Internal controls are all the procedures and measures companies put in place in order to achieve two specific goals related to accounting (Kieso, Kimmel, & Weygandt, 2011). The first goal is the protection against loss of assets from various sources such as theft or accounting error (Kieso, Kimmel, & Weygandt, 2011). Companies, clients and shareholders must have assurance that there is suitable control over all business assets like inventory and bank accounts all the way down to the actual physical handling of money. The second goal of internal controls as it relates to accounting is the promotion of accurate and reliable accounting records (Kieso, Kimmel, & Weygandt, 2011). The achievement of these two goals is critical to the success and long-term viability of businesses and because of this it is important to have an adequate understanding of internal controls and their real world application. To that end, this paper will discuss the Sarbanes-Oxley Act’s impact on internal controls, limitations and principles of internal controls, as well as give an example of an unethical accounting practice in the news and how internal controls could have helped.
The Effect of the Sarbanes-Oxley Act of 2002 on Internal Controls
Regardless of whether a person believes the Sarbanes-Oxley Act of 2002 (SOX) has been beneficial or not there is no denying this act had several significant effects on Internal Controls such as making them mandatory for publicly traded companies and creating different guidelines encouraging compliance and ethical practices (Kieso, et al, 2011). SOX immediately made all companies who did not have internal controls in place develop these systems and procedures. For those companies that did have some controls in place they had to analyze their effectiveness and make appropriate changes. A perfect example of this was Ei Lily finding redundancies and controls they needed to add when they performed a review of their
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