The Importance of Internal Control Programs

Essay by mradamhUniversity, Bachelor'sA+, February 2006

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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: 1. reliable personnel with clear responsibilities, 2. separation of duties, 3. proper authorization, 4. adequate documents, and 5. 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. 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...