Justification for an Internal Control SystemThe 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 systemcompared to the existing control scheme. Existing Control SchemeThe 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 the investment in assets.The Benefits of an Internal Control SystemSince the 2002 Sarbanes-Oxley Act (SOX), the public concern over internal controls along with the legal requirement for the controls has been heightened significantly. This increased control requirement resulted in the American Institute of Certified Public Accountants issuing SAS 112, Communicating Internal Control Related Matters Identified in an Audit. In 2008, the AICPA issued SAS 115 with the same title as SAS 112 as a superseding statement. These Generally Accepted Accounting Principles require all publicly traded companies that are required to release financial statements, include in those statements assessments of internal controls, and provide independent audits of the internal controls to assure the public of the quality of the company’s financial information. These new regulatory requirements present a significant challenge and liability to management over maintaining the internal controls. Internal controls are the processes, procedures, personnel, records, and devices organized by the board of directors, management andothers to provide reliable financial reporting, efficient operations, and compliance with laws and regulations (Thomas, n.d). SOX section 302 requires that the CEO and CFO of a public company certify that they have reviewed the financial reports and that the reports present the information fairly and accurately. An internal control system with adequate controls, appropriate systems, and consistent audits is critical to management being able to certify the information in the financial reports. ConclusionThe current company practice of risk mitigation through insurance and portfolio management are both by their nature reactive to the business risk. An internal control system isan active process that reviews the established policies, procedures, and technologies to ascertain if any of these presents a risk to the business. The proactive approach is mandated by the SOX legislation and subsequent regulatory initiatives by the AICPA mandating that an internal controlsystem is in place and audited for effectiveness. ReferenceMcCarthy, P., Flynn, T., & Brownstein, R. (2004). Risk from the CEO and board perspective: What all managers need to know about growth in a turbulent world. New York: McGraw-Hill.Thomas A, G. (n.d). Internal Assessments Improve Transparency of Private Company Reporting.Commercial Lending Review, 24(5), 29. Retrieved from ProQuest: ABI/INFORM Complete