Write an academic essay on the following issue demonstrating effective use of extensive reading and research around the subject.
Is the lack of transparency and failed internal control on the part of financial institutions responsible for the financial crisis (post 2007) or should the external auditors as professionals also share the blame? Illustrating your analysis with recent corporate failures from financial sector, critically evaluate the role played by transparency, internal controls and external auditors during the crisis period; and discuss the changes that could be suggested to improve these areas.
The Importance of Financial Institutions
Following such trends by most financial institutions to upgrade their businesses, some financial institutions are enjoying the fruits of the oversight systems. In our case, financial institutions are, establishments that conducts financial transactions such as investments, loans and deposits, (Berger, et al., 2016). For instance every transactions that involve depositing money to taking loans and exchanging currencies are done in such institutions. Such institutions includes the banks amongst other institutions. However if the systems are not properly implemented, the institution is at the risk of closing its doors. Such a situation is referred to as financial crisis. To mean that the supply of money is outpaced with the demand for money. Hence meaning that the institution has no liquidity since all its money is withdrawn from the banks and also have their assets incapable of being converted quickly so as to meet its short term goals, (Berger, et al., 2016). Hence detrimental to the operations of a financial institutions such as the banks.
Therefore, my paper is exclusively tackling the whole idea behind financial crisis in relation to how transparency within an institution and failed internal controls being key in promoting the financial crisis. Moreover, internal control are processes that are ignited by the board of management and other personnel within an organization so as to provide reasonable assurance regarding the achievement of the objectives in various categories. It is a vital element in reliability of financial reporting, efficient and effective entity operations and adherence to the regulations within a certain jurisdiction. Similarly, the paper critically evaluates the role played by transparency, internal controls and external auditors. As used in the instance in my paper, internal auditors are an oversight lot within an organization that is simply responsible for the running of the internal control systems of an institution. Finally the paper discusses the changes necessary to improve such areas within a financial institution so as to ensure sustainability of the business.
To begin with, internal control promotes the productivity of operations by inducing the uniform procedures; it promotes worth to regulate the processes, standard definitions of procedures, job descriptions, and set rule guidelines, (Berger, et al., 2016). Therefore, contributes the promotion of management effectiveness and efficiency. Moreover, it aims at securing an entity's recent assets through proper control mechanisms since it grows into a systematic challenge to secure its assets as the organization grows for instance as the company grows so do its assets hence making it hard to manage. The internal controls ensures that all the aspects and undertakings of the company both financial and non-financial are properly running. Proper application of the control systems are very mandatory in ensuring that the financial institution are running towards its desired goals or objectives.Similarly, internal control promotes the dependability of the financial reporting. For instance, it supports the directors or the management of the organization in making proper financial choices hence eliminating or identifying fraudulent activities going on within the institution, (Berger, et al., 2016). Internal control strengthens and guarantees compliance with governing customs and laws of a particular jurisdiction. We can say that it simply protects the institution from any asset or financial loss, unreliable or even careless made decisions, scam, loss of profits. Hence inability to reach its desired goals as an organization which may be as a result of the lack of proper internal controls. Therefore, the significance of internal controls, to provide assistance to the management so as to safeguard the company’s assets, eradicate any income or even resource loss, making goal-based and reliable decisions, identifying and avoiding fraud, (Ege, 2014). To summarize, internal control is not only a process affected by an organization's structure, nature of work and stratification of authority, employees and the management information structures but also modeled so as to help the organization achieve its set desired goals, (Berger, et al., 2016). It provides a sensible assertion hence making it the responsibility of the organization’s management to ensure that the systems are properly implemented so as to ensure efficient running of the financial organization.
