Internal Controls XACC 280 Crystal Riley Sanford September 10, 2010 Instructor Glenn Dakin Internal Controls Internal controls are the measures a company takes to do accomplish two primary goals; protect their assets from employee theft, robbery and unauthorized use. Internal controls are also used to increase accuracy of company financial information, reducing the risk of errors (accidental) and irregularities (intentional) (Weygandt, 2009). Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 (SOX) was put into effect because of the corporate scams that were being committed in that time period. Congress passed the act to force companies to keep closer tabs on their internal controls. Under SOX, companies are required to “develop sound principles of control over financial reporting” (Weygandt, 2009). According to Wegandt (2009), corporate executives have complained in about the time and expense that is involved in monitoring internal controls, but it has been proven that investors are less likely to invest in a company that does not comply with SOX. So SOX has affected internal controls in a positive way because a company is more likely to attract investors on top of that company having more accurate records. Even if it were not for the investors, companies will see less fraud and a higher amount of accuracy in their records by complying with SOX. As part of SOX, companies are also required to report any deficiencies in their internal controls. Because investors are more confident and comfortable with a company that complies with SOX, it is true in turn those investors lose confidence in a company that has deficiencies in its internal control. With this lose in confidence is the risk of a drop in stock prices. Internal controls can only provide a company with a certain amount of assurance that their assets are being protected. For example, in the accounting office at Wal-Mart, the cash is required to be balanced three times a day; before we start work for the day, after the pick-up (counting registers and making the deposit) and before we leave. This is an internal control that helps us locate where an error occurred limits the window of opportunity to steal money. Cameras, of course, are also put in place to review in case an incident arises. Limitations of Internal Controls One example of the limitation of control is the safeguarding of assets such as store merchandise and office supplies. In most if not all company policies, it is stated that if you take something from the supply closet for use other than work, it is considered stealing. However, a majority of employees have the attitude that a pen will not make a difference, or a notebook, or a stapler, but it is still considered stealing, as is taking a $0. 0 candy bar from a register. It is unreasonable to keep tabs on supplies that employees use, especially for businesses that have a lot of office use and a lot of employees. Employees who are caught can be dealt with; otherwise it Is left to the integrity of the employees. “Control is most effective when only one person is responsible for a given task” (Weygandt, 2009). One example of such a control is one person per cash box. If it is not possible, an audit of the drawer should be performed when the next person signs on. Recently the cash office had a register that was short. Upon research, six different people at been on and off that register all day. At that point it is impossible to determine the responsible party. As a result, all employees who operated that register received a write up for the missing money. Why were proper controls not exercised? Because of the human element. In order for proper controls to take place, only one person can use a register at a time or else an audit is required. Only management can perform audits. This can be time consuming and conflicts with the time constraints and the other responsibilities that an employee needs to or feels they need to complete. Nothing usually happens anyway, right? There are certain areas that internal controls are easier to keep track of and other areas where they are fuzzy. For example, entering data and having limited tasks in an area increase the effectiveness of internal controls. In other areas, such as cash handling combined with customer service and other various tasks, those internal controls may not seem as important concerning the register as it does stock. Comparison of Internal Controls Establishment of responsibility and segregation of duties are similar in that one person is assigned and responsible for a certain asset. In establishing responsibility, it is easy to determine who made a mistake and how it was made because one person was responsible. In segregation of duties, one person is assigned to a certain task alternately. For example, having one person count the cash in the office and having the other key it into the system, to ensure numbers are not being changed to make everything appear balanced. Physical, mechanical and electronic controls are used to safeguard assets and enhance the security of them (Weygandt, 2009). Examples would be keys only assigned to cash office personnel, the code on the vault, time clocks and video surveillance. Independent internal verification is way of double checking the information reported by employees. For example, managers are not directly associated with the accounting office and they check the daily work completed by accounting office employees on a weekly or semi-weekly basis to ensure that all reports and numbers match. Internal controls of every kind are very important in maintaining accurate records and in discouraging unethical behavior performed by those who have been made responsible for certain controls. If internal controls are being carried out properly, a company will only stand to gain from the ‘hassle’ of complying with SOX. Resource Weygandt, J. J. , Kimmel, P. D. , & Kieso, D. E. (2008). Financial accounting (6th ed. ). Hoboken, NJ: Wiley.
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