The Importance of Internal Controls

Essay by shellymichaelsCollege, UndergraduateA, March 2007

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Corporate finance is complex, enticing, and can be corrupt. This paper will address the importance of internal controls, identify effective internal control techniques, illustrate the relationship between ethics internal control techniques, as well as the importance on the Sarbanes-Oxley Act.

Corporations and Joe's Diner both require records of their operating activities, however, fewer 'investors' have concerns in how Joe manages his profits. Outside investors as well as Board members of corporations make decisions regarding spending, investing, expansion, etc. therefore regulations and decision-making procedures must be established. The recent past is proof of corruption, e.g., ENRON and Martha Stewart are only two examples. Tyco International Ltd., L. Dennis Kozlowski, former CEO, is another example of how, even with the appearance of propriety, a corporation can hide its misdeeds. (Symonds, 2002)

Kozlowski structured his company so strategically controlling the internal audits, reporting directly the Board and subsequently to the outside auditors, PricewaterhouseCoopers.

His creative fiscal management style was ultimately his demise and nearly that of the Tyco name. It is clear there was a lack of effective internal control techniques. Methods and procedures authorizing transactions and safeguarding the company's assets could have been established by the Board, and then followed to avoid this type of incident.

Frameworks for internal controls vary, however a firm following a set of clearly defined measures to ensure a firm has made every reasonable attempt to implement internal controls, their ethical integrity will be evident under review.

Regardless of an entity's size or type, and regardless of whether it is held privately or publicly, managers, and accountants should be alert to the rudiments of accounting systems and controls. All good systems of internal control have certain features in common. A summarized checklist of these features includes:

1. Reliable personnel with clear responsibilities

2. Separation of duties...