Internal Controls
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Internal controls are functional procedures to safeguard all parts of a business, especially playing a key role in the accounting system. The quality and functionality of a business can determine if a business will succeed or fail. The typical business has many internal control standards that work for the type of company they have. Having these internal controls is not enough to help a business; the law requires companies to monitor these controls to make sure they are being followed correctly. Internal controls have the ability to make or break the goals a company may have while at the same time keeping the compliance of their staff efficient.
In 2002 the Sarbanes-Oxley Act, or also known as SOX was passed after scandals became public about numerous corporations. The Sarbanes-Oxley Act was created in 2002 in order to introduce changes to the financial practice and corporate governance regulations. The main point of this act was to ensure that companies would pay attention to the internal controls. The responsibility is on the corporate executives to ensure the reliability of the internal controls that have been put in place for financial reporting. This law has made all companies and their executives liable for any inaccuracies made in the companys financial reporting due to lack of internal controls.
When a company has internal controls in place, it shows the company is responsible and that they care about the financial reporting for their company. If a company were to go public and admit they have poor internal controls shows the irresponsibility of that company. Any investor would have to seriously think twice before investing their money in this company by purchasing stock of a company who is irresponsible with their finances.
While internal controls have their advantages, they also have their limitations. There are many variables that can affect a companys internal controls. In order to make sure internal controls will work for each company, that company should create their own. In creating their own, they are more likely to succeed rather than fail. There are other aspects that need to be considered, such as maintaining the internal controls, implementing the internal controls, and the reality of whether the internal controls are obtainable. Nothing and no one is perfect, mistakes are made therefore limitations of the internal controls can come down to a simple human error. Most employees do not just set out to fail when they are using internal controls, however carelessness, and fatigue are factors that can make internal controls fail.
One essential part of internal controls is the segregation of duties, making sure that each employee is responsible for a different part of the job. This will ensure that the right person is held responsible if a mistake is made. The second part that is also essential is making sure that proper records are kept for all of the company assets, these records should