Internal Control

Abstract

Internal Control is a system designed to promote efficiency, assure the implementation of policy, safeguard assets and avoid fraud. Internal Control is very important in a company because it not only ensures that everyone is operating ethically and efficiently, it also protects the organization’s resources. Internal Control does not only apply to employees, but most importantly its senior level executives. In recent years there have been a number of companies that went under due to fraud and lack of internal control; Enron, WorldCom, Arthur Anderson, etc. Since then Congress has created the Sarbanes Oxley Act of 2002 to help ensure that scandals like these will never happen again. In this paper I will discuss how the lack of internal controls played a major role in these scandals and how the Sarbanes Oxley Act of 2002 protects companies and shareholders from future fraudulent activities.

Internal control is a term typically heard in a business setting and is extensive in scope. Internal control can include many different aspects of a business and is meant as a way to secure the business from wrongdoing. The purpose of an internal control in a business is to keep the company running smoothly without any unlawful activity by its employees. The activity may be intentional or unintentional, but having steps in place to catch mistakes can help a company save money, inventory, time and even its reputation. Internal control means that there are safe guards that the company leaders have put in place to watch for incorrect procedures. The employees of the company are the control.

Internal control can be placed anywhere in a company. You will find most of the control where the money is. Whether it is in accounting or inventory areas, corporate leaders want to make sure they are not losing money. They will create an internal control to ensure that theft of any type is very difficult. Other controls fall into categories of quality to ensure the product is meeting company expectations, customer service to make sure employees are treating customers in the manner required, and safety to ensure that employees are not injured.

An example of an accounting control might be a separate employee signing the checks than the one that printed them. Also, most companies will have more than one person sign a check that is over a certain amount of money. Payroll might be processed by one employee and another may look at the reports. A company might even bring in auditors from a different location to look at the overall books to ensure there is no wrongdoing. Inventory controls will make sure that all products are counted correctly. This not only keeps someone from walking off with product, but also insures that the inventory is correct for reporting on financial statements. One inventory control is the inventory count.