Internal_Controls

Internal control is the process a company or business does to protect and prevent themselves from any fraudulent activity and any mistakes in the accounting process. Internal control has two primary responsibilities. The first is to guard against loss of assets because of theft, accidental destruction, and errors. A guarantee must exist transactions related to assets have been properly processed and that appropriate physical handling and control over assets exists. Second is to ensure financial reporting and compliance with applicable laws and regulations. The Sarbanes-Oxley Act of 2002 was put into place to force companies to pay more attention to internal controls. “It came as a result of the corporate financial scandals involving Enron, WorldCom, and Global crossing. Provisions of the Sarbanes Oxley Act detail criminal and civil penalties for noncompliance, certification of internal auditing, and increased financial disclosure. The Sarbanes Oxley Act requires all financial reports to include an Internal Control Report” (Sarbanes Oxley 101). This shows that a company financial data is accurate and sufficient controls are in place to safeguard financial data. A company that announces deficiencies in its internal control will probably experience a fall in the price of stock because investors and stockholders will be at risk of losing money and assets. A company that has weak internal control people will not want to invest in or buy stock because the company will experience financial losses. I consider collusion, lack of training, and lack of management to support to be some limitations of internal controls. For example, if a person does not know the proper procedures for internal controls or is not explained the importance of internal controls they will not follow them. If a cashier did not count money that they received or gave back to customers there cash register will be short and they will negatively affect a company’s finances. Collusion is where two or more employees work toward to fraud the company. For example, if two people worked for the same company, one of them was a cashier and the one was security. They knowingly let their friends come and steal merchandise. One of them would fake like they were ringing up items and the other one would be a lookout to make sure they got out the stores not getting caught. Another limitation of internal controls would be the lack of management support. Managers are the ones who need to communicate and enforce the internal controls within the company are being followed. If managers skip steps and procedures for internal controls the employees will also do the same. The six principles of internal control are: 1. Establishing responsibility 2. Using physical, mechanical, and electronic controls 3. Segregation of duties 4. Independent internal verification 5. Other controls 6. Documentation procedures One of the top principles is assigning responsibilities to specific employees. “Control is most effective when only one person is responsible for a given task” (Weygandt, Kimmel, Kieso 2008).Segregation of duties requires different individuals be assigned responsibility for different elements of related activities. “The responsibility for record keeping for an asset should be separate from the physical custody of that asset. The work of one employee should without a duplication of effort, provide a reliable basis for evaluating the work of another employee” (Weygandt, Kimmel, Kieso 2008). If one person is responsible for all related activities there will be a greater chance for errors and discrepancies. Some examples of physical, mechanical, and electronic controls are: safe, vaults, locked warehouses and storage cabinets, computer facilities with key pass access and passwords, alarms, cameras, and time clocks to record time worked. “Independent internal verification involves the review of data prepared by employees. Companies should verify records periodically or on a surprise basis. An employee who is independent of the personnel responsible for the information should make the verification. Discrepancies and exceptions should be reported to a management level that can take appropriate corrective action” (Weygandt, Kimmel, Kieso, 2008). Internal control is a critical issue that needs to be taken seriously. There are many principles and laws in place to help with this matter. Internal control means to me the power and regulations that a company has within its self. A company has to come up with ways on its own to prevent the loss of assets and fraudulent activity. The better internal controls you have the more protected you will be. A company will weak internal controls will be looked at as risky and investors will not want to take that chance. Internal control can’t be any followed by one person it has to be followed by all to be effective. References Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2008). Financial accounting (6th ed.). Hoboken, NJ: Wiley. Retrieved from http://www.sarbanes-oxley-101.com, 2012.