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Fin 324 - Internal Controls

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Internal Controls

FIN 324

October 23, 2011

Internal Controls

Internal controls consist of a system to performance measures that include checks and balances structure to help an organization manage its business in an efficient and orderly fashion. Internal controls protect an organizations resources and assets by preventing fraud, errors, and theft and ensuring complete, accurate, timely, and ethical accounting practices and financial reporting. Additionally internal controls support adherence to policies, procedures, and the values of the company. The framework for internal controls begins with the Sarbanes-Oxley Act of 2002 (SOX) and sets the required standards for financial reporting.

The Importance of Internal Control Programs

The importance of an internal control program is to meet the essential information for management decision-making. Standardized financial statements and other reports serve as guidelines for effective and proficient business operations, reliable financial reporting, and compliance to the laws set by the Securities and Exchange Commission (SEC).

Managing an organization effectively requires solid internal controls that include plans, processes, and procedures that will meet or exceed the company's goals and objectives and support performance management.

Internal control programs serve to safeguard organizations assets, protect, and prevent fraud, and help company management achieve compliance with government regulations for accurate and reliable financial reporting. By providing a standard financial reporting framework and internal oversight employees, stockholders, and management clearly understand financial resource allocation and the methods of preparing financial report.

Safeguarding assets is an important objective of internal controls. The United States General Accounting Offices (GAO), (1999) state that "internal control is management control that is built into the entity as a part of its infrastructure to help managers run the entity and achieve their aims on an ongoing basis" (p. 5). Additionally internal controls provide a standard by which an organization monitors the use, disposition, and possible hostile acquisition of its assets. Internal controls improve accountability by management, identify performance issues such as areas of waste, fraud, mismanagement, and abuse and help an organization operate in using the most ethical and legal practices.

Effective Internal Control Techniques

Implementing effective internal control techniques is the responsibility of management. Managers develop policies, practices, and procedures to fit the organizations operations and its culture that become part of daily business operations.

One effective internal control technique is creating a positive environment for employees to follow and a culture of discipline to adhere to these standards. Management and staff must demonstrate "leadership in this area, especially in setting and maintaining the organization's ethical tone, providing guidance for proper behavior, removing temptations for unethical behavior, and providing discipline when appropriate" (The United States General Accounting Office, 1999, p. 8).

Another technique of internal control is creating competencies through training programs. Training programs help employees receive the appropriate knowledge and skills to perform job duties and accomplish objectives. Training mitigates the risk of poor performance, deviation from policies, and procedures and helps to instill an attitude of accountability and pride for workers.

A strong organizational structure is also a form of an internal control. Employees understanding of the management hierarchy clarify the lines of control and responsibility, reporting, and communication, and help delineate operating activities and protocols. Establishing appropriate hiring, orientation, training, and evaluation, promotion, compensation, and discipline practices provides an environment of proper supervision.

Managers of an organization establish control activities that ensure that policies, procedures, techniques, and mechanisms administer company directives. These activities may include approval processes, authorizations, and verifications of checks, reconciliation of checking accounts and statements, employee performance appraisals, Internet security maintenance,



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