The Relationship between Transparency and Failed Internal Control
However for the internal control to work effectively, some aspects have to be considered. The vital aspects that determine the quality of the internal control systems are mostly the structures that revolve around organizational structures and the acceptability of the system within an institution. The basic components includes the control environment, the risk assessment, the communication systems and lastly the monitoring systems, (Ege, 2014). Moreover, the business environment and management policy are also effective in the formulation of control environment. Similarly, the kind of risk identified within the business also has an impact on the effectiveness of an internal control system. Since, different risks have different ways through which they are properly handled. Hence the identified risks have a role in determining which control system is adequate to addressing it. Same applies to the communication modes and the unit at which the institution is properly controlled.
Have a totally different working formula as compared to the internal controls. Internal audits are therefore said to be a form through which a financial institution can be overseen from within. The employees of the internal audits are always the employees of the company employed by the managers of the institution so as to ensure that the systems within the financial institutions run effectively, (Ege, 2014). Therefore the internal auditors are only responsible to the senior management, since they are their employers. However within the internal audit, it is easy to impress the clients since the employees of the audit section are close enough to the other sections within the company hence easily interact with the clients at a personal level. However, in as much the internal auditors are a vital key to ensuring the progress of a company, they work on a fixed objectives that are set by the senior management of the company. For instance, they only look where they are told to look, (Ege, 2014). They do not have the free will to look into other aspects of the company that might pose a problem to the institution. Therefore in as much as they are set to ensure that the systems of the company both financial and non-financial work, they work under fixed objectives. Hence the need of understanding their role within an organizational structure.
It is amongst the measures that most financial institutions amongst other organizations are taking to ensure that they grow and develop within the global competition environment. The internal auditor help to foretell on impending risks, (Cohen, et al., 2014). The internal audit sections within a financial institution are responsible to overseeing the risk management systems of an organization. Therefore the role ensures that the company is very up dated on impending risks and ways through which the company can tackle the risks is clearly stated. Hence making the section of internal audit is a very important section within the institutions structure. Simply because, the company will be able to evade all the coming financial trouble like the financial crisis in the implied manner within their regulatory laws. For instance, the internal audit can advise the company to acquire more liquidities assets through investing in long term projects so as to be profitable. Such an action by the audit section is mandatory to ensuring that the company is a profit making entity hence very important to making the financial institution able to realize its log time and short term goals.
Role of Internal Control and Auditors during the Financial Crisis
The internal audits are also vital to boosting the confidence of the investors. Another fact that has risen recently is the expectation of the investors to investors to ensuring that they bank their investments in entities that are worth because of the need to ensure that they benefit from the institutions. With that fact said, the investors more so insist to having frequent internal audits. Since it facilitates the confidence of the company’s worth that investments would not get lost in the moment of investment. Such act by the internal section is very mandatory to ensuring that the company attracts more investments in form of either financial or even manpower. It also puts the company at the edge to ensuring that it works to acquire approval form its main investors hence the need for the internal audits.
However for the internal auditor to perform its mandate, there are factors for consideration that might improve the quality of an internal audit. For instance, the company need to be granted the independence from other sectors within the company since by interference from the sections of the financial institution, the audit simply loses its quality. Similarly the department needs adequate resources just like any other department within the company just like the finance or even the customer service department. Resources provided can be inform of not only capital but also skilled staffing that can ensure that the department is focused toward the main objective. Another thing to consider when there is need to improve your internal audit is to ensure that there is proper management structure within the company so as to ensure there is commitment by the company to address the weaknesses that are detected, (Ege, 2014). When an internal audit is properly managed by a financial institution, the idea of the financial crisis is likely to be a forgotten phenomenon.
The external auditors performs an audit, in reference to the laid down regulations of the financial statements of a company, of a government entity or of any other organization, (Malaescu and Sutton, 2014). The external auditors are an independent entity different from the company hence the name external. Unlike the internal audit which gives the analysis pertaining the risks the institutions face, the external auditors are more interested in looking at the financial statements of the company and issues an opinion pertaining the credibility of such statements. Unlike the internal audit, the external auditors conduct an audit once in a year while internal auditors do their audits on a frequent timing simply because of the closeness of the company. Moreover, the external auditors report to the company’s investors. The external auditors also have an unrestricted objective since they can look at all the factors that promote to the suffering of a financial institution so as to provide an illustrative findings of the same. However in as much as the external auditors are of importance to the company, they have very little capability to impress the company’s clients, (Cohen, et al., 2014).
