Since the Enron and Worldcom scandals, auditors, regulators and financial statement users have placed a renewed emphasis on evaluating a company's system of internal controls and producing reliable financial statements in order to avoid fraud. Business owners are being called upon to understand and explain their company's internal controls and, in some cases, to attest to its reliability.
Auditors may make observations and suggestions about internal control as part of performing their financial statement audit. Business owners may see the annual audit as a deterrent, a means to help control the risk of loss due to fraud, but the independent auditor is not part of their client's internal control.
The objective of a financial statement audit is for the auditor to express an opinion on fairness of the Company’s financials taken as a whole. The odds of a financial statement audit detecting fraud are not very high. It does happen on occasion but the primary objective is the expression of an opinion, not to detect fraud.
The business owner, board of directors (if one exists) and the company's management team shares the ultimate responsibility for establishing and maintaining the organization's internal control system. Only management has the ability and the authority to analyze the various elements of internal control, make decisions, supervise and otherwise ensure that the system functions effectively, ensuring that the company has taken the necessary steps to avoid fraud.
Establishing an Effective Internal Control Environment
Management must establish a proper tone, from the top, that consistently reinforces the company's commitment to complete, transparent and accurate financial reporting. This control environment is the foundation of the organization's internal control. Without a solid foundation, all other control components are quickly rendered ineffective. You, as a leader of your company, must demonstrate ethical behavior.
Jerry Murray, CPA – Assurance Practice Principal for Goldin Peiser & Peiser, L.L.P.
If you have any questions, need additional information or require assistance in establishing and documenting your system of internal control, please do not hesitate to contact him via email at 214-635-2519.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.