Internal Control Failure the Collapse Term Paper

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The CEO of ENRON attempted to give a rosy picture of the company financial position to protect his own investment in company shares.

As a part of internal control, the accounting function and actual physical stocks should not be managed by the same person. This removes the temptation of cooking the books and allowing the stock to disappear without anyone noticing the fraud.

Protecting computer records through limiting access to accounting and record functions protects integrity of records and also removes the risk of unauthorized persons altering the records to commit fraud.

Regular and independent audits are essential for internal control. Failure of internal control is most often due to failure of proper supervision and independent checks of business related matters. Auditor must understand the business, its internal controls and the business environment to audit the system.

Internal controls helps business to achieve its performance and profitability objectives without risking the problems that can happen due to failure of internal controls. Reliable financial reporting avoids dishonest employees cheating the company, helps in compliance of laws and regulation applicable to the business and avoids damages due to mismanagement, failure in compliance of regulations and ensures that the profits due to the company do not end in someone else's pocket.

Internal control however cannot change a poor manager into a good one. Management of large companies often design internal controls to keep them out of the internal control mechanism. This allows audit and internal failure control up to a certain level while the high ups can benefit from the frauds they commit. [Tipgos, 2003] argued that the present internal control systems do not prevent senior management fraud.

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He argued that the rules formulated by the Tread-way Commission and the Committee of Sponsoring Organizations (COSO) for internal controls created zones of 'responsibility to comply' and 'responsibility to implement'. Between these two areas is a "zone of discretion and prerogatives" which top management enjoys and which defines management's range of compliance. The fraudulent executives have used this 'zone of discretion and prerogative to an extent where the board of directors have no option but to accept the management wishes. In order to extend the internal controls up to the top level to prevent the cases such as ENRON and WorldCom, "The fundamental question is whether top management would allow itself to be subject to the controls it has instituted or implemented in the organization."

In all cases of negligence, product failure and accounting frauds, failure to implement internal controls have been found to be the main reason for the debacles. The International System of Standards ISO relies on ensuring quality by internal controls at all stages of company business. The failures to implement these controls results in poor or substandard production and financial losses to the businesses.

In financial accounting and store function management internal control lead to large scale frauds and the businesses have to ensure that internal controls and audits are strictly implemented to prevent these lapses. The senior executives have been able to use their powers within the company and by discretion and prerogatives allowed to them. The regulation needs to strictly include this level of management to prevent Leeson's and Enron and WorldCom of this world from playing their fraudulent games......

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