Internal_Controls

Internal Controls Chris Stafford 10/17/2010 XACC 280 The internal controls are a system within a system they play a key role in the success of an accounting system. Internal controls are in place to protect businesses from fraud and abuse. Internal controls also ensure that the information is accurate and complete while making sure that the information meets regulatory requirements. Section 302 of the Sarbanes-Oxley Act mandates that senior officers of publicly traded companies certify that their company has designed, established, and maintained internal controls that ensure the information contained in the periodic reports are accurate. Section 404 of the Sarbanes-Oxley Act requires that management and external auditors prepare a report that shows that the company’s internal controls are adequately functioning in regards to financial reporting. Based on recent research corporations with internal control deficiencies as defined in section 404 of Sarbanes-Oxley Act are more susceptible to accounting irregularities end up paying the price through higher cost of capital, and lower stock prices. Academic research and some feedback from market participants have demonstrated strong evidence that these deficiencies are not received well by capital markets, and the companies that have these deficiencies are going to face higher cost of capital to reflect the risk accounting and governance irregularities. Effective internal controls will only provide a reasonable amount of assurance that a company’s financial controls, operating system, and reporting systems are effectively working. A well designed and operated set of internal controls will not be able to provide an absolute assurance that the company’s objectives will be met. In order to design and develop an effective internal control system the management department will have to clearly understand the company’s objectives and the operating environment. The company will also have to plan for limitations created by the system that will impact the company’s objectives and services. While effective internal control systems can reduce the occurrence of errors or omissions in a company’s operations, there are limitations that effect internal controls, which tend to result from system errors, human factors, and constraints of resources. Examples of these would be: system error – controls fail to capture or flag unusual transactions, human factors – staff carelessness caused by poor judgment or lack of knowledge, constraints of resources – controls and processes are viewed as a hindrance in delivery.  Financial Management Branch of Treasury. (n.d.). Financial Accountability Handbook. Retrieved from http://www.treasury.qld.gov.au/office/knowledge/docs/financial-accountability-handbook/2-4-limitations-internal-controls.pdf Gottlieb, O. (N.D.). Paying the Price for Internal Control Deficiencies. Audit Integrity News. Retrieved from http://www.section404.org/UserFiles/File/research/Audit-Integrity.pdf  Investopedia. (2010). How the Sarbanes-Oxley Era Affected IPOs. Retrieved from http://www.investopedia.com/articles/financial-theory/09/how-sox-affected-ipos.asp  MoneyInstructor.com. (2002-2009). Internal Controls of an Accounting System. Retrieved from http://www.moneyinstructor.com/doc/internalcontrol.asp  U.S. Securities and Exchange Commission. (n.d.). SEC Implements Internal Control Provisions of Sarbanes-Oxley Act; Adopts Investment Company R&D Safe Harbor. Retrieved from http://www.sec.gov/news/press/2003-66.htm