Internal Control Standards: Protecting Assets, Accuracy & Compliance - Essay Sample

Introduction

According to the American Institute of Certified Public Accountants (AICPA), internal control is the organization's plan and all the coordinated methods and measures applied to a company to protect its assets, check the accuracy and fidelity of its accounting data, promote efficiency and encourage compliance with established administrative guidelines (Drogalas, Pazarskis, Anagnostopoulou, & Papachristou, 2017). Internal control standards are designed to promote the accountability of officials for the mission and objectives entrusted and the use of the assigned assets and resources to achieve the goals of an organization.

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The principles of internal control are procedures adopted to ensure the safeguarding of the company's assets (Frazer, 2016). One of the standards violated in the case study is the negligence of responsibility by both the school board and Hock, the business manager who having only worked as the school secretary was promoted to a position that required complex skills and understanding. The board, despite being aware of Hock's lack of qualification and inability to handle sophisticated accounting systems, did nothing to rectify the open management problem as part of their oversight responsibilities.

Another standard of internal control violated in the case is the failure by Hock to document all transactions in writing which would enable her to track all communication between the school and the company. Assigning consecutive numbering to invoices and records under specific control is a vital standard for avoiding accounting errors (Frazer, 2016). Instead of checking through records to ascertain the validity of orders, Hock believed the company contact and proceeded to make invalid payments exposing her incompetence in her obligations. Employee rotation as a standard of internal control was also violated. Despite her professional qualifications, Hock held a vital position in a public company for a decade from 1978-1988. Rotation of employees is essential in preventing such things as embezzlement and other unethical practices. The violation of this standard cost the school district over $2 million.

Preventing Similar Fraud in the Future

The key to preventing fraud in an organization lies in the implementation and monitoring of internal control standards (Drogalas et al., 2017; Frazer, 2016). In the case study, this means implementing measures that protect financial data. Finance employee protocols and procedures must be established to ensure that any school purchases are well documented so that only accurate payments are made against delivered products. Good documentation is a measure of good practice and will provide accurate information to support managers in improving school operations, focusing on the objectives to be achieved, and focusing on reducing costs. The process of authorizing transactions must also be made to minimize any chance of fraud. The case study demonstrates how easy it was for Hock to authorize and make irregular payments. Besides closely monitoring of the authorization process, employees should also be rotated every two years. This will be done to reduce errors, avoid theft and fraud which will inevitably improve excellence in the management of financial resources in the district.

The Roles of Internal Control and Post-Audit in the War Against Waste, Fraud, and Abuse

The significance of internal control is predominantly linked to fraudulent acts that have resulted in massive abuse and waste of resources. Scandals, lobbies, kickbacks, and manipulations of financial statements are examples that have been presented as a result of widespread neglect of business controls (Frazer, 2016).

Among the main roles in designing internal control system include (Sabbar, Al-Dulaimi, Alalawi, & Rashid, 2018):

• Separation of duties- One of the pillars on which the internal control system is based is controlled by the opposition of interests, which consists of an operation being carried out with the intervention of several sectors. In general terms, it is convenient to separate the decision or authorization functions of the operation, the physical custody, and the accounting records.
• Authorization levels- The procedures (and to a lesser extent the job descriptions) must establish who are the persons who can authorize an operation according to the type and amount of the transaction.
• Assignment of responsibilities- The attributions and responsibilities of each operation must be established to avoid conflicts or "nobody's zones" (functions that do not have a responsible person). Contributions and procedures manuals contribute significantly to this end.
• Security in asset management- The rules must establish the safety precautions for the deposit, custody, and management of the company's assets.
• The integrity of information- When an operation originates, the data related to it must be captured, on time and following legal, professional and accounting principles.
• Design of forms, files, and records-The information media must be designed in such a way that they collect all the necessary information, in a clear and precise manner, and record the person responsible.

In the accounting process, controls must be established to ensure the timeliness and reliability of the information. To do this, those responsible for each task must be clearly defined, establish closing task schedules, carry out reconciliation and analysis of periodic accounts. It is necessary to emphasize that beyond compliance with the standards, the Internal Control System is based on ethical values, which direct the behavior of those operating them. These ethical values belong to a moral dimension and, therefore, go beyond mere compliance with laws, decrees, regulations and regulatory provisions, and are essential for the control environment as they frame the conduct of officials and employees, guiding your integrity and personal commitment.

References

Drogalas, G., Pazarskis, M., Anagnostopoulou, E., & Papachristou, A. (2017). The effect of internal audit effectiveness, auditor responsibility and training in fraud detection. Accounting and Management Information Systems, 16(4), 434-454

Frazer, L. (2016). Internal control: Is it a benefit or fad to small companies? A literature dependency perspective. Journal of Accounting and Finance, 16(4).

Sabbar, F. A. A., Al-Dulaimi, Z. Y. S., Alalawi, T. G. Y., & Rashid, A. M. (2018, May). The importance of adopting principles of corporate governance for the quality of internal audit. In Proceedings of the International Conference on Business Excellence (Vol. 12, No. 1, pp. 1089-1101). Sciendo.