Internal_Controls

In my opinion, internal controls are in place to protect the business and shareholders by limiting access to funds and confidential information, limit wasteful spending. The Sarbanes-Oxley Act of 2002, or SOX, was created after companies such as Enron, Tyco International, Penegrine Systems, and WorldCom were affected by accounting scandals that cost investors billions of dollars when stock prices collapsed. SOX directly impacts CPA’s, especially CPA firms that audit public companies, Publically traded companies including their officers, employees, and owners (including holders of more than 10% of the outstanding common shares, Attorneys who work for or consult publically traded companies, as well as brokers, dealers, and investment bankers or financial analysts that are employed by these companies. This law establishes a five member accounting oversight board that is subject to the Securities and Exchange Commission (SEC) oversight. Of these 5 members that are on the board, only 2 members of the board may be CPAs, in order to limit the ability for accountants to change the books. All of these members must be appointed by the SEC. This board is responsible for registering public accounting firms that prepare audit reports, establishing or adopting auditing, quality control, ethics, and independence standards. It will inspect, investigate, and discipline public accounting firms and enforce compliance with the SOX act. All public accounting firms, whether foreign or domestic, that audits public companies must register with this board, all registration and annual fees collected from these firms will go towards the costs of processing and reviewing applications and annual reports. All of an accounting firm’s audit and review workpapers for all audits must be retained for five years after the end of the fiscal year in which the audit was completed, information of sufficient detail to support the conclusions reached in the audit report must be kept for a total of seven years. In addition, companies that are responsible for auditing clients will be prohibited from most “consulting” services to those same clients, in order to prevent a conflict of interest. CPA’s that work auditing a client must only do so for five years, before another auditor is rotated in, as an internal control. This law also has some specific rules for companies that use accounting firms. For instance, it is now unlawful for an officer or director or anyone acting for a principal to lie, bribe, mislead, or hinder the auditing CPA firm. Financial Officers of publically traded companies are responsible for following a new code of ethics adopted by the SEC. All Internal auditing committee’s must be comprised of at least one member that is a financial expert. Other members must be on the board of directors of the company, and to be otherwise independent. CEO’s and CFO’s are responsible for establishing additional internal controls to ensure that they are notified of any violations. (http://www.nysscpa.org/oxleyact2002.htm) Any company that announces insufficient internal controls would show a massive fall in stock prices because internal controls are designed to protect investors from fraud and corruption. If a company has failed to manage it’s own company, and is no longer working for it’s investors, no competent investor would want to keep such high-risk stock. Internal controls, while designed to limit the ability to steal and misappropriate funds, should not go so far as to significantly hinder everyday business operations. In addition, it would not be feasible to have these rules apply to small businesses with small amounts of employees, as most financial information would be above most employees pay grade. In conclusion, the Federal Government was embarrassed when stockholders lost billions of dollars in a short amount of time due to several large companies admitting accounting fraud within a small period of time. Due to the fact that these companies could not create decent internal controls on their own, the Federal Government stepped in and created mandatory bare-minimum laws that all publically owned companies and auditing companies must comply with, in order to hold someone accountable should this problem ever arise again. . The principles of internal control are: Establishing responsibility; using physical, mechanical, and electronic controls; segregation of duties; independent internal verification. Only a select few employees are allowed to handle the information or funds that are being controlled. Checks, not cash are used to pay vendors, and more than one person is required to authorize a check, the person who signs the check cannot be the one who authorized it. Lastly, someone that was not in control of any of the previous process, is responsible for verifying that all debits and credits were correctly handled.