Financial Internal Controls
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Financial Internal Controls
The importance of internal controls is to form the foundation for financial systems of risk management. The controls also safeguard assets; help the board and management guard against fraud and financial mismanagement; and ensure compliance with laws, regulations, and the institutions own policies. In 1992, the Committee of Sponsoring Organizations of the Tread way Commission (COSO) outlined five essential components of any internal control system. The five components include: control environment; risk assessment; control activities; accounting, information, and communication systems, and self-assessment or monitoring. There also is the American Institute of Certified Public Accountants (AICPA) who establishes professional standards; assist members in continually improving their professional conduct, performance and expertise; and monitors such performance to enforce current standards and requirements.
Effective internal control techniques are to evaluate the effectiveness of accounting structures and financial transactions, determining assessment for non-traded investments, and estimating allowances for losses. Internal controls are put in place to keep the company on course toward profitability goals and achievement of its mission, and to minimize surprises along the way. The controls should enable management to deal with rapidly changing economic and competitive environments, shifting customer demands and priorities, and restructuring for future growth. Internal controls are intended to promote efficiency, reduce risk of asset loss, and help ensure the reliability of financial statements and compliance with laws and regulations.
The internal control is looked upon more and more as a solution to a variety of potential problems. The effectiveness and efficiency of operations as a technique relates to performance and profitability goals and safeguarding of resources. Another important technique to pursue is making sure the reliability of financial reporting of reliable published financial statements, including interim and condensed financial statements and selected financial data. Finally, integrity and ethical values must stay within compliance with applicable laws and regulations throughout the organizations overall environment.
The chief executive sets the tone at the top that affects integrity and ethics and other factors of a positive controlled environment. Everyone in an organization has responsibility for internal control too. Ethical values are characteristically the science of morals, or the study of good and evil, right and wrong. These values persuade people toward positive reflection with internal control techniques used by management. Internal controls should have business practices that ensure cooperation of others and reflects the values, attitudes, beliefs, language, and behavioral patterns that define an organizations operating culture. A successful enterprise is based on a network of trust binding management, employees, shareholders, lenders, suppliers and customers. According to Sarbanes-Oxley, like Federal Deposit Insurance Corporation Improvement Act (FDICIA), failure to articulate ethical principles in relationship to internal control techniques can lead to some most unfortunate outcomes.
Sarbanes-Oxley Act of 2002 requires companies to evaluate and report on the effectiveness of internal controls over financial reporting as of the fiscal year-end. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Act-which applies in general to publicly