The effectiveness of internal control in business since the enron scandal Essay Example For Students

The effectiveness of internal control in business since the enron scandal Essay Outline1 1. Introduction2 2. Accounting Information Systems3 3. Organization of board of managers4 4. Business moralss5 5. Decision 1. Introduction In 2001, Enron reaffirmed that their old fiscal study had to revise as accounting mistakes existed in their computing machine system. After that, Enron the largest US corporate with assets of $ 63.4 billion faced the terminal route of bankruptcy all of a sudden. Four 1000 employees face losing theirs occupation and retirement wages ( Benston, 2002 ) . It is non simply one individual can interrupt a solid concern construction. The consequence of probe shows this instance was a corporate dirt. The Enron s top executive empowered the employees to pull strings the stock monetary value. We will write a custom essay on The effectiveness of internal control in business since the enron scandal specifically for you for only $16.38 $13.9/page Order now As a consequence, the Sarbanes-Oxley Act was legislated because of the fraud behaviours which created by Enron. President Bush described this dirt as the most far-reaching reforms of American concern patterns since the Great depression when he signed SOX Act ( Hays 2003, cited in Eichar S. 2009, p.1 ) . It seems likely that the weak internal control system were has ability to forestall the accounting dirt go oning. Furthermore, the top directors did non work efficaciously in order to supervise theirs company s fiscal status every bit good as affecting in accounting dirt. Another job is that the directors moralss behavior demands to be tested and considered. The chief intent of SOX Act is to forestall a fraud such as Enron instance go oning once more, whereas some people have the incredulity with SOX Act that can still work for modern corporation. This paper attempts to analyze that internal control was by and large become more effectual since the Enron dirt. 2. Accounting Information Systems The Committee of Sponsoring Organizations of the Treadway Commission ( COSO ) has a definition on internal control that as a procedure is designed to supply sensible confidence sing the accomplishment of aims in effectivity and efficiency of operations, dependability of fiscal coverage, and conformity with applicable Torahs and ordinances. ( hypertext transfer protocol: //www.coso.org/resources.htm ) When Sarbanes-Oxley ( SOX ) Act ( to protect investors by bettering the truth and dependability of corporate revelations made pursuant to the securities Torahs, and for other intents, US Congress ) ( SOX Act ) has been signed in 2002, the construct of internal control has been carefully considered in information system betterment. The subdivision 404 of SOX Act indicates that company has the duty to declare the appraisal of internal control construction in each financial fiscal study. For an organisation, an accounting information system ( AIS ) which is a cardinal model for information system plays an of import function in organisation, processing and direction the procedure of dealing, which is a foundation for constructing information system in concern ( Moscove, 1999 ) . Because accounting information system could convey benefit for computerized company. Not merely can it command obvious audit trail ( an obvious grounds to corroborate the minutess accurately ) for intent of confidence and auditing, but besides it has linking general demand for physical protection of assets. Presents, the Enterprise Resource Planning ( ERP ) system is used popularly after SOX Acts had announced. ERP system is built based on the advantage of accounting information system. Harmonizing a research indicates that 80 per centum of the fortune 500 houses have implemented the ERP system ( SAP, 2005 cited in Brown A ; Nasuti, 2005 ) , because of the undermentioned benefits: accessing informations in clip, incorporating the procedure of concern operation and reassigning internal information right. The SOX Acts requests the endeavors should maintain traveling on rating of the direction hazard, ERP systems still has important consequence on roll uping hazard direction informations as companies used it ( Brown A ; Nasuti, 2005 ) . Research ( Huang, Hsieh, Tsao, and Hsu, 2008 ) shows the most of import factor of internal control dimensions is the control environment: monitoring. There is a good illustration illustrates some chief elements of internal control as utilizing ERP syste m. Research ( Huang, Hsieh, Tsao, and Hsu, 2008 ) finds some characteristics of utilizing ERP systems in Taiwan public companies and there are most of import consequences tally with the intent of internal control: ( 1 ) Constitution of IT organisations and their dealingss, ( 2 ) Integration and communicating of fiscal information, ( 3 ) Development of IT strategic programs, ( 4 ) Management of information quality, and ( 5 ) Monitoring of operating processs ( pp. 104 ) . This consequence is precisely integrated with the original definition of control environment by COSO: The Control Environment sets the tone of an organisation, act uponing the control consciousness of its people. It is the foundation for all other constituents of internal control, supplying