Accounting_Internal_Controls

When we think about accounting and auditing we never think about the standards in which this practice must follow. This system of standards is called the internal controls. These controls will help reduce or eliminate fraud. In business, all organizations have to have a way to protect their assets, both physical and intangible. These internal controls help to do this without hindering the everyday work flow and have also helped companies to achieve specific goals. The two major bodies that regulate these internal controls in the United States are The Public Company and Oversight Board and The Financial Accounting Standards Board. If we were to think about how the world complies with internal controls we would look to the International Accounting Standards Board. These organizations were developed to help keep companies internal controls inline and also to help reduce fraud. The Financial Accounting Standards Board (FASB) was established in 1973 and has been the designated organization in the private sector for establishing standards of financial accounting. The standards set by this organization are recognized by the SEC for nongovernmental entities. (fasb.org, 2012) The Public Company Accounting Oversight Board (PCAOB) is the regulatory body for auditing in the United States. They are a non-profit organization that was created by the Sarbanes-Oxley Act of 2002, (pcaob.org, 2012) The main job of this organization is designed to oversee the auditors of public companies. The PCAOB also “protects the interest of the investor and the public by promoting informative, accurate, and independent audit reports.” (pcaob.org) The International Accounting Standards Board (IASB) is the regulatory body for the global accounting community. They are located in the United Kingdom and they are a privately-funded, independent board which sets the financial standards for the globe. (answers.com) This organization works to set a single set of high quality, understandable, and enforceable global accounting standards. There are two basic goals of internal controls which involve a specific transaction level and the organizational level. Internal controls on the specific transaction level refer to an action that takes place to achieve a specific objective. On the organizational level these controls refer to the reliability of financial reporting, timely feedback on achievement of operational or strategic goals, and compliance with laws and regulations. Internal controls have four main principles. The use of these principles establishes responsibility, the use of physical; mechanical; and electronic controls, independent internal verification, and segregate duties. • Establish responsibility: All transaction and activities must adhere to specific pre-established guidelines unless authorization has been provided by a manager. An example of this is when a person has a fixed price list and needs to deviate from this listing they would be able to do so with the authorization from a manager. • Independent internal verification: This is when a supervisor or manager will perform an audit on employee’s performance to make sure they are following the internal controls for a company. A simple example of this is the end-of-shift verification of an employee’s sales draw by a manager to make sure it balances. • Segregate Duties: Different people are assigned responsibility for different parts of related activities. Examples of these include authorization, custody, or recordkeeping. One supervisor may be in charge of authorization, but not recordkeeping. This creates a system of checks and balances • Physical, electronic, and mechanical controls: A company must protect all of its assets. These controls are put in place to do this. These controls can track a company’s assets such as company vehicles and company records. (cliffsnotes.com) The processes of internal controls help to reduce variations which in turn can lead to a more predictable accounting outcome. The idea of internal controls goes back to ancient Egypt where a private party would oversee tax collections. Today’s internal controls were implemented by the Sarbanes-Oxley Act of 2002. This act required improvements to corporate accounting controls for public companies of the United States. This act contains 11titles or provisions that describe specific mandates and requirements for financial reporting in the U.S. These titles or provisions are (in their respected order): 1: Public Accounting Oversight Board 2: Auditor Independence 3: Corporate Responsibility 4: Enhanced Financial Disclosure 5: Analyst Conflicts of Interest 6 and 7: SEC Role and Studies 8: Corporate and Criminal Fraud Accountability 9: White collar Crime Penalty Enhancements 10: Corporate Tax Returns 11: Corporate Fraud and Accountability These provisions were set up by Senator Paul Sarbanes and Representative Michael G. Oxley in 2002 after the ENRON, Tyco, and WorldCom scandals to protect investors from corporate fraud. (uslegal.com) In the corporate world we see many benefits from the SOX Act. Some of these benefits include the reduction in conflicts of interest for auditors self-regulating their own work or analysts providing recommendations for a stock while providing banking services for the finances. This act also stopped failures from the Board of directors of companies due to lack of skill or experience. The SOX act also help to reduce the pressure on management to earn bonuses and it improved banking practices. Internal controls of accounting are an essential business function for a growth-oriented organization. They include the element of risk assessment, information communications and even employees’ roles and responsibilities. These controls are designed to protect a company from fraud, abuse, and inaccurate data recording and help organizations keep track of essential financial activities. (ehow.com) The truth of the matter is that internal controls are important for all not just the companies. They help to keep a company from committing fraud and they help to protect the investor of said companies. There will never be a set of controls that will be 100% fool-proof and these controls are no different. Someone will always find a way to get around them, but at the utmost minimum the people who are trying to “go around “ these rules will be caught and the laws in place shall prevail. REFERENCES: Author Unknown, n.d.: “Facts about FASB”; Retrieved from fasb.org on 7/22/2012: http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176154526495 Author Unknown, n.d.: “About the PCAOB”; Retrieved from pcaob.org on 7/22/2012: http://pcaobus.org/About/Pages/default.aspx Author Unknown, n.d.: “International Accounting Standards Board”; Retrieved from amswers.com on 7/22/2012: http://www.answers.com/topic/international-accounting-standards-board Cliffs Notes (n.d.): “Internal Controls”. Retrieved July 22, 2012, from Cliff Notes: http://www.cliffsnotes.com/study_guide/Internal-Control.topicArticleId-21081,articleId-21006.html Darnay, Brigitte T. (n.d.): “Sarbanes Oxley Law and Definition”; Retrieved July 22, 2012 from: http://definitions.uslegal.com/s/sarbanes-oxley/ Karimi, Sabah, (n.d.): “About Internal Controls of Accounting”; Retrieved July 22, 2012 from: http://www.ehow.com/about_4571081_i