Internal Controls

Topics: Internal control, Enron, Sarbanes–Oxley Act Pages: 8 (1221 words) Published: June 17, 2014

Internal Controls

XACC 280


University of Phoenix


This paper will discuss the internal controls and how they work in business. I will shed some light on the organizations financial and business policies, process and procedures. The purpose of these internal controls is to protect the company’s resources against fraud, misappropriate funds and most important waste. A company can spend quite a bit of money that does not make the company any profit. This paper will examine all aspects if internal controls and their functions.

When we look at the world of internal controls, there are two main goals for internal controls in a company. First is to ensure the company’s assets/trade secrets are safe. That could mean robbery, theft, fraud and other unauthorized individuals walking away with the corporation's possessions. The second primary of internal controls is to ensure the accounting/finance accounts are chronicled properly. This means that there are no account errors and receivables and payables are recorded appropriately.

Everyone in a company theoretically has internal controls. Their responsibility varies from their day-to-day involvement. President of the company and senior executives laid the foundation for ethics, competence, integrity for a positive control environment. This is important because this sets the environment in the company. If the senior staff and management hold them selves to a high standard, that should trickle down to the entire company. Head of departments have responsibility for internal controls in their divisions that are given to managers. Managers are responsible for implementing procedures and internal controls at the lower level that are then dispersed to the employee. Every person in the organization is aware the of internal control procedures that coincide with their position/responsibility. An internal audit is designed to scrutinize the competency and efficiency of the company’s internal controls and make suggestions as to how the company can improve. It is important to have an internal audit to ensure your company is adhering to the rules and standards that are put in place. Typically a company will use an outside company to complete an audit because they have no allegiance or stake in the company. Since an internal audit is to remain objective and is independent, the internal audit does not have main responsibility for creating or preserving internal controls within the company. The objective is to test the existing internal controls that are in place. Having said that, the effectiveness of the internal controls is augmented through the reviews achieved and suggestions made by an internal audit.

This brings us to the Sarbanes-Oxley Act also known as the government implemented the SOX. “An act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The Sarbanes-Oxley Act (SOX) mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud. SOX was enacted in response to the accounting scandals in the early 2000s. Scandals such as Enron, Tyco, and WorldCom shook investor confidence in financial statements and required an overhaul of regulatory standards.” “The rules and enforcement policies outlined by the SOX Act amend or supplement existing legislation dealing with security regulations. The two key provisions of the Sarbanes-Oxley Act are:

1. Section 302: A mandate that requires senior management to certify the accuracy of the reported financial statement 2. Section 404: A requirement that management and auditors establish internal controls and reporting methods on the adequacy of those controls. Section 404 had very costly implications for...
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