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Accounting fraud and sarbanes oxley
Internal control (review of literature
Literature review on internal control
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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. The Sarbanes-Oxley Act of 2002 (SOX) was named after Senator Paul Sarbanes and Michael Oxley. The Act has 11 titles and there are about six areas that are considered very important. (Sox, 2006) The Sarbanes-Oxley Act of 2002 made publicly traded United States companies create internal controls. The SOX act is mandatory, all companies must comply. These controls maybe costly, but they have indentified areas within companies that need to be protected. It also showed some companies areas that had unnecessary repeated practices. It has given investors a sense of confidence in companies that have complied with the SOX act. The SOX act section 404 requires that the auditor assess the company’s management of internal controls and report on it. The act requires that a company include a copy of the internal controls in the year end annual report. All financial statements must be certified by a company’s management. (Coustan, 2004) A company that announces deficiencies in its internal control will more than likely have a fall in their stock prices. Investors will not trust that company’s financial information. The investors know that the company will be hit with fines for not complying with the regulations. No honest investor wants to be involved with a company that defies the government. There are some limitations of internal controls. One is a person knowing the system. This person knows when everything is done and how it is done he or she can find a loophole and use it to his or her advantage. Another limitation is... ... middle of paper ... ...l. If a transaction is missing or the cash on hand is not adding up management should be notified. 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. Works Cited A Guide to the Sarbanes-Oxley Act of 2002 (2006). Retrieved December 16, 2009 from www.soxlaw.com Coustan, H., Leinicke, L.M., & Rexroad, W.M., Ostrosky, J.A. (2004). Sorbanes-Oxley What it means to the marketplace. Journal of Accountancy. Retrieved December 17, 2009 from www.journalofaccountancy.com
Internal controls is defined as a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance
Siegel, P. H., Franz, D. P., & O'Shaughnessy, J. (January 01, 2010). The Sarbanes-Oxley Act: A Cost-Benefit Analysis Using The U.S. Banking Industry. Journal of Applied Business Research, 26, 1.)
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
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.
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.
Romney, Marshal, and Paul Steinbart. Accounting Information Systmes. 10th ed. Upper Saddle River: Pearson Education, 2006. 193-195.
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 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.
Firms must not rely on internal controls when they have smaller reporting issues. When assessing effectiveness internal controls firms usually fail to identify and test controls that mitigate audit risk at assertion level.
Sarbanes-Oxley Act of 2002 (SOX), Pub. L. No. 107-204, 116 Stat. 745 (codified as amended in scattered sections of 15 U.S.C.)
In fulfilling its responsibilities for the integrity of financial information, management maintains and relies on the Company’s system of internal control. This system is based on an organizational structure that efficiently delegates responsibilities and ensures the selection and training of qualified personnel. Management believes that to date, the internal control system of the Company has provided reasonable assurance that material errors or irregularities have been prevented or detected and corrected
Failure to maintain internal control can have devastating effects. For example, Enron company did not properly follow a system of internal controls. As a result, the company collapsed, leaving thousands of employees and investors to suffer the consequences. As a result, the Sarbanes-Oxley Act of 2002 was established. It requires publicly traded companies to disclose internal control reports and imposes stiff penalties for those who do not adhere to it.
Internal controls help to ensure that an institution or business entitiy is in compliance with the laws and regulations affecting the operations of our business.
In conclusion, I found that Exton Industries has some internal controls that will prevent fraudulent financial reporting and misappropriation of assets however, they are lacking effective internal controls as well. As a result of Exton Industries having weak internal controls, control risk is increased and the audit team will need to choose higher control risk strategies. If controls in the areas lacking are not improved the control environment will fail to protect future fraudulent acts.
Overall, the company is having ineffective controls regarding different departments and in the whole organization. An effective internal audit department should be established within the organization which should test the effectiveness of these controls on regular basis and make it sure that all controls are working effectively and efficiently with the different departments of the organization. Also the Internal auditor should implement the most effective processes and measures to prevent and detect the fraud, corruption and non compliance with the laws and regulations in the organization. Establishment of internal audit committee would be helpful in this regard which comprises of executive and non executive directors.