Internal Controls

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Internal Controls

Internal controls are all of the protocol and methods by which a company or organization protects its assets and ensures the correctness and reliability of its financial and accounting records. Tight internal controls are essential to any company that desires confidence in its stockholders and clients. Recent accounting scandals at companies such as Enron and Tyco have necessitated the need for strong internal controls and accounting procedures. As a result of these accounting scandals new legislations and organizations have been developed to audit private companies and ensure that the proper controls are in place.

The Sarbanes-Oxley Act of 2002 (SOX) was passed after the Enron scandal had been all over television headlines. It was clear that something had to be done to ensure that companies practiced and adhered to sound accounting principles and that they were verified often. SOX did just that: [it] “imposes more responsibilities on corporate executives and boards of directors to ensure that companies’ internal controls are reliable and effective”. (Weygandt, Kimmel and Kieso, 2008) SOX has increased the job demand for accountants and highlighted the importance of this department to an organization. Companies have experienced increased productivity and efficiency since the implementation of SOX requirements, as the tighter controls have force companies to audit the procedures and methods in which they record, organize, and calculate information. Many shortfalls can be easily brought to light with the new procedures, as they are more thorough and require frequent auditing. Companies that do not comply with SOX are subject to prosecution or fines from the government. SOX created the Public Company A...

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...cts of internal controls so employees who handle cash must be checked periodically to ensure that they are not trying to scam the employer.

Internal controls are essential to organizations as they safeguard assets and ensure the accuracy and reliability of accounting practices. As we have seen in the past from companies like Enron and Tyco companies who fail to maintain proper internal controls see their stocks plummet and lose consumer confidence. Thanks to SOX internal controls have been reinvented and more emphasis has been put on the need for them. No system can ever be perfect as there are humans who are responsible for each aspect of internal controls. What we can do is learn from the mistakes we have witnessed to maintain the effectiveness of internal controls as they will be ever changing due to technology and periodic penetration of controls.

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