Accounting 280 Week 8

Internal Controls

Your Name

XACC/280

1/14/2012

Internal Controls

Internal control is designed to govern a company’s financial system by ensuring effective and efficient operations, reliable financial reporting, and compliance with applicable state and federal laws and regulations. Internal controls safeguard assets against theft and unauthorized use, acquisition, and disposal. A system of internal control serves to enhance accuracy by minimizing errors in accounting records and to prevent fraud, embezzlement and theft by employees, customers, and vendors. The following paragraphs will describe the Sarbanes-Oxley Act of 2002 and how it has affected internal controls; explain deficiencies and how they affect stock prices, and examples of internal control limitations.

Bloch  (2003), "The Sarbanes-Oxley Act of 2002 addresses perceived weaknesses in internal controls, the systems a public company employs to collect, process, and disclose financial information to satisfy its statutory reporting requirements. Recent corporate and accounting frauds have demonstrated the inadequacy of internal controls with regard to revenue recognition. The Act also contains requirements aimed at ensuring proper revenue recognition” (para. 1). Prior to the passage of the Act, corporations were not required to maintain such a high standard of financial recordkeeping. It requires companies to establish a system of internal controls, preparation of quarterly statements assessing the strengths and weaknesses of these controls, and forces the company to company to hire an outside accounting agency to provide an independent assessment of the in-house auditing controls, and to report flaws or fraudulent practices that occurred. Lawmakers made certain that corporations are required to maintain paper and electronic records for a minimum of five years, which has imposed a heavy strain on IT departments.

Internal controls limit the amount of unethical practices and...