Internal Controls
Definition
Internal controls are policies, procedures, and practices implemented by an organization to safeguard assets, ensure accurate financial reporting, and promote operational efficiency.
Explanation
Internal controls help prevent and detect fraud, errors, and inefficiencies. They include both preventive controls (approvals, segregation of duties) and detective controls (reconciliations, reviews, audits). Strong internal controls are essential for reliable financial reporting and regulatory compliance.
The COSO Framework provides a widely accepted standard for designing and evaluating internal controls. Public companies are required by SOX to document and test their internal controls over financial reporting.
Example
A company implements a policy requiring two signatures on all checks over $5,000, ensuring that no single employee can authorize large payments independently.