Allgood Ltd, a listed company, announced the appointment of Sumer, as the Company's executive director. Despite opposition by few shareholders, the management offered justifications for the new structure to be more indep

CS Professional · Environmental, Social and Governance (ESG) Principles and Practice · PYQS · December 2024
Allgood Ltd, a listed company, announced the appointment of Sumer, as the Company's executive director. Despite opposition by few shareholders, the management offered justifications for the new structure to be more independent and investor friendly. It indicated that foreign investors were optimistic about the future of the Company and expected better financial results. The Company has been actually witnessing and struggling to address certain corporate governance challenges. A small shareholder filed a law suit against the Board of Directors' misuse of corporate funds. Rishi, the present Chairman and CEO, was working with the Company since last sixteen years and was a close family friend of Promoters. His leadership style being democratic, he was liked and praised by everyone. He was often found meeting people at all levels within the organisation and called for trying new things. His philosophy diminished conflicts and tensions in pursuit of goal setting and achieving. He believes that as long as dividend is paid to shareholders and earnings per share increases, the market values the stock. To address the changing business situations and the perception of the various stakeholders, Rishi had a detailed discussion with Sumer, to identify the further course of action, as Sumer had experience in managing crisis. Both of them evaluated various aspects threadbare and concluded that they should appoint some professional firm, who would do a detailed review and suggest the way forward to address these issues. In consultation with other directors and senior management, they appointed Mangal & Co., a consulting firm, to evaluate the present situation and suggest the best practices to mitigate these issues. The consultants were provided with the following shareholding pattern as on March, 31, 2024: Type of Shareholder Holding % Promoters 51.60 Mutual funds 7.25 Domestic financial institutions and Banks 24.75 Foreign institutional investors 10.40 Corporate bodies 4.60 Individuals 1.40 Total 100.00 Mangal & Co., performed a detailed evaluation of the Company's process and procedures, including its corporate governance practices and suggested that the Company should strengthen the role and position of a Company Secretary, who would not only be a focal point for the governance aspects, but also assist in the risk management process. Develop a robust system of internal controls and internal audit, which would support the management and also have a crisis management plan, which would help the Company to prepare a strategy in identifying and responding to threats. In the background of the above facts, answer the following: Explain internal control and indicate the difference in scope of risk management and internal control.

Answer & Explanation:

Internal control is essential to the smooth operation and daily operations of a firm and it helps the organization accomplish its corporate goals. The range of internal control is extensive. It includes all controls included into the strategy, governance, and management processes, including the full spectrum of activities and operations carried out by the organization and not simply those directly associated with financial operations and reporting. Its scope encompasses all facets of a business, including those that could be broadly categorized as compliance matters as well as aspects related to performance. Control must not be viewed as a burden on business but rather as a tool for maximizing business prospects and minimizing possible losses brought on by unfavourable circumstances. Successful businesses should also avoid being complacent or oblivious to their own success. There are many instances of businesses whose success has been at risk due to a lack of or flaws in internal controls. Scope of Risk Management and Internal Control: It is the responsibility of each business to put in place risk management and internal control systems that are suitable for the circumstances. In a group, the parent company must make sure that each of its subsidiaries has internal control and risk management procedures in place. These systems must be modified to account for the unique traits of the subsidiaries and their interactions with the parent company. A parent company should take care to consider the possibility of familiarizing itself with and reviewing its affiliate's measures regarding risk management and internal control when it has a sizable equity interest and significant influence over an affiliate. Risk management focuses on identifying threats and opportunities, while internal control helps counter threats and take advantage of opportunities. Proper risk management and internal control assist organizations in making informed decisions about the level of risk that they want to take and implementing the necessary controls to effectively pursue their objectives. Successful organizations integrate effective governance structures and processes with performance-focused risk management and internal control at every level of an organization and across all operations.

Topics: Risk Management, Internal Control

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