Internal Controls Essay

1192 words - 5 pages


Internal Controls
Jared Johnson
University of Phoenix

Internal Controls

In order for a company to survive and be profitable there need to be a plan in place to safe guard their finances. These plans fall under an umbrella term known as the internal controls of a company. It doesn’t matter if these companies are huge corporations with thousands of employees or small one store operations with a half a dozen employees, or if they are public or private. There need to be some sort of controls in place to protect the company and it’s employees. This brings us to the two primary goals of internal controls, they are; (1)To safeguard its assets. By doing ...view middle of the document...

The Sarbanes-Oxley Act of 2002 mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud. Finally in 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act this legislation set out to reshape the U.S. regulatory system in a number of areas including consumer protection, trading restrictions, credit ratings, regulation of financial products, corporate governance and disclosure, and transparency(A). It is interesting to note that these measures were enacted within a few years after a financial crisis or corporate wrong doing.
The Sarbanes-Oxley Act of 2002 has changed internal controls in many ways. It created new standards for corporate accountability as well as new penalties for acts of wrongdoing. It changes how corporate boards and executives must interact with each other and with corporate auditors. It removes the defense of "I wasn't aware of financial issues" from CEOs and CFOs, holding them accountable for the accuracy of financial statements. The Act specifies new financial reporting responsibilities, including adherence to new internal controls and procedures designed to ensure the validity of their financial records. It also requires all financial reports to include an internal control report. This is designed to show that not only are the company's financial data accurate, but the company has confidence in them because adequate controls are in place to safeguard financial data. Year-end financial reports must contain an assessment of the effectiveness of the internal controls. The issuer's auditing firm is required to attest to that assessment. The auditing firm does this after reviewing controls, policies, and procedures during a Section 4040 audit, conducted along with a traditional financial audit (B).
Why would a company knowingly give out wrong information about earnings? If the earning of a company can appear to be very high the value of that company and its stock will be worth more because that company appears to be very strong. A company would rather be looked at as strong and valuable instead of weak and struggling. When a company that announces deficiencies in its internal controls, or in other words they admit that they lied on their financial reports the value of their stocks fall because, #1 the value of their stock was inflated because of their wrongful information and #2 people have lost trust in their financial reports altogether. By doing this people wonder if any thing that they report is true or not.
Unfortunately no matter how well internal controls are designed there are still some...

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