subject and construction. ( COSO, 1992 cited in Huang, Hsieh, Tsao, and Hsu, 2008, p. 114 ) As the consequence, the primary undertaking is doing security for physical control, in order to treat the internal control map efficac iously. In add-on, the senior direction support could be a chief factor caused ERP and IT undertaking execution successfully. The 2nd issue which should be considered for internal control is integrating and communicating of fiscal information. The ERP systems could back up use IT to unite organisational resources and information about finance and accounting for company s operation schemes. Furthermore, the SOX subdivision 404 has regulated the internal control taking to part of fiscal coverage ( Huang, Hsieh, Tsao and Hsu, 2008 ) . The company mangers non merely could utilize fiscal information for measuring their companies fiscal construction and the consequence of operating, but besides public users have more assurance to put these companies with their safety fiscal information. Therefore, it is necessary to corroborate the relevance and dependability of fiscal information. .u228da015369235f37f140730b9a5d5d7 , .u228da015369235f37f140730b9a5d5d7 .postImageUrl , .u228da015369235f37f140730b9a5d5d7 .centered-text-area { min-height: 80px; position: relative; } .u228da015369235f37f140730b9a5d5d7 , .u228da015369235f37f140730b9a5d5d7:hover , .u228da015369235f37f140730b9a5d5d7:visited , .u228da015369235f37f140730b9a5d5d7:active { border:0!important; } .u228da015369235f37f140730b9a5d5d7 .clearfix:after { content: ""; display: table; clear: both; } .u228da015369235f37f140730b9a5d5d7 { display: block; transition: background-color 250ms; webkit-transition: background-color 250ms; width: 100%; opacity: 1; transition: opacity 250ms; webkit-transition: opacity 250ms; background-color: #95A5A6; } .u228da015369235f37f140730b9a5d5d7:active , .u228da015369235f37f140730b9a5d5d7:hover { opacity: 1; transition: opacity 250ms; webkit-transition: opacity 250ms; background-color: #2C3E50; } .u228da015369235f37f140730b9a5d5d7 .centered-text-area { width: 100%; position: relative ; } .u228da015369235f37f140730b9a5d5d7 .ctaText { border-bottom: 0 solid #fff; color: #2980B9; font-size: 16px; font-weight: bold; margin: 0; padding: 0; text-decoration: underline; } .u228da015369235f37f140730b9a5d5d7 .postTitle { color: #FFFFFF; font-size: 16px; font-weight: 600; margin: 0; padding: 0; width: 100%; } .u228da015369235f37f140730b9a5d5d7 .ctaButton { background-color: #7F8C8D!important; color: #2980B9; border: none; border-radius: 3px; box-shadow: none; font-size: 14px; font-weight: bold; line-height: 26px; moz-border-radius: 3px; text-align: center; text-decoration: none; text-shadow: none; width: 80px; min-height: 80px; background: url(https://artscolumbia.org/wp-content/plugins/intelly-related-posts/assets/images/simple-arrow.png)no-repeat; position: absolute; right: 0; top: 0; } .u228da015369235f37f140730b9a5d5d7:hover .ctaButton { background-color: #34495E!important; } .u228da015369235f37f140730b9a5d5d7 .centered-text { display: table; height: 80px; padding-left : 18px; top: 0; } .u228da015369235f37f140730b9a5d5d7 .u228da015369235f37f140730b9a5d5d7-content { display: table-cell; margin: 0; padding: 0; padding-right: 108px; position: relative; vertical-align: middle; width: 100%; } .u228da015369235f37f140730b9a5d5d7:after { content: ""; display: block; clear: both; } READ: Internet Privacy (1596 words) EssayToday, houses should see implementing a new construct of internal control monitoring ( ICM ) engineering for intent of support and ease internal control processes. There are two definitions that explain ICM map: ICM engineering encompasses a scope of control monitoring undertakings, including the mechanization of everyday control trials, enhanced hazard appraisals, rating and certification of controls, and managing and pass oning control confidence activities ( COSO 2009 cited in Masli, 2010, pp.1103-1104 ) and The end of ICM is to heighten the overall visibleness of the organisation to hazard and public presentation through the effect ual usage of engineering ( KPMG2008 cited in Masli, 2010, p.1104 ) . Masli ( 2010 ) shows that most companies had imputed large-scale investing in IT development in the last 10 twelvemonth. Unfortunately, these financess were wasted, because some grounds caused the program to neglect, such as untrained workers can non to the full use the taking package efficaciously and physical hardware mutual exclusiveness. Different than AIS and ERP system, the ICM concentrates on hazard appraisal and responds a message instantly if person intends to interrupt internal control system. The ICM engineering can associate with other informations of operating index. For case, if the supervisor finds companies stock monetary value has an unusual fluctuation in stock selling, the monitoring system will react to high executives and name the possible factors together. For these grounds, there is no inquiry that the ICM engineering can be used in every house. 