Businesses are faced with many risk factors that can hinder their growth. Some of the risk factors include fraud, natural disasters, adverse economic climate, changing consumer preferences, stiff competition, and unfriendly government regulations. Therefore, it is vital to examine the principles of internal control and how they can be used to prevent fraud, why corporations mainly invest in debts and stock securities, how they are recorded in financial statements, and the impact of irregular items on financial statements.
Principles of Internal Control and their Application in Business
The principles of internal control include maintaining precise records, segregation of duties, mandatory employee rotation, use of technological controls, and the establishment of responsibilities. Moreover, it entails the execution of regular independent reviews, insurance of business assets, and splitting related party responsibilities. These principles ensure effectiveness, accountability, and the minimization of loses. Businesses that deal with huge sums of cash are vulnerable to fraud, robbery, and theft. In this case, employees should be understood especially with regard to attitude change, which indicates a risk and internal issues to be addressed. Also, everyone should be aware of the fraud risk policy as well as the forms of fraud and their penalties. Additionally, the management should ensure employee rotation and vacation to ensure checks and balances. Lastly, the organization should hire Certified Fraud Examiners (CFE), Certified Public Accountants (CPA) and CPAs who are Certified in Financial Forensics (CFF) to help establish antifraud policies and processes.
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Why Corporations Invest In Stocks and Debt Securities
First, the rate of return while investing in stock and debt securities is higher than keeping cash in a bank savings account (Hilliard et al., 2016). Secondly, corporations invest in stock and debt securities to gain influence over other companies. Thirdly, corporations seek to position strategically to gain operation leverage over the target firm within an economy. Next, corporations seek to generate more income, diversify, and invest in other types of businesses. This helps minimize loses in case of any eventualities (Lynch et al., 2019). Besides, stocks and debt securities have high liquidity; thus, they can be held within a short period generating more income.
How Debt and Stock Investments are reported in Financial Statements
Debts securities are categorized as available for sale, held to maturity, or trading securities (Dib et al., 2018). In this case, their reporting and valuation becomes easier. On the other hand, stock investments are never recorded as held to maturity securities since they do not have a distinct maturity date. They are recorded as current assets with a specific value attached to them. Available for sale stock is recorded as either long-term or short-term investment.
Effects of Irregular Items on Financial Statements
First, they impact the net income calculations. In this case, they affect both profits and losses. Secondly, they impact earnings per share in public companies. In these companies, the net income is typically divided by the number of shares to obtain the earnings per share. Thirdly, irregular items impact the operating cash flow by affecting the net income.
References
Dib, Y. , Kmeid, N. , Greige, H. and Raffoul, Y. (2018) Optimization of Cash Management Fluctuation through Stochastic Processes. Journal of Mathematical Finance , 8, 408-425.
Hilliard, J. I., Pottier, S. W., & Xu, J. (2016). Trust-Preferred Securities and Insurer Financing Decisions . Journal of Risk and Insurance, 85(1), 219–244.
Lynch, H., Page, S., Panariello, R. A., Tzitzouris, J. A., & Giroux, D. (2019). The Revenge of the Stock Pickers . Financial Analysts Journal.
