Internal Controls Essay

Internal Controls Paper

FIN/324

University of Phoenix

November 2, 2005

Internal Controls Paper

When it comes to the internal controls of firms and enterprises, executives are constantly keeping a close look on the accuracy and effectiveness of these controls along with seeking ways to better them. According to COSO (2004) the implementation of internal controls helps guide companies in reaching towards their profitability goals, the accomplishment of their mission statement, and helps minimize any unexpected events that may occur. This analysis will: (1) describe the importance of internal control programs, (2) identify effective internal control techniques, (3) illustrate the relationship between ethics and internal control techniques, and (4) describe the importance of the Sarbanes-Oxley Act.

The Importance of Internal Control Programs

Effective internal controls are the foundation to a safe, sound, and successful enterprise. A properly designed and consistently enforced system of internal controls helps a company’s board of directors and management safeguard their resources and produce reliable financial reports. According to COSO, the three primary objectives of an internal control system are to ensure; efficient and effective operations, accurate financial reporting, and compliance with laws and regulations. Internal control programs can help managers in many ways such as measure performance, make decisions, evaluate progress, and limit risks. An effective control program can also help with avoiding surprises by detecting mistakes caused by factors such as personal distraction, carelessness, fatigue, errors in judgment, or unclear instructions in addition to fraud or deliberate noncompliance with policies. According to the American Institute of Certified Public Accountants (AICPA), effective and well designed internal control systems are still subject to execution risk. This means that human beings still must execute most control systems and even with the well trained personnel with the best of intentions can become distracted, careless, tired, or confused. Therefore, everyone at all levels, in any given organization has a sole responsibility for internal control.

Effective Internal Control Techniques and Ethics

Internal control techniques are the mechanisms by which control objectives are achieved and they must be reviewed to be effective and efficient in accomplishing internal control objectives. According to AICPA, techniques include such things as specific policies, procedures, plans of organization, and physical arrangements such as fire alarms and locks. To be effective, techniques should fulfill their intended purpose and provide the coverage they are supposed to along with operating when they are intended to do so. All techniques should be evaluated over a period of time.

Stated by AICPA, some examples of these techniques are: (1) documented policies and procedures, procedure manuals, and organization charts must be in evidence, (2) Safes, locks, secure electronic data tape, and disk libraries, (3) controlled custody of critical forms, including periodic accounting for these