Compliance and Internal Control Systems

Compliance and Internal Control Systems in Phoenix


We Can Help Ensure the Integrity of Your Financial Reporting and Regulatory Compliance


The Code of Federal Regulations comprise about 220 soft-bound volumes, and as many as 3,000 additional federal regulations are published each year. These federal regulations are in addition to state and local codes. With the complexity of modern business, it’s good to have help to ensure you comply with laws and regulations and prevent potential fraud. 

Internal controls are the policies, procedures and rules implemented by a company to ensure the integrity of accounting information. Internal controls can also prevent employees from stealing assets and improve operational efficiency with more accurate and timely financial reporting. 

Importantly, the Sarbanes-Oxley Act of 2002 introduced strict reforms to financial disclosure and made managers legally responsible for the accuracy of their companies’ financial statements. In summary, compliance and internal control systems play a critical role in a company’s internal controls and corporate governance. 

Internal Controls Create an Audit Trail for Your Company’s Financial Statements

The accounting scandals of the early 2000s (including companies like Enron and Lehman Brothers) were a wakeup call to regulators and legislators. The Sarbanes-Oxley Act of 2002 was enacted to protect investors from fraudulent accounting activities and improve the accuracy and transparency of corporate disclosures. Internal controls have become more important because managers who do not properly establish and manage internal controls can face serious criminal penalties.

 

Your financial statements may include an auditor’s opinion on the procedures and records used to produce the statements. External auditors may test your company’s accounting processes and internal controls and include an opinion on their effectiveness in their report.

 

Creating strong internal controls can help limit the impact and disruption that an audit can have on your business operations while also exposing potential inefficiencies and fraud in your organization.



What Are the Components of Internal Controls? 

Just like every business is different, no two systems of internal controls are identical. That said, good internal control systems are designed to promote the core philosophies of financial integrity and accurate accounting practices. Investing in internal controls can help streamline operations and prevent fraud. Your business’s internal control systems should include:


  • Control environment that establishes for all employees the importance of integrity and a commitment to reporting fraud
  • Risk assessments that regularly identify losses and potentially implement policies to contain risk
  • Monitoring systems of internal controls, including system updates and employee training to ensure internal controls are viable
  • Communication offering clarity of purpose and defined roles that facilitate employees’ ability to report violations of company policies
  • Control activities pertaining to the processes, policies and other actions that maintain compliance through preventative and detective activities


How to Deter Errors in Financial Reporting and Catch Potential Fraud

Generally speaking, internal controls fall into preventative and detective activities. Preventative control activities are designed to discourage errors or fraud through robust documentation and authorization policies. Detective controls supplement preventative controls to catch events that might have been missed.

 

An example of preventative internal controls is a separation of duties. This part of the process ensures that no individual in your organization can authorize, record and take custody of a financial transaction and resulting asset. Other preventative internal controls include authorization of invoices, verification of expenses and limiting physical access to equipment and inventory.

 

Detective internal controls attempt to find problems if they’ve occurred. A good example of a strong detective internal control is reconciliation, which compares data sets like invoices sent and invoices paid. Other detective controls include internal and external audits.



What Is the Value of Your Business’s Reputation?

Internal controls are critical to the integrity of a company’s operations and the trustworthiness of their financial information. If you have plans to take your company public, merge with another private business or sell your company, clean and verifiable financial statements are a critical tool. Even if you plan to keep your company closely held, you want to limit your exposure under the Sarbanes-Oxley Act and maintain your reputation in your community. You don’t want to be mentioned among companies like Enron and WorldCom who committed corporate accounting fraud.

 

Let us help you implement successful internal controls that prevent employees from cutting corners for the sake of operational efficiency or working together to conceal fraud. Call H&H Accounting Services today at 480-561-5805.




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