Internal control is designed to govern a company’s financial system by ensuring effective and efficient operations, reliable financial reporting, and compliance with applicable state and federal laws and regulations. Internal controls safeguard assets against theft and unauthorized use, acquisition, and disposal. A system of internal control serves to enhance accuracy by minimizing errors in accounting records and to prevent fraud, embezzlement and theft by employees, customers, and vendors. The following paragraphs will describe the Sarbanes-Oxley Act of 2002 and how it has affected internal controls; ...view middle of the document...
Internal controls limit the amount of unethical practices and errors that occur in the financial reporting process. Under the Sarbanes-Oxley Act companies are required to assess their internal controls systems and report any deficiencies. Internal controls protect against theft and manipulation of accounting figures by employees (Waygandt, Kimmel, & Kieso, 2008). In the event that a company has poor internal controls, investors will have less confidence that its financial statements are accurate. Resulting in company stock price falling (Waygandt, Kimmel, & Kieso, 2008).
A proficient internal control system can only offer reasonable assurance that an agency’s financial control, operating systems, reporting, and other agency processes are working effectively. No matter how well designed and functioning, internal control systems are, they cannot provide complete guarantee that agency objectives have been, and will continue to be, met. Effective internal control systems decrease the likelihood of mistakes or exclusions in agency operations. However, there can be limitations in the effectiveness of internal controls. Limitations of internal controls may result from human factors, system omissions, lack of system flexibility, or resource constraints. There are many potential limitations of internal controls including staff carelessness, lack of knowledge, or poor judgment. The internal control system may be outdated and no longer reflects the changes that have been made in operating conditions or new risks. Collusions made by staff, which eliminates the protection segregation provides (Waygandt, Kimmel, & Kieso, 2008). Controls become undermined when methods are viewed as a hindrance in the delivery of agency services.
To maintain high standards of record keeping, companies follow precise control principles. Establishment of responsibly must be determined. Each employee is assigned specific responsibilities to preserve an effective internal control system. For example, only designated personnel have the authority to sign company checks (Waygandt, Kimmel, & Kieso, 2008). Assigning duties to one person makes it easier to determine who is responsible for the mistake. Segregation of duties...