Information Systems and Internal Controls - Term Paper Example

Information Systems Information Systems Introduction General Electric (GE) is among the leading electri producers and generatorsin the world. The American company operates as a multinational conglomerate with interests in different fields and segments, such as power and water, energy management, oil and gas, healthcare, aviation, capital, as well as transportation. The headquarters of the company are at Fairfield, Connecticut in New York. The company is among the largest companies operating in the United States, especially considering its ranking of number 26 among the Fortune 500 companies in US by gross revenue. The company also appears in the Forbes Global 2000 as the fourth largest company in the world, considering further metrics. This is in spite of the company ranking 14th most profitable corporation in the US, also according to the Fortune 500 list. The success of this company comes from its lean management style, as well as the internal controls structures implemented within the organization. Internal Controls GE has in place a number of internal controls that enable it to operate both efficiently, as well as profitably. According to the latest 10 – K report from the company, it is evident that the company meets the rules and regulations criterion of the Internal Control Integrated Framework as established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and the PCAOB. This commission established a number of guidelines to adhere to while undertaking internal control processes and procedures, and as such, General Electric (GE) Corporation has to adhere to these provisions in order to be compliant with Internal Control Integrated Framework set by COSO and PCAOB. Initially, the essence of internal controls is to keep the company on the right course in order to guarantee the achievement of its mission, as well as ensure maximum profitability in operations. Furthermore, internal control systems are equally instrumental because they enable the company to minimize the level of surprises that they may encounter along the way. As such, internal control mechanisms enable the executive team of the company to deal appropriately with the rapidly changing economic field, as well as the growing competitive environments of trade, in addition to shifts in customer priorities and demands. Therefore, the administration of the company is better place to restructure the organization for future growth and development within the modern day dynamic business environment. The company ends up enjoying a significant wide range of benefits through it implementation of the internal controls systems, such as enhanced efficiency and effectiveness in operations by the company, reduced levels of risk associated to asset loss, as well as developing enhanced reliability in the preparation of financial statements and reports of the company. Consequently, these internal control measures enable General Electric to comply with all the laws and regulations in place, both within the industry, as well as within the market. As such, a broad definition of internal control is that of the process implemented by the board of directors, management, as well as other personnel in the company, designed to provide reasonable assurance with regards to the achievement of the objectives of the company. The achievement of these objectives should fall in line with the following set categories, which include efficiency and effectiveness of operations, reliability of financial reporting, as well as compliance with applicable laws and regulations. The efficiency and effectiveness of the business generally relate the basic objectives and functions of the company, such as performance levels, profitability margins, as well as protection and safeguarding of the available resources. Reliability in financial reporting, as evident in the 10K report of General Electric, relates to the appropriate preparation of published financial statements that are reliable and dependable, such as the interim financial statements, condensed financial statements, as well as a selection of financial data obtained from these statements reported publicly, like earnings releases. The aspect of compliance with applicable regulations and laws relates to those which the entity is subject. As such, these differentiated categories allow directed focus on separate needs of the company. As such, the internal control systems operate at different scales or levels of effectiveness. Consequently, these systems are judged to be effective in each of the three categories provided above, with reasonable assurance from the board of directors they understand the extent to which the operations objectives of the entity are achievable. These could be in the reliable preparation of the published financial statements of the company, and compliance with the industry’s applicable laws and regulations. As such, internal control have to adhere to five major components of the operations of the company, which include control environment, control activities, risk assessment, monitoring, as well as information and communication. a. Compliance with COSO A review of the 10K report of prepared by General Electric for its 2014 financial results provides that the company be in total compliance with the provisions of the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and the PCAOB. This is evident through the efficiency and effectiveness in operations of the GE Corporation, especially considering its lean management structure that enables astute management of operations within the company. Furthermore, the financial statements and reports presented by the company are of true and fair value, thereby reliable for investors, as well as other