Internal Controls xxxxxx Accounting 280
April 8, 2012 xxxxxxxx Internal controls ensure that all public companies follow a standard set of rules to operate and report finances in business. It is required by law to monitor the different models of internal controls. According to Renee O'Farrell (2012), "'internal controls' can be defined as actions and procedures by which a company monitors itself". The two primary goals of internal controls are to safeguard assets from theft and unauthorized use, and to enhance the accuracy and reliability of company accounting records to avoid errors and irregularities in the accounting process. The establishment of responsibility, the use of physical, mechanical, and electronic controls, the segregation of duties, and the independent internal verification are internal control principles. Establishing responsibility is necessary to hold all employees responsible for the records reported. If a company successfully reports records inaccurately, the scandals that occurred in the early 2000s could be repeated. By holding employees, management, the board of directors, and auditors responsible, it helps control that documents and records are truthful when reported. This allows the shareholders' of the company to make the best financial decisions with the information given (Internal Control", 2012). The physical control of the company is established as a safeguard for records. This includes physical safeguards and IT Security. Physical safeguards is the "use of cameras, locks, physical barriers, etc. to protect property, such as merchandise inventory" ("Internal Control", 2012). With the use of IT Security, documents are "restricted to authorized personnel" through items such as employee ID cards, locks, and security codes. The segregation of duties creates a system of checks and balances by ensuring that no two people have the same responsibility in the company. "Separating authorization of transactions, custody, and record keeping roles" ensure that one person is not held solely responsible or able to make an error in reporting or commit fraud ("Internal Control", 2012). Independent internal verification is necessary to ensure that all the reports are accurate. This means that the work is double checked by someone who did not initially do the work. Management will review and compare reports based on "performance versus objectives" ("Internal Control", 2012). Without internal controls, companies would be able to withhold pertinent financial information from the public. This could lead to a lack of confidence by the public and cost them billions of dollars when investing in companies that are scandalous. In the early 2000s, companies such as Enron, Tyco, and World Com contributed to the distrust of their investors and the public. The Sarbanes-Oxley Act of 2002 was created to detour their actions from occurring again. The Sarbanes-Oxley Act made it mandatory to discipline corporations that withheld financial information and who operated fraudulently ("Sarbanes-Oxley Act", 2012). According to Charles Hecht (2002), there are only "four significant changes in accounting" after the Sarbanes-Oxley Act of 2002 (SOX) was implemented. "New penal law adds "significant fines and longer jail time for corporate executives who improperly sign-off willingly" on financial documents. This along with a longer stature of limitations for claims of "fraud, deceit, manipulation or contrivance in contravention of regulatory requirement concerning the securities laws" holds company executives responsible for activities that are fraudulent. Hecht (2002) then indicates that a "five member oversight board for the accounting industry" was created. The board reports to the SEC and the SEC provides them with responsibility in the accounting world. They investigate fraudulent activity. The last change in accounting is the "increased role of state prosecutors and attorneys general in enforcing the securities law." This will ensure that the SEC will become more involved in the enforcement of the actions in financial practices (Hecht, 2002). Announcing a deficiency in the internal controls of a company would probably lead to the stock prices dropping. Investors would have an uncertainty of the company's financial statement accuracy. They would also be concerned that their assets were not properly protected against fraud and theft. There are some limitations to internal controls; no company will be completely safeguarded from errors and fraud; some companies are subject to inventory theft, with or without cameras. There is also the chance that those in charge could abuse their rights and mishandle their duties; making the company susceptible to errors, fraud, and theft. Another risk would be not enough man power; not having enough employees to fulfill the duties and responsibilities could cause limitations to internal controls as well. There are still apparent risks associated in areas of accounting and detection despite the internal controls. Running a successful business relies on much more than increasing profits. Having a knowledgeable, ethical staff will benefit the company as well. The external factors of competition and technology may inhibit whether an organization achieves their company's objectives (Wikipedia, 2012). Because these factors are not a part of the internal objective of internal control, achievement cannot be guaranteed. Safeguarding financial statements and ensuring that they are reliable are the two primary objectives of internal control. The principles involved and the SOX creates barriers for top-level executives to report fraudulent reports to the public. The changes have changed the accounting business permanently, but there are still risks that could be associated. These limitations could be internal or external.

References
Hecht, C. (2002). Four significant accounting changes of the Sarbanes-Oxley Act. Retrieved from http://accounting.smartpros.com/x34948.xml
Internal control. (2012). Retrieved from http://en.wikipedia.org/wiki/Internal_control#Limitations
O'Farrell, R. (2012). What are internal controls & their purpose?. Retrieved from http://www.ehow.com/about_5383237_internal-controls-purpose.html
Sarbanes-Oxley Act. (2012). Retrieved from http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act#Implementation_of_key_provisions