Internal Controls

Running head: INTERNAL CONTROLS

Internal Controls

All companies have a need and responsibility to track their financial positions. Depending on the size of the company, those tracking systems or accounting systems, can be very simple or very complex. “An accounting system is a set of records, procedures, and equipment that routinely deals with the events affecting the financial performance and position of the entity (Shiraz Noordin, 1997).” The accounting records are kept to measure financial progress, track cash flows, sales, revenues and a myriad of other financial data. In order to ensure the accuracy and consistency of the accounting system another system needs to be implemented. This other system is the internal control system.

The integrity of corporation’s financial records is extremely important for shareholders and stakeholders both internal and external. Internal controls provide a way to ensure that integrity. Investors look at financial statements in order to decide when and how much to invest in a company. Since the recent corporate scandals such as TYCO and Enron the accuracy of a company’s financials has gained a heightened sense of importance. Most companies now report their internal control and auditing systems in their financial statements.

The most common and effective internal controls are internal audits and establishing and following policies and procedures. However, selecting the appropriate personnel to conduct the audits and enforce the policies and procedures and then segregating those duties to specialists increases the effectiveness of those internal controls. Other effective controls include training in ethics and corporate codes of conduct. Proctor and Gamble instituted a self assessment program to evaluate the effectiveness of their internal controls. More and more companies are finding new ways to secure the effectiveness of their internal systems to raise the level of public confidence in their organizations. The most important factor in all of the internal control systems is the relationship with ethics.

Internal controls and ethics must work in conjunction with each other to truly be effective. Ethics involves honesty, avoidance of conflicts of interest, proper disclosure of financial transactions and integrity. The public demands adhering to these standards when a corporation conducts business. As previously mentioned, investors rely on a corporations ethical standards for financial reporting. The more confidence investors have in the financial information they receive the better the decision they can make on investing their funds. Those funds come from many sources and affect many different people. Ethical standards are not laws per say, but rather rules made by the company that are designed to prevent the company from wrongdoing. Some examples of these rules are proper disclosures of properties and assets, compliance with laws, proper and timely filings and