American stockholders have billions if not trillions of dollars invested in various publicly traded companies throughout the country. With that much money involved, it is only wise that there be control measures and safeguards put into place protect these investments from any unlawful or irresponsible activity. Publicly traded companies are required by law to develop such measures. These measures are often referred to as internal controls. These internal controls exist for two main reasons. One reason being, to keep the employees honest. With so much money and other assets involved in business every day, the temptation to steal or misuse those assets cannot be ignored. Humans are flawed beings and measures need to keep such activity from going unchecked. The second reason internal controls exist is to ensure the quality of companies accounting reports. As mentioned before, humans are flawed beings and they do make mistakes. When dealing with billions of dollars in assets, accounting mistakes can turn out to be very costly. Also, realizing that the primary goal of a company is to make money, companies may be tempted to misrepresent their accounting figures in order to facilitate their financial goals.
Although internal controls are maintained by the individual companies, they are monitored and audited under the Sarbanes-Oxley Act of 2002 or SOX act as it is often referred to. This law mandates that companies not only establish but maintain and evaluate their internal control measures. The law also holds executives legally responsible for making sure their company is in compliance. The SOX act also mandates auditing of these control measures from outside agencies. These auditing organizations are independent of the company itself ...
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...er, the measures do not come without cost. Databases must be maintained for record keeping. Personnel must be on hand to conduct internal verification. Physical control measures cost money to install, maintain, monitor and so on. There is also the human factor to consider.
In July of 2009, Walmart reported $100.1 Billion dollars in sales for the fiscal quarter. Imagine how many transactions must have taken place to amass that much money. Considering the various locations and large number of transactions, there is a large margin for human error to occur (D. Schepp, 2009). Even with the control measures in place, discrepancies will surely arise.
Overall, using internal controls are in the best interest of both investors and public companies. They are not full proof, but they are very effective in protecting investor assets and public trust in our businesses.
Implementing strategies to create an effective internal control environment is needed to prevent and detect controls of fraud (Murphy, 2015). Control is needed to combat fraud, enforcing employees and volunteers to do the right thing. Management must have control of the organizations operations to tackle risks when they arise (Arshad et al, 2015). According to Arshad et al (2015):
Even though internal controls do not always work, every entity that has workers should have internal controls. Internal controls protect entities from dishonest workers. Internal controls are a series of checks and balances. The Sarbanes-Oxley Act of 2002 was needed to gain control of accounting improprieties. Dishonest accounting has cost company employees millions of dollars in retirement funds. It has also cost investors millions of dollars.
In conclusion, internal controls include separation of duties, assignment of responsibilities, third-party verification and the use of mechanical and physical controls. In and of themselves, these tactics stop and prevent much abuse of the bookkeeping and accounting systems. The addition of Sarbanes-Oxley requirements in 2002 require that a company enact internal controls and assign responsibility of the control system to executives and directors, further providing insurance that financial reporting is accurate. Without this insurance that reports are accurate, company stock will fall and investors will be lost. Even with intrinsic limitations, the positive aspects of good internal controls far outweigh the negative implications. Good internal controls equal accurate financial records and future company success.
According to PCAOB Auditing Standard 5 paragraph 2, “effective internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. If one or more material weaknesses exist, the company 's internal control over financial reporting cannot be considered
What is internal control? According to University of Phoenix, Axia College Internal Control and Cash (2009), internal control is all of the related methods and measures adopted within an organization to safeguard its assets and enhance the accuracy and reliability of its accounting records. The primary reasons for internal control are help companies protect their investments and merchandise against theft from everyone, including employees and to make sure that the accounting is done correctly and truthfully.
This section was included to reduce potential for fraud in publicly traded companies by adding more strict procedures and requirements for financial reporting. Management was responsible to create or enhance their internal controls and follow-up with a report assessing the effectiveness of the control structure. For many companies, this section was the most complicated and most expensive to implement because it also required management to report on the shortcomings of the controls. These reports also needed to be checked for accuracy by an external, registered auditor to confirm the operation and effectiveness of the
Internal controls are a big factor in a company’s growth and value. Proper accounting practices are a big part of this process. Following the scandal caused by the unethical practices used by companies such as Enron, Tyco, Global Crossing and Worldcom, the Sarbanes-Oxley Act of 2002 was enacted. This act held companies accountable for their actions. Companies could either face fines, imprisonment or both if the act was not followed. Also, if there are deficiencies in a company’s internal control, stock prices can plummet. There are many physical, mechanical and electronic controls involved in internal controls. Some of these are good controls while others, even though helpful, are not as effective as others.
Internal controls are increasingly a crucial part of any business large or small. Controls serve two purposes according to financial accounting chapter eight; they safeguard assets and enhance the accuracy and reliability of accounting records. Expanding on that concept internal controls are put in place as a result of activities that have occurred in the past and are an effort to protect internal and external users. Internal controls safeguard company assets by outlining fair and efficient regulations in an effort to prevent theft. Regulations designed to establish responsibility, segregation of duties, and accountability protect investors, management, and the public. The result of a financial outrage and catastrophes of WorldCom, Enron, Tyco, Hollinger, and Tyco necessitated the need for better regulation and control leading to the creation of the Sarbanes Oxley Act (SOX).
Internal controls provide foundation for successful and safe organization. Information listed in this brief will provide management some insight into the internal controls and some risk organization should be aware off.
Internal controls are the controls and preventive measures that a business should consider adopting in order to prevent and mitigate cash losses from dishonest schemes by employees, customers, and other parties it deals with. Every business should institute and enforce internal controls that are effective in preventing fraud.
Since the implementation of SOX, companies are required to establish effective and efficient internal controls in order to be in compliance with the SEC requirements (Jahmani & Dowling, 2015, p. 129). According to COSO internal control is defined as “a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of the following objectives: 1. Reliability of financial reporting, 2. Compliance with laws and other regulations, 3. Efficiency and effectiveness of business operations, and 4. Protection of property” (Kanagaretnam et al., 2014, p. 30 & Kapic, 2013, p. 63). Additionally, Kapic notes internal controls contain policy and procedures that assist the company and management with smooth operations of all daily business
The report on internal controls, according to ExxonMobil’s CEO, Treasurer and Controller, states they are solely “responsible for establishing and maintaining adequate internal control over (ExxonMobil’s) financial reporting.” They evaluated the effectiveness of internal controls over financial reporting based on COSO’s framework and concluded that controls were effective (MD&A, F-22). The report in internal controls acknowledged us—ExxonMobil’s independent public accounting firm PricewaterhouseCoopers LLP (PwC)—stating that the Corporation maintained effective internal control over financial reporting for 2009 and 2010 as it is the responsibility of management to maintain and assess its effectiveness. We, PwC, are responsible only to express an opinion on internal controls, which we opined in 2009 as unqualified (MD&A, F-22).
Internal fraud is one of the biggest threats to new businesses. Employee theft is responsible for almost one-third of business failures according to the US Chamber of Commerce. Strong internal controls act as
Internal management defined in accounting and auditing is a process for assuring achievement of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies. A broad concept, internal control involves everything that controls risks to an organization. It is a means by which an organization's resources are directed, monitored, and measured. It plays an important role in detecting and preventing fraud and protecting the organization's resources, both physical and intangible.
The role of internal control to restrain the corruption in organisation is to adopt the integrated control framework to institute the internal written policies and procedures in offer to provide reasonable assurance to management and ensure compliance with the applicable rules and regulations (National Internal