Changes to Improve Transparency, Internal Control, and External Audits
Just like the internal auditors, the external audits give an exclusive analysis of the company financial status. The external audits give a very conclusive view of the company financial statement so as to ensure that there no malpractices in acquiring the tenders, there no misappropriated budgets and that there are no fraudulent behaviors that might weaken the financial institution’s ability to sustain from a financial crisis. However unlike the internal audits, the external audits leave no stones unturned. They assess all the aspects of a financial institutions even the internal control systems so as to ensure credibility, (Malaescu and Sutton, 2014). Hence, the external audits are meant to reduce the constant loss of resource by the company and ensuring that the company is focused on meeting its intended goals.
Similarly, external audits attracts investments by ensuring the profitability of the company. The external audit if properly applied acts like a sieve. It ensures that all the vices that might lead to the collapse of the institution such as misappropriation of funds and other fraudulent acts by the top management, (Masciandaro, 2015). The audit also outlines the failed systems within a financial institution hence giving the management an easy task in ensuring that the failed systems are enabled to operate effectively. Hence making the company an attraction to the potential investors. The audit boosts the confidence of the investors since it makes them believe that the company is a potential profit-destined entity. Hence the need to ensuring that the financial institutions regularly have such audits at least on a yearly basis.In as much as the systems are very useful, the following have to be addressed to ensure that the external auditors remit a very quality audit. The financial institution have to work alongside the external audit, (Malaescu and Sutton, 2014). The management of the financial institution have to provide the necessary assistance to the external audits so as the auditors can provide a quality audit. Lack of cooperation from the internal audit may make the external auditors lose direction in terms of understanding the structure of the company. The assistance from the internal audit team is at most necessary so as to ensuring that the audit is properly undertaken.
It is simply the trustworthiness of the company’s employees towards ensuring the company is heading towards success. In most financial institutions, the lack of transparency is to blame for the financial crisis happening within the different countries, (Betz, et al., 2014). Moreover transparency is not something that the institution can acquire and improve easily in its workers but can be contained, (Jizi, et al., 2014). Transparency can simply be promoted by instilling measures to ensure that the company does not give room to facilitate fraudulent acts within its watch. Such measures can be inform of the internal control systems and the regular audits which discourages the employees from involving in acts that are meant to make the financial institutions fail, (Bhasin, 2015).
Transparency will accord the company trust from the investors, (Laurens, et al., 2016). Proper measure put in place to ensure transparency within the working space is very important in ensuring that the investors’ confidence is boosted. Lack of transparency makes the company suffer lots of losses since the individuals that work in the company are only interested in serving their own interests other than those of the whole company, (Ratnovski, 2013). Hence such an organization losing trust not only to the investors of the company but also to the general market space. Therefore making customers withdraw all their capital from the institution. Therefore the concept is very vital to ensuring that survival of the company in the competitive market.
Role of Internal Auditors in Financial Institutions
For a financial institutions to survive all the requirements from the audits to the internal control systems have to be in check, (Knechel and Salterio, 2016). However for both the internal and external audits to work more effectively, the institution has to put in all its efforts in ensuring that there is corporation between the senior offices and the overseers. Hence making it easy for the internal auditors to realize a potential risk and factors that can lead to the collapse of the financial institution while the external auditors to take account for the loss of capital within the institution,(Alleyne, et al., pp.10-23, 2013). If such cooperation is enhanced by the financial entity, then it means that it will aim at not only improving its services to woo its clients but also will focus on the golden set goal.
To conclude, if the discussed measures from the audits, both internal and external are properly implemented within a financial entity, it means that the entity will be able to sidestep certain consequences that have resulted mainly from the lack of transparency within the financial institution. Moreover it is important to note that the above measure facilitate the realization of the desired goals by a financial institution.
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