INTERNAL CONTROLS

Internal Controls: Increasing Responsibility within Organizations Corporations struggle with the difficulty of tracking every transaction and every dollar, and it becomes much more difficult when there are millions of dollar being distributed and collected over any given time. This is when a company must have strong internal controls to account for where these transactions have taken place and that they are accurate. Internal Controls is an accounting procedure or system designed to promote efficiency free from errors and assure the implementation will safeguard assets to avoid internal fraud, theft, and or robbery. (Fellbaum, 2005) The Sarbanes-Oxley Act of 2002 was enacted by Congress to protect investors and companies from internal fraudulent accounting. It was created in response to a large amount of corporate scandals that were occurring involving accounting fraud. The Sarbanes-Oxley Act requires top level executives and board of directors of these corporations’ additional responsibilities to ensure that their internal controls are effective. (Investopedia, 2012) Under the act each company must develop sound principles of control over financial reporting. (Weygandt, 2008) The top level executives must also sign off on the financial reporting is accurate prior to disclosing the financial statements. In addition companies must have independent external auditors review internal controls to verify their effectiveness. Companies who have successfully implemented internal controls are benefiting causing less accounting errors and better financial reporting. Investors have more trust in whom they are investing in preventing the fear of fabricated financial figures. When a company expresses deficiencies within its internal controls there can be a drop in stock prices. Investors want a company that has strong internal controls to ensure that the money they invest in the company is going to be used in the capacity it was meant for and not for fraudulent reasons. , Internal controls also allow all employees including top level executives to be able to pinpoint errors and losses efficiently and the ability to correct them. If there are deficiencies within the internal controls, if financial issues arise they will continue because will be an inability to correct them quickly causing financial losses. Investors will not invest in companies with weak controls because it means loss of revenue which can create loss in profit and dividends. Internal controls don’t ensure that theft, fraud and errors will not occur. There are still limitations to internal controls. Most internal controls are still done by people or the human element, and therefore there can still be errors. (Weygandt, 2008) The person who could be reviewing the financial documents could be trying to complete them quickly, distracted, indifferent, asked to ignore them, or fatigued causing several errors to be missed. Another issue can be the magnitude of the reports that can cause errors, if the company is a large corporation with several financial areas it can be difficult to ensure that all errors will be detected. (Weygandt, 2008). The expectation is also that you get what you pay for when comes to internal controls, if a company invests in creating a strong internal control department then it will be more effective than a company that doesn’t. The company who creates an internal control that satisfies the minimum requirements may not have the best internal controls to prevent errors. There are 4 different principles of internal controls; The Establishment of Responsibility, Physical, Mechanical and Electronic Controls, Segregation of duties and Independent internal verifications. The Establishment of Responsibility which requires certain employees are accountable for given tasks. This also includes them giving authorization and approval for certain transactions. If a person is directly related to a task it becomes