The U.S. Sarbanes-Oxley Act requires evaluation of how public companies implemen

ID: 2716987 • Letter: T

Question

The U.S. Sarbanes-Oxley Act requires evaluation of how public companies implement financial reporting controls. Many companies prepare a risk control matrix to assess risk. Preparing a risk control matrix can help identify pertinent data and often identifies the risks, controls, and monitoring methods to help ensure accurate financial reporting. Based on your employer, prepare a risk control matrix for a particular area within your company. For example, a risk control matrix regarding the filing of corporate taxes. Create a professional memo of 3–4 pages communicating this profile to the organization's board of directors, including details of the risk and your recommendations for a system of control. Be sure to identify within the memo the strengths and weaknesses of your recommended system.

Resources/Readings:

http://web.b.ebscohost.com.ezp.waldenulibrary.org/ehost/pdfviewer/pdfviewer?sid=627b3c02-f215-40d1-af28-8a7d3ee84952%40sessionmgr198&vid=0&hid=101

AND Chapters 8 and 11 from:

http://wafaa-sherif.com/new/ar/wp-content/uploads/2012/11/Enterprise%20Risk%20Management.pdf

Explanation / Answer

Solution: Assumption of an IT firm working as outsource partner for its clients. It faces many risks related with continuous foreign exchange fluctuation, interest rate risk and credit risks which affects the revenues and final profit of the firm.

The Below Matrix juxtaposes risk probability and the severances of the event. For example C9 refers to failure of customer to pay dues. For the firm it happens occasionally, though it is a critical event as it can lead to lower revenues and higher bad debt. However, the firm has considered the revenue as service has been provided.

Risk Evaluation Probability Severity

Frequent 5

F2, I4

Probable 4

Occasional 3

O11, C9

Remote 2

Improbable 1

Rating

None 1

Negligible 2

Marginal 3

Critical 4

Catastrophic 5

SEVEARITY

F2 = Foreign Exchange Risk

I4 = Interest Rate Risk

O11= Raw material

C9= Failure of customers to pay dues

Risk F2

Risk I4

Risk O11

Risk C9

Control 1

Control 2

Control 3

Control 4

C1. The contract terms could be defined such that the risk does not affect one party severally. For ex. For a predefined service the exchange rates remain fixed.

C2. Long vs. Short Monetary Position

When a devaluation of the dollar takes place, foreign assets and income in strong-currency countries are worth more dollars as long as foreign liabilities do not offset this beneficial effect. Foreign exchange risk can be analyzed by examining expected receipts or obligations in foreign currency units.

A company expecting receipts in foreign currency units (‘‘long’’ position in the foreign currency units) has the risk that the value of the foreign currency units will drop. This results in devaluing the foreign currency relative to the dollar. If a company is expecting to have obligations in foreign currency units (‘‘short’’ position in the foreign currency units), there is risk that the value of the foreign currency will rise and it will need to buy the currency at a higher price.

If net claims are greater than liabilities in a foreign currency, the company has a long position since it will benefit if the value of the foreign currency rises. If net liabilities exceed claims with respect to foreign currencies, the company is in a short position because it will gain if the foreign currency drops in value.

Similarly different control activities can be defined according to the condition and the risk.

But before implementing such controls there must be a robust system of continuous monitoring and predefined control measures in place.

Strengths and Weakness of the System

Weaknesses

Strenghts

Provides ideas for controls.