Internal Controls

Internal controls are a necessary part of any company. They are comprised of all the methods and measures used by a company to one of two things. (Wetland, Kieso, & Kimmel, 2003,) They either safeguard a companies assets from things such as theft or unauthorized use, or they help to enhance the accuracy and dependability of a companies accounts and records. This second use helps to ensure that fewer errors are made wither intentional or unintentional. Without internal controls, there would be a lot of room for mistakes that could potentially destroy a company. For example, accounts could be stolen from and manipulated or a simple calculation could be missed, upsetting the entire balance of the accounts. These internal controls help to ensure that these things do not happen. In 2002, congress passed the Sarbanes-Oxley act due to the rising amount of corporate scandals in the previous years. This act is often said to be one of the most important acts passed in decades because it allows companies to focus more on internal controls and give them more attention. The act is often calls SOX for short and it puts more pressure on the executives and directors to ensure that their internal controls are reliable and are working to the best of their ability. The act requires companies to have internal controls specifically for financial accounting including auditors and frequent assessments. This act also established the Public Company Accounting Oversight Board or PCAOB. The PCAOB establishes the standards for auditing as well as auditor activity. (Weygandt, Kieso, & Kimmel, 2003,) The SOX act of 2002 also gave stockholders more confidence because they felt that their investments were safer with the new regulations for financial accounting. Without this act, companies would not feel the burden of making sure that internal controls were an important and crucial part of their company. The act made internal controls a priority which in turn made investors feel more confident and builds their trust. Internal controls help to establish a companies ability to avoid mistakes as well as show their accounts without mistakes or lies. This gives investors a confidence in the company because they feel tha the company can be trusted and the money they invest will not be wasted. For this reason, a companies internal controls are incredibly important. If a company were to announce that they had deficiencies in the internal controls, the price of its stock would definitely take a hit. Internal controls ensure that accounts are correct, employees are dividing responsibilities and other important things such as the company being audited to ensure correct finances. If it were to come back that a company was lacking in their internal controls, people would lose their confidence. They would feel worried in the companies ability to handle their finances well, including any investments that have been made. When a company has deficiencies in its internal controls, that means that the company is not being monitored the way that it should be, giving the possibility that there could be large issues withing the walls of the company that are unknown to the public and the investors. These unknowns can mean a loss of money to investors which usually means that they will not invest. When investors do not invest, the price of the companies stock falls due to high supply and low demand. Internal controls can have many limits. Depending on the company and its abilities, there may be millions to spend on internal controls or they may only be thousands. This means that huge companies will have a larger ability to add controls as they need them where as a small company may only have the ability to set up limited controls that are most important to them. There are other limits as well that include employees, negative intentions, or even support. If an employee does not understand the need for internal controls, this would hinder the ability for them to work properly. Also, if members of a company are colluding to commit fraud of some type within the company, they will intentionally find ways to do this by going about the current internal controls. Even if the internal controls are strong, a group of employees working on the same goals will find a way to manipulate the data for their own personal benefits. For example, two employees may share their passwords with each other allowing them to falsify data without anyone seeing the need to come behind them and verify their transactions. Another limitation of internal controls is a lack of support. A company can have an incredible set of internal controls but if the management does not support it perfectly and carry this on to their employees, the internal controls will be immediately limited. The four parts of internal controls are establishing responsibilities, using physical, mechanical and electronic controls, segregation of duties, and independent internal verification. All four of these things make up the internal controls and are essential to them working. Establishing responsibilities ensures that control is retained because no one employee is responsible for one task. This allows the task to be check by others for correctness. Segregation of responsibilities means that one related activity is split between multiple employees to ensure that mistakes are avoided by group checking rather than personal responsibility. Physical, mechanical, and electronic controls are essential to internal controls because they protect assets in multiple ways. Independent verification means that employees are reviewed and records are verified as well as discrepancies being reported. Internal controls are the backbone of a companies ability to function without mistakes and setbacks. Without these controls, the chance of making a mistake large enough to significantly hurt the companies image and finances is high. These controls also keep companies safe from internal users trying to get ahead in ways that are morally wrong. Internal controls are a necessary part of each and every company. Without them, trust and confidence would not come easily to the company or the customers.