3. Organization of board of managers In Enron Company, the board of managers does non hold duties to observe the weak fiscal construction. Even though there were 15 members in the board of managers, they do non forbid directors utilizing high hazard accounting criterions , and disregard any possible because all members are. Furthermore, the each member had received more salary and owned high sum of Enron s stock ( USA senate study ) . The board of managers could impact the quality of companies internal controls. First of all, one thing which has to be considered is the figure of outside managers on the board of managers. Research ( Beasley, 1996 cited in Yan, Jian A ; Nan, 2007 ) suggests that the board independency does non normally lead to the job of fiscal fraud. Then, other expertness indicates it is necessary to see the figure of managers in a board. Enhancing the board construction could cut down the likeliness of the concern being exposed in weak fiscal system and better the fiscal coverage reason. Research ( Dalton, 1999 cited in Yan, Jian A ; Nan, 2007 p.308 ) states a big board has more expertness than a little one, and that it tends to be more effectual in supervising accumulations. It seems that the phenomenon of weak internal control does non be in a big board. Furthermore, another expertness finds that the board size is good for audit commission independency and a big board of manager could hold the effectual audit commission every bit good as served high-quality audit services ( Yan, Jian A ; Nan, 2007 ) . It seems that there are more outside managers can heighten the quality of internal control, because their independency can non be affected by compensation such as the manager fees and stocks. Under SOX, the primary issues of puting up the independent hearers could take to the dependability of the internal control. The SOX subdivision 301 requires that the audit commission has duty for guaranting the audit study and each member should be independent ( SOX Act ) . From the Enron instance, it is clear that the audit commissions can heighten the fiscal study quality and offer effectual monitoring censoring in internal control. An audit commission has some duty of such as: reappraisal of the internal audit section and the one-year audit program, evaluate of one-year fiscal studies and the consequences of audit, criticize of the internal accounting controls, and security of concern assets. ( Steven T. , 2005 p.58 ) Steven T. ( 2005 ) points out that companies have the dependable fiscal information, because their audit commissions are independent. Then, if the members of audit commissions have high fiscal background, it can happen that these companies are improbable to hold jo b of internal control and have more abilities to happen the mistakes of internal control ( Yan, Jian A ; Nan, 2007 ) . One issue which should be considered the audit independency has a important consequence on revelation of house s internal control jobs. Because the fees are a possible factor to impact the relationship between hearers and client concerns, the hearers are more likely to disregard possible jobs and publish an wrong sentiment on clients internal controls. Conversely, an expertness claims that there is no relation between non-charge services and independency. In order to keep hearer s repute, they could supply high-quality service and forestall anyone doubted about their independency ( Yan, Jian A ; Nan, 2007 ) . It can be concluded that the independency for board of managers is more of import than the outside hearers ( Certified Public Accountant movies ) . .u111e2c9f1a9cfb43a08b9b257696af9a , .u111e2c9f1a9cfb43a08b9b257696af9a .postImageUrl , .u111e2c9f1a9cfb43a08b9b257696af9a .centered-text-area { min-height: 80px; position: relative; } .u111e2c9f1a9cfb43a08b9b257696af9a , .u111e2c9f1a9cfb43a08b9b257696af9a:hover , .u111e2c9f1a9cfb43a08b9b257696af9a:visited , .u111e2c9f1a9cfb43a08b9b257696af9a:active { border:0!important; } .u111e2c9f1a9cfb43a08b9b257696af9a .clearfix:after { content: ""; display: table; clear: both; } .u111e2c9f1a9cfb43a08b9b257696af9a { display: block; transition: background-color 250ms; webkit-transition: background-color 250ms; width: 100%; opacity: 1; transition: opacity 250ms; webkit-transition: opacity 250ms; background-color: #95A5A6; } .u111e2c9f1a9cfb43a08b9b257696af9a:active , .u111e2c9f1a9cfb43a08b9b257696af9a:hover { opacity: 1; transition: opacity 250ms; webkit-transition: opacity 250ms; background-color: #2C3E50; } .u111e2c9f1a9cfb43a08b9b257696af9a .centered-text-area { width: 100%; position: relative ; } .u111e2c9f1a9cfb43a08b9b257696af9a .ctaText { border-bottom: 0 solid #fff; color: #2980B9; font-size: 16px; font-weight: bold; margin: 0; padding: 0; text-decoration: underline; } .u111e2c9f1a9cfb43a08b9b257696af9a .postTitle { color: #FFFFFF; font-size: 16px; font-weight: 600; margin: 0; padding: 0; width: 100%; } .u111e2c9f1a9cfb43a08b9b257696af9a .ctaButton { background-color: #7F8C8D!important; color: #2980B9; border: none; border-radius: 3px; box-shadow: none; font-size: 14px; font-weight: bold; line-height: 26px; moz-border-radius: 3px; text-align: center; text-decoration: none; text-shadow: none; width: 80px; min-height: 80px; background: url(https://artscolumbia.org/wp-content/plugins/intelly-related-posts/assets/images/simple-arrow.png)no-repeat; position: absolute; right: 0; top: 0; } .u111e2c9f1a9cfb43a08b9b257696af9a:hover .ctaButton { background-color: #34495E!important; } .u111e2c9f1a9cfb43a08b9b257696af9a .centered-text { display: table; height: 80px; padding-left : 18px; top: 