Relevance Of Strong System Of Internal Accounting Controls

Definition of Internal Controls

Discuss about the Relevance of Strong System of Internal Accounting Controls.

Internal control in the organizations can be defined as the process of ensuring organizational objectives achievement regarding operational effectiveness and the operation’s effectiveness, law compliance, policies and regulations and maintaining reliable financial reporting (Saraiva et al., 2014). Internal control procedures in organizations indicate effective and orderly business operations, proper detection of theft, fraud and errors along with maintaining timely and reliable management and financial information. The objective of the paper is to analyse the importance of internal controls in the organizations. Moreover, the paper intends to explain that with the help of strong system of internal accounting controls the organizations do not rely on the detection of the impropriety.

Internal control in organizations can be explained as a process that is impacted by an organization’s board of trustees, management along with human resources. Internal control system is designed to offer reasonable assurance in consideration to the objectives in categories namely, operational affectivity and efficiency and financial reporting reliability. (Moeller, 2014) defined internal controls to be the methods developed by an organization in order to ensure about the accounting and financial information integrity, address profitability and operational objectives and shift policies of management all over the organization.

Internal controls is deemed to work at its best at the time they are applied they are employed within several divisions and deal with the interactions among all the business departments (Moeller, 2014). It is stated that no two systems of internal control are similar but several other major philosophies considering financial integrity and accounting practices have turned out to be standard management practices. Internal controls must be documented in order to develop an audit trial. Organizational management is held accountable for the development and maintenance of organizational internal controls. For the organizations, those require an audit, the accounting companies offers an opinion regarding the efficiency of such controls.

The major components of the “internal control system” employed by organizations include:

• Control Environment: The factors those address the needs of the organizations and affect the control consciousness of its employees. Such factors include ethical values and integrity, competence commitment, human resource practices and policies, organizational structure, operating style and philosophy of management along with audit committee participation (Hammersley et al., 2012).
• Risk Evaluation: Risks those might affect organizational capability to adequately process, record, process and summarise the financial information including new personnel, speedy growth, new information systems, and business restructuring, foreign operations along with new products, activities and new lines includes risk evaluation.
• Control Activities: Several policies and procedures that support in making sure that those necessary actions are taken to deal with the risks affecting the attainment of organizational objectives. These components will include physical controls, duties segregation and reviews of performance (Cheng, 2013).
• Communication and Information: Records and methods maintained to process, record, summarise and report transactions and to ensure accountability of associated liabilities and assets. Such components must consider recording all the valid transactions, measure value adequately and communicate responsibilities to the organizational employees.
• Monitoring: Quality evaluation of the performance of internal control performance on a regular basis is included in monitoring process.

There are generally two types of internal controls namely preventive and detective controls and both these controls types are necessary for a superior “internal control system”. “Preventive controls” are deemed necessary as they are protective and focus on quality. Moreover, “detective controls” have a vital role in offering an instance that the “preventive controls” are effective as required.

Preventive Controls: These internal controls are designed for discouraging any errors or irregularities from taking place. Such control ensures that organizational objectives are addressed through segregation of duties, asset security and ensuring verifications, approvals and authorizations (Choi et al., 2013). In such controls, the management authorizes the organizational staff to perform required activities and carry out certain transactions within the required parameters. Moreover, organizational duties are also segmented among staff of specific departments in order to decrease the error risks.

Components of Internal Control System

Detective Controls: Such internal controls have been designed to reveal errors or irregularities once they have taken place. Instances of such detective controls undertaken by organizations are performance reviews, physical inventories, audits and reconciliations. In such controls, organizations management compares the information and recent performance of companies with the budgets, forecasts and several other benchmarks in order to measure the extent to which organizational objectives are attained and for recognising the unexpected outcomes (Skaife et al., 2013).

Effective internal control implementations will help in decreasing the risks caused from asset loss and facilitate organizations in making sure that company information are accurate and complete, the financial statements are highly reliable and the internal control plan complies with necessary regulations. Implementation of the internal controls offers certain constructive advantages to the organizations implementing them. Such advantages are described under:

• Internal control facilitates in proper implementation of management policies in order to attain all the business goals (Hoitash et al., 2012).
• Internal control is advantageous in safeguarding the assets of the business from several accidents, theft and misuse.
• Internal control strategies of organizations facilitate the auditor in organizational work that helps in detecting all the frauds and errors those are committed within the accounting books.
• Internal control facilitates increase of the organizations financial statements reliability and accuracy and the accounting books.
• Establishing internal control strategies supports in establishing some moral pressure on the employees
• Internal control effectively supports the management of organizations to develop and implement constructive plans through offering accurate and relevant information (Biegelman & Bartow, 2012).
• Internal control facilitates the management of organizations in regulating the work of its employees through dividing tasks among employees in a scientific way that facilitates in making the everyday tasks of the employees extremely effective.

