Internal Controls

Internal Controls
Chris Stafford
XACC 280

    The internal controls are a system within a system they play a key role in the success of an accounting system. Internal controls are in place to protect businesses from fraud and abuse. Internal controls also ensure that the information is accurate and complete while making sure that the information meets regulatory requirements.
    Section 302 of the Sarbanes-Oxley Act mandates that senior officers of publicly traded companies certify that their company has designed, established, and maintained internal controls that ensure the information contained in the periodic reports are accurate. Section 404 of the Sarbanes-Oxley Act requires that management and external auditors prepare a report that shows that the company’s internal controls are adequately functioning in regards to financial reporting.
    Based on recent research corporations with internal control deficiencies as defined in section 404 of Sarbanes-Oxley Act are more susceptible to accounting irregularities end up paying the price through higher cost of capital, and lower stock prices. Academic research and some feedback from market participants have demonstrated strong evidence that these deficiencies are not received well by capital markets, and the companies that have these deficiencies are going to face higher cost of capital to reflect the risk accounting and governance irregularities.
    Effective internal controls will only provide a reasonable amount of assurance that a company’s financial controls, operating system, and reporting systems are effectively working. A well designed and operated set of internal controls will not be able to provide an absolute assurance that the company’s objectives will be met.
    In order to design and develop an effective internal control system the management department will have to clearly understand the company’s objectives and the operating environment. The company will also have...