Companies must have “Internal Control” to maintain principles and limitations. Internal controls are in place to help with securing the company from theft, robbery, and unauthorized use and enhancing the corrected and reliability of its accounting records by minimizing errors and making sure that are no unknown patterns in the accounting process. All U.S. corporations are required to have an adequate system of internal control because of the Sarbanes-Oxley Act of 2002 or the companies will be subject to fines and company officers may be imprisoned that do
The Sarbanes-Oxley Act of 2002 (SOX) was implemented because of all of the corporate scandals of the recent years were uncovered. SOX were put into place because it forces companies to pay more attention to internal controls. This system forces the company’s responsibilities on corporate executives and boards of directors to make sure that the companies’ internal controls are effective and reliable and less than one part of the law, companies must develop sound principles of control over financial reporting. The companies must continually develop and check sound principles of control over financial reporting and that the system is in working condition. Independent outside auditors must attest to the level of internal control. In addition, SOX also developed the “Public Company Accounting Oversight Board”, (PCAOB) which now establishes auditing standards and regulates auditor activity. Some corporate executives have complained about the expense and time that has involved in following the requirements but 60% of the investors believe that this is a good system and would not invest in a company that does not follow SOX.
If a company announces that it has deficiencies because of a weakness in internal controls, its stock price can fall because the investors are weary about their investments at that time. Possibly it could be a shoplifting problem in the retail stores or something internal. If it is a shoplifting problem, the stores could take drastic measures and search customers as they leave but that could give the store a bad name and it could not be justified in doing so. Stores instead have become to safe guard a little differently. They have now started to install cameras and use store detectives and post shoplifting signs in the stores along with sensor equipment at the exits.
The human element has become an important step when it comes to internal controls. Any good system can become ineffective as a result of an employee being greedy or careless. Some employees do not count inventory as they should and make up numbers as they go or they may work together to...