Internal Controls: Who's Really in Control?

Running Head: INTERNAL CONTROLS: WHO'S REALLY IN CONTROL?

Internal Controls: Who's Really in Control?

L. Anson

April 10, 2011

Internal Controls: Who's Really in Control?

Mark Twain once said, "Laws control the lesser man... Right conduct controls the greater one" (n.d.). This is something all business people would hope that their peers and subordinates would subscribe to; however this is not the case. Whenever the human factor is put into play there is a need for checks and balances. In the business world this would be internal control. Internal control is systems and measures taken by a company or "organization for the purpose of protecting its assets against waste, fraud, and inefficiency" (FAQ: Parts of Internal Control, n.d.). It also includes measures to ensure accuracy and reliability in the company's data and compliance with company policies (Internal Control of Transactions, n.d.).

Though there are internal controls, unfortunately there are also limitations to those very same controls. Some of those limitations are as follows (McIntosh, 2010);

 Collusion-Employees colluding to fraud a business will find ways to get around internal controls. Sharing of passwords or access information can open avenues for concern. Additionally when collusion occurs there is the potential of theft or other illegal activity.

 Lack of Management Support-In the work force there is a need for management to remain active and proactive. If internal controls are in place and management is not supportive of these internal controls this will allow employees to circumvent procedures and in some cases management may override a problem without investigating the cause. Fraudulent activities can occur do to management's lack of support for the internal control system.

 Lack of Training/Communication-If an employee does not understand the reasoning or purpose for internal controls the process itself can become inefficient in ineffective. If the information from management is not communicated clearly it may leave the employees feeling overwhelmed, over worked and mistrusted. This open the door to sidestepping the internal control system. If the employees are not trained properly they with either not use internal controls or will create their own version.

Internal controls are consistently used to maintain compliance to rules, regulations and procedures. These controls are very important in businesses and industries which are heavily regulated. According to the University of Delaware (n.d.) "Internal controls consist of five interrelated components:

 Control environment- This includes integrity, ethical values and competence of the company's staff and is the foundation for all other component of internal control.

 Risk assessment-All company's face risk and these must be identified, analyzed and managed to reach objectives.

 Control activities-This is used to ensure that management directives are followed through and all risks are dealt with.

 Information and communication-Information systems must be in place to identify, capture and communicate pertinent information in a form and timeframe that facilitate people to carry out their responsibilities and maintain accountability for