There are many rules companies must follow whenever documenting financial information or any other data which is gather during any business transactions. In order for said companies to report financial information internal controls have to be put in place as companies have to adhere to certain laws and regulations. Internal controls can be defined as a process which companies follow in order to ensure all financial reporting is done in a reliable and lawful manner. Some think of it as a system which works within a system as it plays a major role on the success of a company’s accounting system. At the organizational level, internal control objectives relate to the reliability of financial
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Enron is a perfect example of what can occur when there are limitations in the internal controls of a company. Enron became a very profitable company in a short amount of time; the problem began when executives within the company began to hide debt from the books as well as investors. This accounting practice made the company seem more valuable than it actually was. It became a cultural issue as management made overlooked internal controls and acted in a selfish manner. Poor judgment and a lack of knowledge can also limit internal controls. If executives, accountants and all other employees that handle financial records do not have a clear understanding of their responsibilities and duties within the internal controls they will not know how to properly do their jobs. It is extremely important that companies outline their internal control policies clearly for all employees to follow, this way it can be understood completely. Training of the employees on the proper way of using internal controls will help avoid issues in the future.
There are four principles of internal controls are as which are establishing responsibility, using physical, mechanical, and electronic controls, segregation of duties, and independent internal verification. Establishment of responsibility is an important principle as it gives responsibility to specific individuals;