Internal Controls

Megan Mitchell

March 14, 2013

XACC/280

Paul Gomez

Internal Controls 2

In order to maintain a company’s security and accuracy, a company will take all related measures and measures adopted within an organization in the form of internal controls. Internal controls are an essential way to maintain conformity with other company’s, to safeguard assets from employee theft, robbery and unauthorized use, and enhance accuracy and reliability of it’s accounting records (Weygandt, Kimmel, & Kieso, 2008). Since major company’s such as WorldCom and Enron were able to commit such extreme measures of fraud, in 2002, Serbanes-Oxley Act (SOX) was passed by congress to ensure company’s enacted internal controls and required them to maintain an adequate system of internal controls (Weygandt, Kimmel, & Kieso, 2008). The SOX requires that all companies must develop sound principles of control over financial reporting, continually verify that the controls are working, and an independent auditor must attest to the level of internal controls. There should be physical, mechanical, and electronic controls so that when jobs are segregated, there are more than one opportunity for a final verification of accuracy (Weygandt, Kimmel, & Kieso, 2008). In years prior to the SOX, the heads of companies did not pay very close attention to the many individual jobs that were necessary to maintain an accurate accounting system. When a business allows multiple people to manage the same duties, a larger margin of error is created (Weygandt, Kimmel, & Kieso, 2008). To correct this, a few principles of internal controls were created. Companies began to realize that controls are most effective when only one person is responsible for a
Internal Controls 3 given task. For example, the till of a restaurant comes up short on cash, but two people were running that till. This creates a segregation of blame and it is one person’s word against the other. If only one person were responsible for that till, there would be no question of who is responsible. This corresponds with the segregation of duties. The main goal of segregation of duties is, “The work of one employee should, without a duplication of effort, provide a reliable basis for evaluating the work of another employee.” (Weygandt, Kimmel, & Kieso, 2008). If one individual is responsible for many duties, the margin of errors grows. Along with these principles of internal controls, there are also physical, mechanical, and electronic controls that are often implemented. Physical controls can be in the form of a lock, code, fingerprint or eyeball scans. These controls verify that only the person responsible for information can access it. Mechanical controls include alarms to prevent break in, TV monitors, and time clocks for recording who worked when (Weygandt, Kimmel, & Kieso, 2008). If a company were to announce deficiencies with internal controls, it would be a safe assumption that they would experience a fall in stock price. Investors now depend on internal controls for the reliability of a company’s financial stability. From recent experience with the downfall of companies like Enron, investors are a little more weary when it comes to investing. Enron is a perfect example of what happens when there are way to many people with too little information. If they were to have established responsibility, then the scandal within the company may have come to light long before so many people lost their money.
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Though internal controls are vital to providing a level of confidence for financial data, they are not fool proof. Everything has limitations and internal controls do as well. The wrong staff member trained to work with financial information can still manipulate data for their own purposes. Most companies that have internal controls but still experience fraud have had someone inside that they trusted but turned out to be untrustworthy. If the people responsible for internal controls are not monitored, collusion can still occur. This means there still has to be someone watching the watcher, and this creates another job. Sometimes, people slack on these duties because they add to an already heavy work load. Unfortunately nothing is fool proof, and money is such a strong force that often encourages people to act unethical no matter how many barriers are in their path. This is all the more reason to invest in companies that rely heavily on internal controls. Without them, there is nothing but trust safeguarding a company’s assets and there are plenty of examples of where trust is not enough. Internal controls are a vital and even legal part of a company because they mean that a company has taken your safety seriously and is trying to protect your investment.

References

CliffsNotes.com. Internal Control. 15 Mar 2013
<http://www.cliffsnotes.com/study_guide/topicArticleId-21081,articleId-21006.html>.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2008). Financial accounting (6th ed.). Hoboken, NJ: Wiley.