Xacc Week Eight Paper
Xacc Week Eight PaperInternal controls: an overview
Internal controls are absolutely essential to the functioning of any public company, and without them companies are doomed to economic turmoil and even collapse. Simply put, internal controls are the various methods that a company uses to “Safeguard its assets from employee theft, robbery, and unauthorized use” and “enhance the accuracy and reliability of its accounting records” (Weygandt, Kimmel, and Kieso, pp. 340). As the text implies, without these controls the corporation would be vulnerable to any number of external and internal problems. In fact, the Sarbanes-Oxley Act (SOX) has many regulations to ensure the creation and maintenance of these internal controls, with severe penalties to those companies that do not do so.
When the government passed the SOX in 2002, it was intended that SOX force “companies to pay more attention to internal controls” (Weygandt, Kimmel, and Kieso, pp. 341). This was in direct response to several corporate scandals that involved corrupt business practices, poor accounting, and non-transparent public financial statements, and inevitably the loss of billions in investor dollars. These laws help to ensure that internal controls are developed using “sound principles of control over financial reporting” and that they “must continually verify that these controls are working” Weygandt, Kimmel, and Kieso, pp. 341). All of this means that they are a watchdog ensuring that companies are honest and forward in their dealings with the public and within their own company. The largest impact of SOX is the fact that they create investor confidence, which is the cornerstone of the investing market. Without investor confidence, companies face almost certain stock price dives, bankruptcy, and possible complete financial ruin.
How does a company ensure internal controls? Well, according to the textbook Financial Accounting on pages 341-346, there is the principle of establishing responsibility,...