The backbone of the business
When there is a business setting and people have to rely on others to help their business grow and develop, there will always be issues. One of the biggest issues when hiring employees to help grow your business is deciding who to trust to handle the financial aspects of the business. The business should establish some type of internal controls to aide in managing the assets of the company. What are internal controls? Internal controls consist of all the related methods and measures adopted within an organization to safeguard its assets and enhance the security and reliability of its accounting records (Weygandt, Kimmel, Kieso, 2008). What this means is that there would be safety valves that allows others to view financial documents to ensure that no one is stealing money or goods and services that the business provide.
One way that the government has gotten involved with internal controls within a business is by establishing and passing the Sarbanes-Oxley Act of 2002. Under this act, all publicly traded U.S. corporations are required to maintain an adequate system of internal control (Weygandt, Kimmel, Kieso, 2008). Companies that fail to comply are subject to fines, and company officers may be imprisoned (Weygandt, Kimmel, Kieso, 2008). The reason this act is so important to business is that is provides laws and regulations for businesses to adhere to for investor safety. Millions invest in the stock market either through their own research or retirement accounts such as through a 401K. If these businesses were not held to any type of law or standard, companies would continue to see episodes of corruption and misappropriation of funds. Millions of American people would be screwed out of millions of dollars because of the acts of one corrupt individual or a group of individuals. When it comes to trading and the stock market, investors would be very hesitant to buy into companies that are known to have weak or no internal controls for fear that their investments would yield little to no return.
There are some limitations to internal controls. The human element is always considered a limitation. No matter how good a company internals controls may be, people in the right position find ways to get around these control measures. A good example of this is the recent case in Detroit involving the ex-mayor Kwame Kilpatrick. He was involved in and charged with racketeering (among other charges) with his long time friend Bobby Ferguson. Bobby Ferguson was the business owner, and through his construction contracting business, the ex-mayor was able to launder money and go beyond the bounds of the internal controls for their own personal gain. They used the business and the power of the mayor’s office to embezzle money in order to provide their family with a financial future while the employees of the contracting business was left out in the cold once it was discovered that the business was a front for corruption. Another example of failed internal controls is when