0; } .u111e2c9f1a9cfb43a08b9b257696af9a .u111e2c9f1a9cfb43a08b9b257696af9a-content { display: table-cell; margin: 0; padding: 0; padding-right: 108px; position: relative; vertical-align: middle; width: 100%; } .u111e2c9f1a9cfb43a08b9b257696af9a:after { content: ""; display: block; clear: both; } READ: The Influence of Real-Time Technology on E-Voting Essay4. Business moralss In this decennary, the universe economic system faces one large challenge that more and more frauds have happened in each twelvemonth, such as accounting uses, and unethical behaviour. The early jurisprudence and statute law aimed at intent of fiscal constitution and the security of the pecuniary system ( Rockness, 2005 ) . Consequently, the fraud dirts happened once more and once more. The Sarbanes-Oxley Act has the map of supplying a ordinance for companies ethical behaviour. The SOX subdivision 301 has ruled on the duties to the audit commission, because the audit commission plays an of import function in board of managers. Analyzing recent ethical failures, one survey ( Lublin and Carms, 2003 cited in Rockness, 2005 p. 45 ) indicates the audit commission was straight involved, perceived as excessively closely tied to the corporation, or unmindful to fiscal coverage state of affairss. In this manner, the audit commission has to supply a mechanism which communicate the unethical behaviour to companies employees and the external hearers. Additionally, it is obvious that SOX Act non merely provides rigorous regulations for concern, but besides giving guidelines for companies to set up the ethical ambiance in order to keep the high on the job public presentation. The SOX subdivision 406 requires that public corporations should put up a codification of moralss for senior directors, and furthermore, they have to explicate in one-year study why non holding codification of ethic. The chief intent of codification should be included: publicity of honest and ethical behavior, full and just revelation, conformity with Torahs, internal coverage for misdemeanors, and answerability for attachment to the codification. ( Securities and Exchange Commission, 2003b cited in Rockness, 2005, p. 46 ) In last two decennaries, most American companies have had an ethical codification. Some of European companies besides have accepted this tendency. These companies have installed the codifications to give theirs employees a guideline for work ( Sobczak, 2003 cited in Stevens, 2007 ) . Harmonizing to one survey ( Kaptein, 2004 cited in Stevens, 2007 ) different states companies have the different consequences, when those companies have implemented ethical codifications. A survey ( Kaptein, 2004 cited in Stevens, 2007 ) finds that European codifications concentrated on work environment are 50 % that more than American codifications. Conversely, the honestness was a important issue for American codifications ( 64 % ) compared with European codifications ( 45 % ) and Asiatic codifications ( 38 % ) . It is clear that American s organisations normally less concern equity in the work. In the Enron instance, it found that Enron were willing to offer high wages in order to actuate their emplo yees to make the concern end with the unethical behavior. To summary all mentioned above, successful companies should hold a alone ethic value that connected with concern ends. These employees could utilize different concern accomplishments at work. It can be more flexible and adaptable without losing their of import ethical values. The long term end for concerns is that inculcating a new thought of purposeful undertaking with the pure ethical values instead than prosecuting the high income ( Stevens, 2007 ) . 5. Decision In decision, SOX Act makes the profound impact on internal control edifice and there are three facets could explicate why recent internal control is effectual for the organisations. First of wholly, the function of accounting information system offer the of import audit trail for accurate auditing and another benefit is protection for the physical assets. Furthermore, enterprise resource planning package has an extra map which is risk direction. Taiwan s illustration shows that the ERP is linked with enhancement information quality and supervise the operating procedure and another map is it can incorporate internal control with the communicating of fiscal information for the operation schemes. Then, new tendency is for execution of the internal control monitoring combined with ERP system. It can guarantee security of the information efficaciously and observe the unusual signal instantly. Second, the independent audit commission is an indispensable demand for heightening the fiscal st udy quality and supervising the internal control. More members in the board of managers could heighten the quality of audit commission and supply high-quality audit occupation for the companies. The last facet is that the SOX Act has mentioned organisations should disclosure the codification of moralss in fiscal study. It means the concern have the duty for developing the ethical civilization to theirs employees. As discussed above, the SOX Act has ruled to do the internal control effectual. It seems that the information system, director s construction and ethical construct have been improved and achieve the internal control effectual.