concerned stakeholders to use in making critical investment decisions. Lastly, the company seems to be complying with applicable laws and regulations within the energy industry and market, as well as within the financial markets. As a publicly listed company, GE has to publicize its annual financial reports and statements for all stakeholders and shareholders to see and evaluate. These statements have to be true and of fair value over the actual performance of the company, its market control, as well as mentioning other issues that is imperative and crucial to the investment portfolio of its shareholders. To this end, the company appears to be in total compliance with the rules and regulations. On the other hand, the format of preparation of the financial statements follows the GAAP principles of accounting, a globally accepted mechanism of preparing financial statements and financial reports. This in turn enables both investors and shareholders to have confidence and trust in the published financial statements and reports of the company. b. Managerial Responsibility As mentioned above, the board of directors, the executive management team, as well as other important stakeholders in the company is the ones tasked with the duty of setting up appropriate internal controls integrated frameworks for the company, especially in accordance with the provisions of COSO. This means that it is the responsibility of the executive team of the General Electric Corporation to maintain the integrity of the accounting information systems relative to the internal controls framework. This is because the duty of the management team is to implement the policies and regulations set by the board of directors in line with the goals and objectives of the company. As such, once the board of directors passes a resolution to adopt the COSO framework in relation to internal controls integrated frameworks, it is the duty of the executive management team and other managerial departments to ensure effective implementation of these policies in order to achieve the results expected. Therefore, with regards to developing a credible and reliable accounting information system, the management team of General Electric has the key role and responsibility of instituting and implementing key provisions of the COSO standards, as provided in the Internal Controls Integrated Framework. Furthermore, compliance with this framework boosts the image and reputation of the organization before the market, as well as to its shareholders and other prospective investors, who in turn develop the necessary trust and confidence in the financial reports and statements published by the company on an annual basis, biannual basis, quarterly reports, or monthly projections. This also enables the company to gain the confidence and trust of its esteemed customers and the general public, who support the company by purchasing and using its products and services, owing to its strong and reputable brand image. The management can ensure adherence to these policies by setting up regulations within the company that the financial department has to follow, especially in recording financial transactions, as well as preparing financial statements. In addition, the executive management team can also create an enabling conducive environment for the company to easily implement and execute all the provisions of the COSO framework, such as adopting the GAAP standards and principles in financial reporting and preparation of financial statements. In addition, the accounting department should also be keen in implementing these provisions as the key advocate of reliability and integrity within the accounting information systems. c. Implications of Computer Technology Computer technology has a significant impact on the auditing procedures, as well as the internal control structure adopted by the company. This is because these computer technologies enable the development of necessary computer softwares that come in handy for General Electric Corporation in the performance of its accounting and auditing roles. As such, a number of computer packages exist within the market that enables the company to undertake its accounting and auditing roles effectives, such as accounting packages like sage, pastel and quick books, accounting ERP programs such as SAP and Microsoft G10, as well as a wide range of other accounting softwares. In addition, the auditing department also has its own range of softwares that enable auditors to undertake their duties and responsibilities religiously. As such, it is evident that these accounting programs and auditing softwares enable the company to prepare reliable financial statements as they assist the persons in charge, those tasked with performing this crucial role, in undertaking their duties and responsibilities, as well as highlighting areas with definitive errors and mistakes. Therefore, this is a clear provision that the computer technology has a significant impact towards the internal control structure, as well as the auditing procedures because of the specialized computer packages and programs that they generate for use in these activities. d. Audit tests and procedures The duty of accountants is to record, prepare and report financial statements according to the provided rules and regulations, such as preset accounting standards and principles, as well as adherence to the internal controls integrated frameworks. This ensures that the results prepared are credible and reliable, and as such, a true representation of the current performance and profitability of the company. Furthermore, it is also the duty of the accountants at General Electric to ensure that management of reliable and credible accounting information systems as these are the pillars of creating