Internal Controls
XACC/280

Internal Controls
What if one of your fellow co-workers you found had been stealing from their cash register over a period of time so they did not get caught until now? What about a book keeper who had been keeping you accounting records and has been placing inaccurate information regarding transactions so they could pocket money for themselves? This is why companies have internal controls in place so it prevents certain situations from happening. Internal controls as defined in the reading are “all of the related methods and measures adopted within an organization to safeguard its assets and enhance accuracy and reliability of its accounting records” (Weygandt & Kimmel, 2008). In my thoughts internal controls is a method or process for a company to protect their assets and their employees and the company itself from liability. What internal controls are processes and methods that companies have to make sure there recording of their transactions are done properly so that the company does not get audited and in possible trouble. These are the two primary goals is to “safeguard assets and to make sure that there are accuracy and reliability of accounting records.” (Weygandt & Kimmel, 2008).
The Sarbanes-Oxley Act of 2002 “is regulations passed by congress in 2002 to try to reduce unethical corporate behavior. It imposes more responsibilities on corporate executives and boards of directors to ensure those companies’ internal controls are in order.” (Weygandt & Kimmel, 2008). Under the new law companies are forced to make “sound principles of control over financial reporting and to be able to verify it” (Weygandt & Kimmel, 2008). The Public Company Accounting Oversight Board helps maintain and regulates auditor’s activities. There are also six principles of internal controls that help and apply to most companies which are establishment of responsibility, segregation of duties, documentation procedures, physical, mechanical, and electronic controls, independent internal verification, and other internal controls. By having these different controls in place it helps a company to be able to make sure they are keeping accounting records accurate and to help their business be protected by fraud or at least try to minimize it as much as possible.
If a company were to announce deficiencies in its internal controls it would most definitely experience a fall in price of stock. Most investors want to know that their investment is sound and that they are investing wisely. One is always scared to take the risk in investing in a company because they are afraid of what could happen to their investment. In the past we have had major scandals of investments gone wrong. Such as the Enron scandal and the Tyco Co. these are huge companies and to know that accurate records were being inflated and embezzlement was going on is scary. This is why internal controls are very important to investors and stockholders. If a problem or situation has been found within a company investors and stockholders would start to pull their investments which would cause price of stock to fall.
There could be limitations to internal controls. Like the example in the reading points out that having a security guard in place and sensors to detect stolen items could be a way to slow down the theft on shoplifting. Some businesses feel that this is an ineffective way to make consumers feel uncomfortable and quite costly. So maybe a cheaper way is to install video cameras. There is also the mention of having employees scan and monitor the equipment. In some cases because of examples such as employee fatigue this can cause problems. I feel an example of this would be for shoplifting to install cameras, but to also have a floor walker trying to help customers along with being trained to know when shoplifting is happening. Also, by training multiple employees all employees can be efficient and can be rotated.
I feel that having internal controls throughout different parts of a business are crucial. A business wants to be compliant and by doing so they have to have a wide variety of difference methods and systems in place. One would be the accounting that is done by the company. By making sure all transactions are reported accurately and always reported when there are discrepancies. Another would be having security enforced by management to ensure employees are maintaining proper cash outs at the end of their shift and that all inventory is accounted for at the end of each month. I also would make sure that proper systems are put into place for customer’s information such as checks, information they choose to share with the company, and how consumers are protected. I also would want all employees’ cross-trained in a majority of areas so that all employees can detect possible situations within the company.
There are different comparisons within the internal control principles. The first on establishing responsibility is to make sure that one person is trained or authorized to have one specific duty. This is making sure the one person for examples is assigned the one task then that one person should be responsible for it and one person would take the blame instead of others who were not responsible fully. The second is using physical, mechanical, and electronic controls. These work hand in hand of each other. “With being physical that would be safeguard assets. Mechanical and electronic would be to also do the same but to enhance accuracy and reliability of the accounting records.” (Weygandt & Kimmel, 2008). The third is segregation of duties which is where an employee should be responsible for their own job and to make sure what they are doing is not being done by someone who could be duplicating and causes harm to another’s work. The last would be independent internal verification which is making sure that all work that is done by employees is verified and made sure is done accurately. These four principles work hand in hand.

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