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Enron case study facts and summary
Lessons learnt from enron coperations
Enron case study facts and summary
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Many people mistakenly believe that the greatest risks companies face are from outsiders. However, studies have shown that internal risks are far greater and more frequent than external risks. Many companies have not only lost billions of dollars but have also perished under the weight of internal unethical activities. A popular example of an organization that crashed due to poor Internal Controls is Enron. In the world today, Manual systems are constantly being replaced by Accounting Information systems (AIS). Even though AIS is extremely important to all organizations, it also brings with it, its own unique set of problems. To mitigate the risks and minimize the possibility of fraud or errors, an organization must have effective internal controls. According to the online business glossary, ‘Internal control is the plan of an organization and all the methods and measures used by a business to monitor assets, prevent fraud, minimize errors, verify the correctness and reliability of accounting data, promote operational efficiency, and ensure that established managerial policies are followed’. (Retrieved from http://www.allbusiness.com/glossaries/internal-control/4943791-1.html) Internal Controls must assist the accounting information system in reaching its objectives. It must not hinder the organization in any way. The concepts must be woven into the day-to-day responsibilities of managers and their staff and also into the AIS of the organization. BENEFITS OF INTERNAL CONTROL There are numerous benefits of having an effective Internal Control in place in an organization. Apart from making sure that the company does not lose money because of different types of theft or misappropriation of information, Internal Control helps to ensu... ... middle of paper ... ...endent employee. This verification could be done periodically or on a surprise basis and all discrepancies and exceptions noted during verification must be reported for corrective action. Human Resources also has a part to play in Internal Control. Thorough background checks must be carried out on all employees. HR must verify all the records provided by the job applicants and must also be on the lookout for past offences or past records. Ensuring that only trained, trustworthy, knowledgeable and competent personnel access the accounting information system to perform tasks prevents errors, irregularities and fraud. Also, Human Resources must make it a point of duty to rotate shifts, employee duties and require employees to take vacations. Many organizations have discovered several unethical practices when an employee was on vacation or assigned to a new position.
Internal controls is defined as a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance
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.
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
Without such controls it would be difficult for most business organizations like Trinity Industries with numerous locations, operations, and processes to prepare timely and accurate financial reports. Since no control system can guarantee that financial statements will not contain material errors or misstatements, an effective internal control system can reduce the risk of misstatements. Internal Controls should therefore be designed and implemented with the risk of fraud in mind and tailored to the circumstances of the company. In the case of Trinity part of the SOX project was to identify key process, by interviewing organizational members to understand how the processes and controls worked within the company, and who was responsible. With guidance from PCAOB AS No.5 they identified the gaps of controls and took steps to close them.
In order to be successful in business, a company must be able to track their assets. This tracking system is typically done by a bookkeeper and must be reliable in order to be effective. The way a company ensures their financial records are reliable is by setting up a system of internal controls. Internal controls allow a company to protect its assets from fraud and theft as well as ensuring records are kept accurately by reducing errors and irregularities (Keisco, Kimmel and Weygandt, 2008). Internal controls work by assigning responsibility, separating duties to provide checks and balances, hiring an independent verification agent and through the use of technology and physical controls. In many instances, internal controls are required and overseen by the Sarbanes-Oxley Act of 2002.
In order to deter fraudulent activities by both management and employee, many companies employ an internal control system. A system of internal controls is a group of processes and procedures in writing, that are put into place by the organization to achieve operational efficiency, effectiveness, reliable financial reporting and to encourage incorruptibility. One of the major leading authorities on the issue is an organization out of the United States called the Committee of Sponsoring Organizations of the Treadway Commission (COSO), which is a joint initiative of five private sector organizations, who provide thought leadership through the development of frameworks and guidance on enterprise risk management, internal control and fraud deterrence,
The Hollate Manufacturing case provided by Anti-Fraud Collaboration has well illustrated how several common issues in an organization contributed to the fraud’s occurrence. These issues can be categorized into two major groups: ethical culture (internal aspect) and internal control system (external aspect). By taking effective actions to enhance these two aspects, an organization can protect itself against the largest frauds, which result in financial and reputational damage.
I am interested in conducting research and teaching in managerial accounting, auditing and assurance services and accounting information systems. In particular, I am interested in exploring the role of accounting information systems in decision making, internal control, and auditing. In order to gain an appreciation of these and related issues, it is essential for me to have a strong grounding accounting, accounting information systems, information technology, managerial accounting, as well as gain a general economic and management perspective.
Auditing has been the backbone of the complicated business world and has always changed with the times. As the business world grew strong, auditors’ roles grew more important. The auditors’ job became more difficult as the accounting principles changed. It also became easier with the use of internal controls, which introduced the need for testing, not a complete audit. Scandals and stock market crashes made auditors aware of deficiencies in auditing, and the auditing community was always quick to fix those deficiencies. Computers played an important role of changing the way audits were performed and also brought along some difficulties.
An Accounting Information System (AIS) can be defined as software that helps accountants to collect data and process it to create information ((Bagranoff, Simkin and Norman 2010)
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.
As an emerging high-tech and wide applied industry, IT industry has relatively high inherent risks even effected by other industries. In the process of development, managers and auditors keep seeking effective and efficient internal controls to reduce the risks as possible. When audit a company operating in IT industry, auditors need to consider the size and complexity, especially the technical risks.
The following essay aims to analyse in depth a computerised accounting system and its aspects such as its history, what technologies is based on, and how it has developed since its beginning. Other aspects such as the current state of the system and the interactions with other systems and the future of the system will also be covered in this paper.
Modern information system is now popular all over the world, it also change the accounting area. Instead of the old manual analysis, many companies making effort in developing a fitted accounting information system for themselves, as they realize the advantages that the new technology brings in - more efficient and accurate in processing, integrated data, detailed record etc. However, even though there are so many benefits, the functional system also brings challenges, making new requirements to the accountants and auditors. This paper will discuss the impact of technology to the accounting information system, as well as the necessary capability ethics that the accountants should learn in this 21th century.