Get Full Access to Every Course

The topic of internal control has long been a significant issue for businesses. Management may view internal control as a set of forms, checklists, and templates required by auditors, but it encompasses much more. Since the passage of the Sarbanes-Oxley Act (SOX), internal control—especially over financial reporting—has become a major focus for all organizations, regardless of their status as public, private, not-for-profit, sole proprietorship, partnership, or corporation. Managers must understand and establish sound, effective, and proper controls for operations, compliance, and financial processes within the organization. Effective internal control can truly provide substantial organizational value.

Internal controls are the mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information; promote accountability; and prevent fraud. These controls direct, monitor, and measure the organization’s resources, including operational and compliance activities. They play a crucial role in preventing and detecting fraud, as well as protecting the organization’s resources.

Internal control is influenced by an organization’s structure, workflows, authority lines, personnel, and information systems, and is designed to help the organization achieve specific goals or objectives. For instance, a small organization with limited resources may not be able to segregate duties as rigorously as a larger organization. However, this does not excuse small organizations from acknowledging the importance of that control; they must find alternative ways to mitigate potential issues. Ultimately, internal control is part of an organization’s overall responsibility and required due diligence to ensure its operations are effective. Management is the “keeper” and “inventor” of internal controls and must take ownership.