[Tutorial note: reward answers arguing for Jayland if shown to be based on reasoning from step 6]
(c) General purposes of internal control systems and main challenges.
General purposes
The first general purpose of internal control is to achieve the orderly conduct of business by facilitating effective and efficient
operation of an organisation’s activities. In doing this, it must be able to respond appropriately to relevant risks and to
configure activities to be able to achieve the organisation’s strategic objectives. This includes safeguarding the assets of the
organisation from external and internal threats and to ensure that all actual and potential liabilities and sources of loss are
identified and controlled. The protection of value is important in underpinning confidence in internal controls and in providing
the capacity for future value adding.
Internal controls are essential in ensuring the robustness, quality and timeliness of both internal and external financial
reporting. The provision of this information is important in managing internal systems (e.g. budgetary controls) and in
maintaining and cultivating confidence among shareholders and capital markets. This involves maintaining accurate records
and processes capable of generating and processing the relevant information.
Internal control is necessary to ensure compliance with any external laws, standards or regulations that apply. These could
arise from companies’ legislation, listing rules or, in some industries, regulations imposed by sector-specific regulators.
Main challenges
Jayland was very under developed until relatively recently and the national culture is, according to Emily Baa, unfamiliar
with modern business practice and behaviour. Achieving effective and efficient operation of the business would be an early
priority for the Hayho investment and this limitation would necessitate substantial initial training and cultural-familiarisation.
If these cultural values (e.g. time-keeping, work commitment, honesty of workers, etc) cannot be taken for granted in a
national culture then it represents a major obstacle in achieving normal plant operation.
Emily reported an unknown security situation in the region with regard to the safeguarding of assets. Being able to ensure
that non-current assets owned by Hayho are secure and being used for the intended purpose is an essential element of
internal control. The value of Hayho belongs to its shareholders and it would be irresponsible of the board (as agents) to invest
in assets in Jayland unless reasonable assurances could be given that they will be safe from sabotage, damage, theft,
deterioration or inefficient utilisation.
Emily’s third point was about the level of necessary skills in the local labour pool. She mentioned the state of quality control
and accounting skills and both of these are necessary for a sound system of internal control.
Appropriate quality control staff are necessary to ensure that the product complies with the stringent international product
standards that apply to Hayho’s products. Where technical skills such as these are difficult to obtain in local labour markets,
unskilled people may need to undergo training, or expatriates may need to be persuaded to move to the Jayland facility.
Guaranteeing that outputs from the Jayland plant were fully compliant with all applicable standards would be an important
early priority for customers and investors and so this issue is likely to be of great importance.
Accounting skills are necessary for guaranteeing accurate and complete accounting records and for reliable financial
information. Gathering required data and reporting to management at head office is required, for example on metrics such as
variance against agreed targets. For a new investment such as those being considered by the Hayho board, the provision of
accurate and timely information is essential in controlling activities under either of the options.
