Internal Controls
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Internal Controls
All publicly traded US corporations are required to maintain an adequate system of internal controls, failure to comply results in fines and prison time for corporate executives and company officers. In 2002 in response to the need for stricter internal controls, congress passed the Sarbanes-Oxley act (SOX). The Sarbanes-Oxley act forces companies to pay more attention and imposes more responsibility on corporate executives and boards of directors. Numerous situations occurred where financial mismanagement was in the hundreds of thousands of dollars and it was imperative that internal controls be enacted to 1. Safeguard a companys assets from employee theft, robbery, and unauthorized use, and 2. Enhance the accuracy and reliability of its accounting records, and reduce the errors and irregularities in the accounting process. There is a chance that these things could still happen, people do make mistakes in accounting, but the law states that the company must develop sound principles of control over financial reporting, and they must continually verify that the controls are working. Additionally, outside auditors must attest to the level of internal control (Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2008), meaning that depending on the business, the company must have controls that cover all financial aspects of the company.
Before it took an act of congress to direct that guidelines be put in place to stop company executives and others who might handle the finances in the company from mismanaging them, there were numerous businesses where improprieties ran rampant. Too many employees losing their pension funds might have been what spearheaded the congressmen to act, at this point it does not matter because the need was already there and had been for some time. Companies that have been found to be deficient in their internal controls, or that have intentionally altered reports or misappropriated funds not only experience a loss of reputation, they also experience a sharp decrease in their stock. The company is deemed untrustworthy or incompetent and investors lose confidence in their ability to do the job. AIG founder Hank Greenberg was quoted as saying that no one was minding the store (September 2008) which is no doubt one reason why the organization is having difficulty recovering. Their scandalous financial behavior coupled with what executives were saying did not, and does not inspire confidence.
Internal controls are meant to limit unethical behavior and catch mistakes before they can have an impact. In a perfect world the Sarbanes-Oxley act would do just that. The only problem is that even with technology and mechanics human nature will kick in and mistakes will be made. Characteristics such as fatigue, indifference and carelessness cause employees not to do the best job possible and numbers come up short. Shipping and receiving clerks sometimes overlook or miscount packages coming in, and there are myriad reasons why a person would be suffering from fatigue because it is more common now than ever before. Also, when there has been a segregation of duties colluding with the one that would normally follow up can cause the numbers or receipts to be miscounted. There can be no system of internal controls that