In consideration to the effective ways in which internal controls are designed and employed by the organizations, certain limitations to such control have been revealed. It is observed that the internal controls can offer reasonable assurance in order to attain specific business objectives. The limitations of the internal control by the organizations include:

• Breakdowns: It is observed that even if the internal controls are well designed it can break down. Moreover, the employees sometimes misunderstand several instructions or simply make several mistakes. Errors might also take place from the new technology ad from the complexity of certain computerised information systems (Stefaniak et al., 2012).
• Judgement: The efficiency of the internal control will be limited by the decisions conducted by the human judgement within pressures in order to conduct business relied on the available information.
• Collusion: Internal control systems might be evaded through employee collusion. All the individuals that act collectively are capable to modify the financial information or certain other management information in a way that cannot be recognised by the internal control systems (Gond et al., 2012).
• Management Override: Top-level personnel might be capable to override certain procedures and policies for individual advantage or gain. This must not be confused with the intervention of management that signifies management actions to remain away from required procedures and policies for several legitimate purposes.

Internal Control in Tesco Company- The Company has implemented highly efficient internal control frameworks and has made sure that they comply with such frameworks for efficient business operation of the company. Complying with the policies of internal control, the management of Tesco attains the responsibility of recognising risks along with developing the design and operations of controls in order to manage risks (Lam, 2014). The company has invested a considerable amount of time and resource in order to understand, analyse and rectify the identified internal control weaknesses.

Internal Control in Sainsbury Company- The board of Sainsbury Company effectively fulfils the responsibility of maintaining efficient internal controls and regularly reviews the efficiency of these internal controls. The internal controls have been highly effective in managing other than decreasing the risks of ay failure within organization. Such effective internal controls help in attaining all the company’s business objectives and can provide assurance against several material losses (Gond et al., 2012). The company’s board determines all the internal controls encompassing operational, financial and compliance control and management of risks.

Conclusion

The objective of the paper was to analyse the importance of internal controls in the organizations. Moreover, the paper intended to explain that with the help of strong system of internal accounting controls the organizations do not rely on the detection of the impropriety. It was revealed that Internal control system is designed to offer reasonable assurance in consideration to the objectives in categories namely, operational affectivity and efficiency and financial reporting reliability. Moreover, effective internal control implementations will help in decreasing the risks caused from asset loss and facilitate organizations in making sure that company information are accurate and complete, the financial statements are highly reliable and the internal control plan complies with necessary regulations.

References

Biegelman, M. T., & Bartow, J. T. (2012). Executive roadmap to fraud prevention and internal control: Creating a culture of compliance. John Wiley & Sons.

Cheng, M., Dhaliwal, D., & Zhang, Y. (2013). Does investment efficiency improve after the disclosure of material weaknesses in internal control over financial reporting?. Journal of Accounting and Economics, 56(1), 1-18.

Choi, J. H., Choi, S., Hogan, C. E., & Lee, J. (2013). The effect of human resource investment in internal control on the disclosure of internal control weaknesses. Auditing: A Journal of Practice & Theory, 32(4), 169-199.

Gond, J. P., Grubnic, S., Herzig, C., & Moon, J. (2012). Configuring management control systems: Theorizing the integration of strategy and sustainability. Management Accounting Research, 23(3), 205-223.

Hammersley, J. S., Myers, L. A., & Zhou, J. (2012). The failure to remediate previously disclosed material weaknesses in internal controls. Auditing: A Journal of Practice & Theory, 31(2), 73-111.

Hoitash, R., Hoitash, U., & Johnstone, K. M. (2012). Internal control material weaknesses and CFO compensation. Contemporary Accounting Research, 29(3), 768-803.

Lam, J. (2014). Enterprise risk management: from incentives to controls. John Wiley & Sons.

Moeller, R. R. (2014). COSO Internal Controls: The New Revised Framework. Executive’s Guide to COSO Internal Controls: Understanding and Implementing the New Framework, 29-40.

Moeller, R. R. (2014). Internal Control Entity and Organizational GRC Relationships. Executive’s Guide to COSO Internal Controls: Understanding and Implementing the New Framework, 161-179.

Saraiva, K. D., de Melo, D. F., Morais, V. D., Vasconcelos, I. M., & Costa, J. H. (2014). Selection of suitable soybean EF1α genes as internal controls for real-time PCR analyses of tissues during plant development and under stress conditions. Plant cell reports, 33(9), 1453-1465.

Skaife, H. A., Veenman, D., & Wangerin, D. (2013). Internal control over financial reporting and managerial rent extraction: Evidence from the profitability of insider trading. Journal of Accounting and Economics, 55(1), 91-110.

Stefaniak, C. M., Houston, R. W., & Cornell, R. M. (2012). The effects of employer and client identification on internal and external auditors’ evaluations of internal control deficiencies. Auditing: A Journal of Practice & Theory, 31(1), 39-56.