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Internal controls have two goals.  One is to protect the company’s assets from theft and fraud.    The other goal is to reduce or eliminate errors and irregularities in accounting records and financial statements.  An important internal control is segregation of duties.  This ensures that one employees work should provide a reliable basis or framework with which to evaluate other employees work.

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For example ordering supplies, and paying the final bill should have enough steps and processes to ensure that en employee is not ordering personal supplies with company accounts.  Errors are the result of unintentional mistakes in the recordkeeping process.  Irregularities are the result of intentional and willful manipulation of accounting records and misrepresentations of the company’s financial position.  Irregularities intend to cover up for theft, fraud, and misstatements of the company’s true financial position.

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Internal Control and Financial Reporting

“The term “internal control over financial reporting” is the predominant term used by companies and auditors and best encompasses the objectives of the Sarbanes-Oxley Act.”  (Securities and Exchange Commission, 2008)  This specific type of internal control is intended ensure that financial statements are prepared and audited in accordance with GAAP, and are free from both error and irregularity.   These controls are intended to curb financial statement fraud including overstating earnings, profits, and assets, and understating debts and obligations in order to appear profitable, manipulate stock prices, and fraudently obtain financing.

Penalties Under Sarbanes Oxley

By law, the  Sarbanes-Oxley Act of 2002 requires that all major corporations in the United States must maintain a set of policies and procedures that constitute a system of internal controls.  These policies and procedures mu be adequate as defined by various laws.  Additionally independent auditors must examine a company’s reporting system, certify that it is adequate, and records are in accordance with GAAP.  Failure to comply with these laws may result in fines to the corporation and/or imprisonment of company executives and employees of accounting and audit firms.

References

Kieso, D., Kimmel, P., & Weygandt, J. (2002). Essentials of accounting: Tools for business decision making. Hoboken, NJ: John Wiley & Sons, Inc.

Securities and Exchange Commission. (2008, August 28). Final Rule: Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports. Retrieved May 6, 2009, from http://www.sec.gov/rules/final/33-8238.htm#vii.

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