sustainable credibility and trust in the brand image and reputation of the company. Once the accountants are through with their work, the other responsibility in verifying the authenticity of the financial statements provided lies in the auditors of the company. GAAP standards and principles requires that a company should employ the services of both internal, as well as external auditors to review its financial statements. The key mandate of the auditing tests and procedures is to assess the veracity of the financial report published, as well as checking for any errors and omissions in the published financial statements. In addition, the auditing process also assesses the control risks and integrity of internal controls over the accounting information systems. One credible audit test used to evaluate the control risks within the organization’s accounting information systems is the Audit Risk Model. The design of this model enables auditors to determine inherent risks, control risks, as well as detect risks that the accounting system of the company may suffer. The other audit test applied to test the risk level within accounting information systems of the company is the Risk of Material Misstatement (RMM) Audit Procedures. These two audit procedures enable the organization to test for the risks involved in the auditing processes, as well as in the internal controls over accounting information systems. Accounting Information System Accounting information systems facilitate the ease of flow of accounting information from one end of the accounting department to the other end of the company where the information is instrumental in making key managerial decisions. As such, it is essential for the business to have appropriate flows of information within the business environment, as this will enable it to trade effectively. Appropriate flow of information will also ensure enhanced integrity and confidence developed in these accounting systems, as well as ensures strict adherence to the provisions of the internal controls frameworks. The traditional accounting records were usually based in the accounting department without moving to other key departments of the company for information sharing or suggestions. This in turn bestowed the duty of financial analysis and preparation within the accounting department, whereby sometimes it failed in delivering its mandate, especially considering the fact that it had the sole responsibility of managing the accounting systems. However, with the invention of the new magnetic equivalents in computer-based systems, the accounting department is now in a position to share easily all the information it has with the other departments within the company, and as such, develops a clear strategy of implementing appropriate internal control structures and platforms. Computer based systems also introduced new practices within the accounting field, which are the real-time processing, and the batch processing. Batch processing refers to processing a backlog of information falling under the same batch, or category or group in one-step. This means that the information processing takes place at one place, in the same time, and as such, follows laid down procedures of the application. On the other hand, real-time processing does not consider the order or group within which a certain order falls, and as such, processes each transaction as it appears. This in turn ensures that the company processes all the transactions first before recording them in their respective categories, as opposed to batch processing technique where it has to categorize the effect of each transaction in its respective order before recording. Other Issues The REA approach is very effective and advantageous for the accounting managers and auditors to apply when processing accounting information as opposed to the traditional approach. This is because the traditional approach puts all the backlog of the work involved over the accountants within the department or the company, thereby increasing the levels of risk, as well as the possibilities of errors and omissions. On the other hand, the REA approach is instrumental in developing a clear interconnection between the accounting department and the rest of the organization, and as such, the accounting department will only have to deal with the reconciliation and consolidation of financial statements forwarded to it by different departments of the company as opposed to doing all the work alone. The ERP systems are also very effective in detecting and attending to all the risks that arise to the organization in relation to the internal controls systems. As such, the general functionality and key elements of ERP systems include efficiency and effectiveness in operations of the organization, compliance to preset standards and regulations by the industry and the market, as well as promotion of effective internal control measures. However, the implementation of these measures may in turn lead to risks and challenges, especially with regard to internal controls, such as the inadequate knowledge of the accounting experts using the ERP system. As such, the computer aided auditing and accounting techniques available in the market are very instrumental in assisting such companies to implement and effective internal controls mechanism. These auditing techniques include globally accepted platforms such as GAAS, PCAOB, and COSO. These audit regulations are essential for the publicly traded companies. References General Electric. 10 K Report for 2014. Retrieved from http://www.sec.gov/Archives/edgar/data/40545/000004054515000030/ge10k2014.htm General Electric. Proxy statement for 2014. Retrieved from http://www.sec.gov/Archives/edgar/data/40545/000120677415000847/ge_def14a.htm Read More