When operating a business having internal controls protects the corporation from internal and external theft along with ensuring employees within the company are acting ethically and within the law. Internal controls set safeguards in place to discourage unauthorized use and theft from current employees and to reduce internal errors or irregularities in the accounting process, which could be construed as misrepresenting the true financial status of the company. The chances of a company employing a person who has the ability to steal money has been shown to be greater when there are no checks and balances to monitor the financial statements and to deter a normally honest person. With the scandals, which have plagued publicly traded companies in order to protect the investors Congress passed the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act or SOX is considered one of the most important laws to be passed in recent decades because this Act forces publicly traded corporations to monitor and maintain a proper system of controls over the accuracy of the financial statements. After the passing of the SOX corporations are held liable for the misrepresentation of their financial statements and can be fined or representatives of the company overseeing the controls of the financials can be imprisoned if found to be maliciously misrepresenting the company’s financial numbers.
Although corporations put forth great effort to abide by SOX there may be times when the division of responsibilities set in place to follow the principles of internal controls are unable to be followed. This could be due to a loss of employees, creating a
deficiency in manpower where one person would be responsible for numerous related activities increasing the possibility for possible errors. The segregation of duties is an integral part of any internal control system. If a company announces deficiencies in its internal controls investors may lose trust in the company to safeguard their investment or handle their money in an ethical and responsible way resulting in less money being invested into the company.
In order to keep the trust of the investors and follow SOX a company sets safeguards to protect the accuracy and reliability of the accounting records. A...