Definition: An internal control is a procedure or policy put in place by management to safeguard assets, promote accountability, increase efficiency, and stop fraudulent behavior. In other words, an internal control is a process put in place to prevent employees from stealing assets or committing fraud.
What Does Internal Control Mean?
Since the accounting scandals in the early 2000s, there has been an increasing importance placed on internal controls in every level of an organization. In fact, the Sarbanes Oxley Act requires management to design, implement, and personally evaluate the effectiveness of internal controls within the business. Executives found guilty of not properly managing the internal control structure of their companies can face fines and even prison time now.
Needless to say, internal controls are a big deal. They protect the company assets and even help streamline the operations. Let’s look at a few examples.
Liquid assets always need to be protected more than illiquid assets because they are more easily stolen. Take cash for example. Cash is the most liquid asset and can be pretty easily stolen by any employee who handles it. Special internal controls are put in place to protect company cash.
The segregation of duties control is often used for cash. This control requires that the person who receives the cash from the customer and the person who records the cash receipt in the accounting system are never the same employee. In fact, some internal control systems take it a step further and require a different employee to collect the cash, deposit it in the bank, and record it in the accounting system.
By segregating the duties of each employee, no single person can collect the cash, deposit it, and record the sale. This prevents fraud because one person can’t pocket some of the cash and just record less cash receipts in the accounting system.