Internal Control Case Study Essay Example

Internal Control Case Study2

INTERNAL CONTROL CASE STUDY

Internal control case study

The increase in cases of fraud in various businesses has made it challenging for these firms to accomplish their goals and objectives. The pattern has increased the need for managers to put internal control procedures through implementing policies and guidelines to govern business operations. The paper will discuss internal control system by looking at various cases where implementation of these procedures could have prevented fraud. The use of bank reconciliation as an internal control will also be discussed, outlining the different benefits derived from such a strategy.

There have been many cases where employees of an institution engage in fraudulent activities to serve their interests. Several Internal controls are available for use by the managers as they aim at reducing the prevalent of these fraudulent activities within a business. Implementation of inadequate internal control procedures pose threats to the business assets by providing opportunities that act as a motivation for the engagement of fraudulent activities by the employees. Strong internal controls not only help in preventing fraud but also provide other benefits such as aligning business activities to helps achieve its set goals and objectives, reducing the risks the business is exposed to and also ensuring accurate financial reporting (Leitch, 2008). The compliance of the business with the set financial and operation requirements also provide additional benefits to the organization.

An example of an organization that has been faced with fraudulent activities is the Origin Energy, which is a power company. The company was fined 2 million dollars after being sued for the illegal door to door sales methods (Arwinge, 2013). The salesperson from the company had been using the method to influence more consumers to convert from other energy providers to Origin Company. The salespersons had been deceiving the customers that there was some problem with electricity bill, and the government were recommending the change.

In the case provided, various internal controls can be implemented by Origin Energy to help prevent these fraudulent activities. Ensuring effective internal controls are in place requiring integrating the various components that include control environment, control procedures and information systems (Arwinge, 2013). Ensuring the right control environment is established is the primary control that helps the other components. It involves the integration of other sub-elements with the primary one being the support of top management.

The top management is responsible for ensuring that the employees are aware of the importance of adherence to the set policies and regulations to the company operations (Leitch, 2008). The top management of Origin should have outlined the importance of adherence to the company’s rules and regulation to the salesperson who would have restrained from engaging in the illegal door to door sales tactics. Another essential sub-element in ensuring the right control environment is the human resource department that assigns tasks and responsibilities. The department should have indicated the strategies that the salespersons can and cannot use and the legal consequences of failing to comply with these rules.

Another component of internal control is implementing control procedures through carrying out a risk assessment to identify the various risks that the business faces while executing the various operations (Leitch, 2008). Since risk assessment is an ongoing process that helps identify possible risks at all levels of business operations. The business would have identified door to door sale tactics as a threat and thus put the right contingency measures in place. Such procedures include implementing policies that ensure that the risk is averted. One such that can be used by Origin is providing authorization of transactions and activities. Ensuring that employees who include salespersons follow protocol while executing their duties would have prevented sales through the door to door tactics.

The other component of internal control is providing effective accounting information systems in place. The extent to which an organization can use information technology in its accounting varies depending on the resources the organization possesses (Arwinge, 2013).

One method of executing internal control is through the use of bank reconciliation. In reporting, bank reconciliation is used to compare the funds in the bank with those in the bank statement that is provided at the end of an accounting period (Leitch, 2008). The bank statement lists all the activities that the business engaged in that resulted in variation in the bank balance. Once the business receives the statement from the bank, the latter verifies the listed activities by comparing the amount with the one recorded in the cash account in the general ledger.

The failure of the amount in the bank balancing with that in the cash account does not always translate to fraudulent activities. It may be due to some activities that reduce the amount in the bank such as service charges by the bank are not communicated to the business in the statement (Leitch, 2008). Variation in where the period where the records were made in the bank statement as compared to the company’s cash account in the general ledger can also result in the difference. Others include uncleared checks, bounced checks and those checks that have been deposited but have been returned (Leitch, 2008). Bank reconciliation help in detecting errors made while keeping accounting records by either the bank or the business over a specified accounting period.

Apart from bank reconciliation, business uses other control activities in preventing against fraudulent activities. The various methods are aimed at addressing specific concerns thus achieving some set targets (Leitch, 2008). Origin Energy Limited has also implemented various control methods.

One main internal control is the presence of an independent Audit Committee comprising of five directors who are not part of the executives (Arwinge, 2013). The committee is responsible for carrying out an oversight of regular audit meant at detecting any fraudulent activities at this moment applying the right contingency measure thus safeguarding integrity in reporting. Auditing is essential in protecting the assets of the company from damage, theft or even misuse. