Internal Controls are to be an integral part of any organization's financial and business policies and procedures. Internal controls consists of all the measures taken by the organization for the purpose of; (1) protecting its resources against waste, fraud, and inefficiency; (2) ensuring accuracy and reliability in accounting and operating data; (3) securing compliance with the policies of the organization; and (4) evaluating the level of performance in all organizational units of the organization. Internal controls are simply good business practices (Strauss, 2003). And, since internal controls can have many more meanings in the world of accounting, the more we understand what were dealing with, the better we can analyze internal controls. As far as a company goes, internal controls are the inside (internal) workings of a business. However, in accounting, these controls permit the financial departments of an organization to use a set of rules to follow and process financial information. By following these guidelines any individual can correctly process information, and not have to worry about any ramifications to any worker who gave the correct information to the human resource department. We will be discussing two key objectives of internal controls, and the Sarbanes Oxley Act of 2002. And, we will look at what can happen to a companies’ stocks if internal controls are not being follow, do to inaccurate financial statements.
The two main goals of internal controls are to protect the assets of the company from employee stealing, and to protect assets from unlawful use. Both of these goals can help to “enhance the accuracy and reliability of accounting records. This is done by
reducing the risk of errors (unintentional mis...
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... so will employees who work for that company. The public image of distrust will led customers or investors away from that company causing it stock – if a public company to drop and potential going out of business and causing workers their jobs.
In closing as we look at internal controls for companies it is a way to keep them doing the right thing both moral and ethical. Managers are now held responsible for their actions and this was thanks to “The Sarbanes Oxley Act.” Everyone in that corporation from the top down must follow the correct procedures. These way investors can invest knowing internal controls are there for their protection. As long as humans are involve in internal controls, the chance of someone getting around them for their own personal gains is possible, but at lease everyone knows when these people are caught, they will pay a high penalty.
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):
Internal controls are in place to protect entities against theft from dishonest workers and outside predators. They are also an accurate series of checks and balances and are in place to find discrepancies.
It has been a decade since the Sarbanes-Oxley Act became in effect. Obviously, the SOX Act which aimed at increasing the confidence in the US capital market really has had a profound influence on public companies and public accounting firms. However, after Enron scandal which triggered the issue of SOX Act, public company lawsuits due to fraud still emerged one after another. As such, the efficacy of the 11-year-old Act has continually been questioned by professionals and public. In addition, the controversy about the cost and benefit of Sarbanes-Oxley Act has never stopped.
In 2002, Congress passed the Sarbanes-Oxley Act (SOX) to strengthen corporate governance and restore investor confidence. The act’s most important provision, §404, requires management and independent auditors to evaluate annually a firm’s internal financial-reporting controls. In addition, SOX tightens disclosure rules, requires management to certify the firm’s periodic reports, strengthens boards’ independence and financial-literacy requirements, and raises auditor-independence standards.
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
ensure that management is doing what it can to establish means of effective internal controls by having to report on them.
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.
There are two primary goals of internal control. The first goal is to keep assets safe from robbery, theft by the employees, and any other unauthorized use. The second goal is to assure the reliability and accuracy of the accounting records. This step is done to reduce the risks of mistakes, intentional or unintentional in the accounting process.
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.
In today’s business world, an accountant and business owners should work together in order to become aware of scandals that occur in corporate companies. Since 2008 a series of corporate scandals and collapses have highlighted the importance of effective board oversight. One of the largest scandals in the corporate world was known as the Madoff’s Ponzi scheme. I will discuss the details of how an accountant allowed Maddoff to continue with his involvement in the Ponzi scheme. Since then, the board of accountancy is mandating that all corporate companies have good internal controls and getting more involved managing risks within the organization. This is becoming an essential role in maintaining a good system of internal control.
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
It is important to develop and maintain internal controls inside nonprofit organizations because they assist in maintaining ethical standards. According to the National Council of Nonprofits (NCN) internal controls are financial management practices which are systematically used to prevent misuse and misappropriation of assets
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).