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Internal and External Control Mechanisms

Background

Investors have the freedom of investing in any business activity provided they respect and obey the laws that govern their practice. Different professional bodies are responsible for maintaining sanity in their industries. The government may step in to help them achieve their objectives. However, the presence of complex business activities and the high number of investors interested in them means that nobody can be trusted except a neutral party. In addition, some firms have internal controls that regulate the activities of their employees and other stakeholders. The external and internal control mechanisms help businesses to stick to their areas of specialization and conduct business without violating the rules of their industries and countries.

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The Roles of Internal Controls and Capital within a Competitive Firm

Internal controls refer to the measures that businesses establish to ensure they achieve their objectives within a brief time. These activities include monitoring, recording, and assessing the financial and operational procedures of an organization to achieve maximum benefits (Scherer, & Palazzo, 2011). Internal financial control mechanisms include recording all expenses and income to ensure employees account for all the money circulating in a company. Companies may hire external auditors to audit their accounts and provide a non-partisan report about their financial positions. For instance, multinational companies like Samsung, Google, and Toyota have many employees and income-generating activities. Therefore, they must have efficient internal auditing systems to ensure all sales and expenses are recorded.

It is not easy to detect fraudulent behavior without putting in place efficient and reliable auditing systems. The United States Sarbanes-Oxley Act of 2002 supports the use of internal control mechanisms to produce accurate and reliable reports. The productivity of employees can also be audited using performance appraisal mechanisms. This practice helps the human resource department to identify weak employees and what should be done to improve their productivity. In addition, it helps hard-working employees to get rewards and motivates them to increase productivity. The IT system requires auditing after some time to ensure it meets the required standards and does not compromise the security of an organization. Internal controls enable companies to establish and use self-regulatory mechanisms to improve productivity and boost the morale of employees.

How A Firm Can Better Utilize and Manage Its Assets and Liabilities

Risk management is an important aspect of a company’s growth strategy (Fiorino, & Bhan, 2014). All investors expect good returns on their investments, and thus they work hard to ensure their employees follow company policies. However, some issues that are beyond their control may cause huge losses and affect the financial stability of a company. Today, terrorism is the greatest risk that investors dread. Natural calamities like earthquakes, tornadoes, and floods may also have direct or indirect adverse effects on a company’s performance (Scherer, & Palazzo, 2011). Liabilities are part of organizational practices that cannot be avoided. However, companies should manage their income and expenses properly to ensure they add value to investments. Successful companies like the Continental Illinois National Bank and Trust Company and Long-Term Capital Management L.P. collapsed because they were unable to manage their assets and liabilities. Effective management of company assets and liabilities helps it to have a good reputation that attracts investors and customers. Insurance companies are the greatest risk-takers yet they have many clients and an endless list of investors interested in their shares.

The Role of Regulations within the Marketplace

Business activities require strict regulations to enable all stakeholders to play their roles and benefit through contributing to economic development. The government is the chief regulator of business activities and controls almost all aspects of companies. First, investors must seek the approval of relevant government departments before starting their operations (Steurer, 2013). They are supposed to accomplish the requirements that regulate the practices of various industries. This regulation ensures only registered investors are allowed to operate their businesses. Secondly, governments protect consumers from unscrupulous investors who do not value their lives. The pricing index used by governments ensures consumers are not overcharged. In addition, the food and drug department sets standards to protect consumers from harmful products. Governments regulate business activities to protect local and upcoming businesses from the negative impacts of multinational companies (Steurer, 2013). Competitions in domestic and international markets require regulation to discourage dumping, manipulation, and propaganda that have serious effects on consumers. Some industries cannot regulate their practices without the intervention of governments. Moreover, governments cannot let investors invade sensitive parts of the economy because they may cause political instability. The production, distribution, and sale of ammunition, drugs, and other sensitive products are highly regulated to protect consumers from criminal activities and economic sabotage (Fiorino, & Bhan, 2014).

However, the Pacific Law Foundation believes that governments do not protect consumers, but instead set standards that will ensure they generate revenue for their projects. Therefore, consumers are used as scapegoats for governments to overtax investors. It is correct to argue that sometimes governments are biased in regulating business activities. They favor companies that have robust social corporate responsibilities and even exempt them from taxation. The lack of fair treatment of all investors by governments makes it an unjust regulator of business activities. The Financial Conduct Authority (FCA) conducts research to identify ways of improving the rights and relationships between consumers and businesses.

References

Fiorino, D. J., & Bhan, M. (2014). Supply Chain Management as Private Sector Regulation: What does it mean for Business Strategy and Public Policy? Business Strategy and the Environment, 51(3), 321-324.

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Scherer, A. G., & Palazzo, G. (2011). The new political role of business in a globalized world: A review of a new perspective on CSR and its implications for the firm, governance, and democracy. Journal of Management Studies, 48(4), 899-931.

Steurer, R. (2013). Disentangling governance: a synoptic view of regulation by government, business, and civil society. Policy Sciences, 46(4), 387-410.

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