company. Then, decrease the condition between agent and principals. Besides this, reliable information is important to make a great decision to a firm. If the information system will not provide reliable information, management may struggle to make quick and enlightened decisions such as product costs, profit information and cost of creation. It's important that the most notable management is made with reliability information, as they rely on these data to make important and critical decisions. Therefore, a solid internal control is necessary in order to make financial information translucent and accessible to the professionals or decision makers.
Second, the management's incentive for building and retaining strong 'inner control' is with an performance and efficiency of businesses in a firm. Effective of inner controls can make sure that all duties are being completed corresponding to standards, guidelines and everything quotas are being fulfilled. However, efficiency of inside control is very important to the achievements of sustainable competitive benefits and the maximization of profitability. Operational procedures, best-practice and performance reviews work internal controls of efficiency. (Ingram, eHow Contributing Copy writer) A solid internal control increases the efficiency and efficiency of procedures, reduces the risk of asset loss, and really helps to ensure compliance with laws and regulations.
Third, the management's incentive for creating and maintaining strong 'inner control' is to avoid and discover of fraud and error in company. Error is unintentional misstatements make by personnel or administrator such as making mistakes in gathering or handling financial data used to prepare financial assertions. Then, fraud is intentional misstatements make by personnel or administrator such as manipulation, falsification, or alteration of accounting details or supporting documents used to prepare financial assertions. Therefore, a strong internal control can prevent and find the error and fraud. For example, segregation obligation between record shipping inventory and calculate inventory in physical form can prevent theft or stolen of inventory occur. Besides, an effective accounting information system can prevent the error or fraud, such as sales clerk only can gain access to and type in the information about the sales and bank account receivables only. Therefore, the sales clerk can't access to cash account in order to create a fictitious customer. Moreover, monthly lender reconciliation can check the mathematical precision of the bank reconciliation working paper and agree the total amount per the catalogs to basic ledger to identify the error or fraud in profile bank.
Next, the management's motivation for creating and maintaining strong 'inner control' is to compliance with appropriate law and legislation. Following legislation and regulation established by government require huge investment funds, especially that of time. Therefore, a solid internal control is essential in order to avoiding legal repercussions by follow the rule and regulation. Which means that, it can reduces or avoid the expenses which may have to occur if the business don't follow rules.
Then, the management's motivation for establishing and maintaining strong 'inside control' is to avoid wastage of resources. A strong inside control can helps company avoiding wastage of precious resources, besides increasing efficiency. It is because maximize the gains or income by utilization the resources is one of the method of efficiency. Strong interior handles can avoiding wastage of resources like an efficient accounting information system can ensure the stability and appropriate of the information for avoid to making an inefficiency and inaccurate decision and squandered asset of the company in investment in that decision such as lost cash or establish a useless debt for an ineffective investment.
The management's motivation for creating and maintaining strong 'inner control' is to making risk management systems effective. An entity's risk evaluation process is its process of identifying, analyzing, and responding to the determined business risk. For instance, mobile phone company such as Nokia always facing business risk not due to its competitive environment only but quick changing technology is also a main reason. To match for the customer trend and favourite, Nokia facing business dangers that are always need to make investment in Research and Development Office to design a new model and quick upgrade their product. However, not absolutely all the mobile phone produce by Nokia will be the favourite of the client and making a profit, so a strong internal control is important to determine the business risk and decrease the business risk to an acceptable level.
The last management's incentive for building and maintaining strong 'interior control' is lowered risk of damage to the association's reputation. For the reason that a strong inside control can create a reliable financial statement, making operating types of procedures more effective and efficiency, prevent and identify the error or fraud and compliance with appropriate regulations. Therefore, the financial article will be more credibility and lowered risk of damage to the association's reputation.
Last however, not least, after we review the management's incentive for creating and keeping strong 'inner control', we can conclude a strong internal control is vital to every company to accomplish their business's goal, such as give a safeguard of records and assets or making an performance and efficiency of businesses. Therefore, a solid inner control is one of the factors that ensure the company may successful also.