An Analysis of Effective Internal Control Programs in Organizations

Internal control programs are important because they help managers and accountants organize and operate their businesses more effectively. Companies who fail to implement a control program often find themselves with a disorganized mess on their hands; often leading to financial troubles. For a control program to be developed effectively, administrators must design the plan of the organization which includes all of the methods and procedures preformed. This gives accounting controllers a better understanding of how the organization functions, so that they are able develop a plan of transactions, safeguard of assets, and accuracy of financial records.

Organizational leaders often refer to the checklist identified in the Importance of Internal Control Systems article found in this week’s website articles.

A summarized checklist of these features include:

• reliable personnel with clear responsibilities,
• separation of duties,
• proper authorization,
• adequate documents, and
• cost benefit analysis.

Without a sound, ethical control in place, a business may find itself in situation similar to the TYCO scam; where upon unauthorized loans and gifts were taken from the company by former chief executive Dennis Kozlowski for himself and other employee’s.

Effective Internal Control Techniques

There are several techniques that business’ use to ensure that their internal control system is dependable. One method is to provide management reports regarding the company’s internal controls within their annual report. While this in not mandatory, it has become best practice because it allows management to share with its shareholder’s current issues and concerns, which would otherwise be left unspoken.

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According to the 1999 edition of Accounting Trends and Techniques, approximately 58% of public companies included management reports in their 10K Management reports typically discuss the following topics:

• Financial statement presentation.
• The purpose, nature and components of the company’s internal controls.
• The role of internal audit.
• The role of the audit committee.
• The role of the independent auditor. (Willis and Lightle)

Another technique for organization maybe to hire employee’s who are members of the American Institute of Certified Public Accountants (AICPA). The AICPA is an organization Committed to member service and the public interest. CPA’s can become members of this organization as part of their
career development. (http://www.aicpa.org/index.htm)

The Relationship between Ethics and Internal Control Techniques

Ethics and internal controls go hand in hand. While the term “Ethics” can be sub-divided into categories, we can refer to Normative ethics because it takes on a more practical task, which is to arrive at moral standards that regulate right and wrong conduct. This may involve articulating the good habits that we should acquire, the duties that we should follow, or the consequences of our behavior on others. A good internal control is based on sound ethical beliefs of the organization’s leaders.

The true test of a good control system is shown by how well these beliefs are carried out among employees. The article Financial accountants’ perceptions of management’s ethical standards best describes this. This is a great article, one which describes how the tone is set top down by senior management and then carried out throughout the organization. For years now, organizations have been trying to create ethical environments by implementing a number of initiatives, including: codes of conduct, ethical awareness training programs, and ethics offices (Ethics Resource Center, 1994). The article goes on to say that managers must understand how employees perceive their work environments. This concept is sometimes hard to fully grasp, thus there have been several documented studies done to help us understand this.

The Importance of the Sarbanes-Oxley Act

To understand the importance of the Sarbanes-Oxley Act, I felt it was important to understand the act itself. From my readings, it appears that the Sarbanes-Oxley act was passed to restore public confidence in the financial reporting of publicly traded companies. The three affected areas-upgrading internal controls, preventing fraud and improving audit committee accountability. This means new responsibilities for CPA’s. They are responsible for shepherding many new rules and regulations through their companies. In this role they will

• Establish new internal controls and methods of evaluating those controls.
• Develop internal audit functions where needed and creating new relationships with external
  auditors and boards of directors’ audit committees.
• Put together anonymous hot lines for employees to report fraud.

References:

1. Willis, D. M. (2000, October). Management reports on internal controls. Journal of Accountancy. 190(4) . 57-64
2. D’Aquila, J. M. (2001, June). Financial accountants’ perceptions of management’s ethical standards. Journal of Business Ethics, 31(3), 233-244.