There are two primary goals of internal control. The first goal is to keep assets safe from robbery, theft by the employees, and any other unauthorized use. The second goal is to assure the reliability and accuracy of the accounting records. This step is done to reduce the risks of mistakes, intentional or unintentional in the accounting process.
The Sarbanes-Oxley Act was implemented in 2002. This act was implemented as a result of a number of accounting scandals that resulted in the loss of billions of dollars to the investors. This act has eleven sections that range from additional company board responsibilities to criminal penalties. This act has made companies more accountable in their accounting practices. If a company knowingly falsifies, conceals, covers up, destroys ,or falsifies any documents to impede, obstruct or influence any investigation of violations of the law can be fined or imprisoned up to twenty years , or both. This makes companies take responsibility of their actions.
A company that announces deficiencies in their internal controls would experience a fall in their stock for several reasons. Following the unethical practices of companies such as Enron, Tyco, Global Crossing and Worldcom which resulted in the loss of billions of dollars to investors, a company with inadequate accounting practices would not be a good investment. By a company announcing deficiencies in its internal control, they would start stockholders scrambling to get rid of their stocks. In doing so, the price of this companies stock would plummet. Nobody wants stock that is unstable.
A limitation of internal controls is that it can only provide reasonable assurance, due to limitations inherent in all internal control syste...
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...her improprieties.
Internal controls are a big factor in a company’s growth and value. Proper accounting practices are a big part of this process. Following the scandal caused by the unethical practices used by companies such as Enron, Tyco, Global Crossing and Worldcom, the Sarbanes-Oxley Act of 2002 was enacted. This act held companies accountable for their actions. Companies could either face fines, imprisonment or both if the act was not followed. Also, if there are deficiencies in a company’s internal control, stock prices can plummet. There are many physical, mechanical and electronic controls involved in internal controls. Some of these are good controls while others, even though helpful, are not as effective as others.
Works Cited
Internal Control and Cash
The American Institute of Certified Public Accountants
Wikipedia
Internal controls is defined as a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance
The book defines Locus of control a reflection of whether people attribute the causes of events to themselves or to the external environment. Neurotic people tend to hold an external locus of control, meaning that they often believe that the events that occur around them are driven by luck, chance, or fate. Less neurotic people tend to hold an internal locus of control, meaning that they believe that their own behavior dictates events (Colquitt, J. A., LePine, J. A., & Wesson, M. J. 2017).
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
The report on internal controls, according to ExxonMobil’s CEO, Treasurer and Controller, states they are solely “responsible for establishing and maintaining adequate internal control over (ExxonMobil’s) financial reporting.” They evaluated the effectiveness of internal controls over financial reporting based on COSO’s framework and concluded that controls were effective (MD&A, F-22). The report in internal controls acknowledged us—ExxonMobil’s independent public accounting firm PricewaterhouseCoopers LLP (PwC)—stating that the Corporation maintained effective internal control over financial reporting for 2009 and 2010 as it is the responsibility of management to maintain and assess its effectiveness. We, PwC, are responsible only to express an opinion on internal controls, which we opined in 2009 as unqualified (MD&A, F-22).
Li, C., Peters, G. F., Richardson, V.J., & Weidenmier Watson, M. (2012). The Consequences of Information Technology Control Weaknesses on Management Information Systems: The Case of Sarbanes-Oxley Internal Control Reports. MIS Quarterly, 36(1), 179-204.
(SOX). This specific act requires management of the company “to assess both the design and
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.
The company concealed huge debts off its balance sheet, which resulted in overstating earnings. Due to an understatement of debts, the company was considered bankrupt in 2001. Shareholders lost $74 billion and a lot of jobs were lost because of the bankruptcy. The share prices of Enron started falling in 2000 and in 2001 the company revealed a huge loss. Even after all this, the company’s executives told the investors that the stock was just undervalued and they wanted their investors to keep on investing. The investors lost trust in the company as stock prices decreased, which led the company to file bankruptcy in December 2001. This shows how a lack of transparency in reporting of financial statements leads to the destruction of a company. This all happened under the watchful eye of an auditor, Arthur Andersen. After this scandal, the Sarbanes-Oxley Act was changed to keep into account the role of the auditors and how they can help in preventing such
In this approach, the focus will be on the internal control objectives so that the control design can be well assessed. First, the auditor will define the control measures and objectives and then find out which measures already installed meet the objectives (Tyrer, 1994).
The role of internal control to restrain the corruption in organisation is to adopt the integrated control framework to institute the internal written policies and procedures in offer to provide reasonable assurance to management and ensure compliance with the applicable rules and regulations (National Internal
While evaluating Exton Industries, I had to consider how the control environment would prevent misstatements arising from misappropriation of assets and fraudulent financial reporting.
Internal control is designed and implemented by an entity's management to provide assurance regarding the achievement of objectives of effectiveness and efficiency of operations, reliability and timeliness of financial reporting, prevention and detection of fraud and error, and compliance with applicable laws and regulations. Besides, internal control plays a vital role in how management meets its stewardship or agency responsibilities. An entity's internal control extends beyond those matters that relate directly to the functions of the accounting system; and it consists of the following five components which are the control environment, the entity's risk assessment process, the information system and related business processes
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...
Internal control, accounting and auditing , as defined in an organization's operational efficiency and effectiveness , reliable financial reporting , and laws, regulations and policies to ensure uyumhedeflerineulaşıl is a process . A broad concept of internal control includes control all risks to an organization .
...r whether its internal controls are able to address new risks. Monitoring occurs both on an ongoing basis and one-time evaluations. Risk monitoring not only evaluates the performance of risk-reducing measures but also serves as a continuing audit function (Bandyopadhyay, Mykytyn, & Mykytyn, 1999). [13] Internal audit activities can test the design and effectiveness of internal controls and find out potential material misstatements in the financial report.