Accounting Deals - Essay Example

One of the most important business functions is accounting. Accounting deals with the recording, tracking, and monitoring of financial transactions. The end result of the accounting cycle is the preparation of financial statements. Due to the importance of accounting companies must implement internal controls in order to protect themselves. Two of the primary goals of internal controls are safeguarding the assets of a company and to prevent against fraud. Three of the main components of an internal control system are the control environment, control procedures, and the accounting system. Some factors that may influence the control environment are regulations, personal policies, and monitoring of responsibilities. Today most organizations utilize computerized accounting systems. The employee that bares the responsibility for the design and functionality of the internal control system of a company is its comptroller. A good internal control system relies on the delegation of responsibilities to the different members of the accounting staff. Internal control systems must be constantly maintained. When designing an internal control system it is important to remember the accounting materialism principles which state that information is only useful if its benefits outweigh the costs. Training and development are often needed to educate employees on internal control. Internal control measures are used to protect and monitor cash, account receivables, payroll, and inventory among other things.

In 2002 the government of the United States passed the Sarbanes-Oxley Act (SOX). This act was a revolutionary legislation that was created to increase the confidence of investors in the stock market due to the fact that the marketplace had been flooded with accounting scandals such as Enron and WorldCom. One of the benefits of the Sarbanes-Oxley Act is that it increased the internal control requirements of public companies. Section 404 of the Sarbanes-Oxley Act says that all public companies must include an internal control assessment report within the annual report. “Section 404 is the most complicated, most contested, and most expensive to implement of all the Sarbanes Oxley Act sections for compliance” (Sarbanes-oxley-101, 2013). A preventive measure that SOX created was the obligation of CEOs to sign financial statements to validate that they are free of material error or fraudulent activity. Based on the Sarbanes-Oxley CEOs are liable for capital punishment if fraudulent activity occurs in the financial statements of a company.

Companies that have inefficiencies in their control systems can a decline in the value of their common stocks. When an investor reads news regarding poor internal controls within a company the person is alarmed at the information. A risk-averse investor may sell off all of the stocks of a company that announces deficiencies in its internal control system. A firm that has a poor internal control system faces many risks such as potential theft of assets and fraudulent activity. The asset that thieves target the most in a company is its cash. Some techniques that companies with weak internal control systems can implement to safeguard the cash of the company are the reconciliation of cash accounts, establishment of dual control, and control measures over petty cash.

Internal control measures are tremendous tools that can increase the transparency of a company, but their implementation has its limitations. One of the limitations of internal control is that it takes money and human resources to implement. Companies that are understaffed often disregard the use of internal control because they cannot afford it. Internal control initiatives do not work effectively if a company faces communication problems with the staff. Organizations that face morale problems and conflict in the staff often visualize the implementation of control measures as a sign of mistrust. A potential con of the use of internal controls is that these measures can be bypassed if the employees collide with each other. Human error can also cause an internal control system to fail (K-state, 2012).

The use of internal control is going to proliferate in the 21st century due to the changing business environment and the complexity of financial transactions. The Sarbanes-Oxley Act of 2002 was a major initiative that helped increased the confidence of investors in the stock market by improving the internal control protocols of public companies. Section 404 of the Sarbanes Oxley Act requires companies to include a managerial assessment of the internal controls of the company in the annual report. Using internal controls can help a company prevent fraud and it can safeguard the assets of a firm including its most valuable and liquid asset which is cash. Three of the limitations of internal controls are the size of the company, the potential for employee collusion, and ineffectiveness due to a lack of communication among the employees of a firm.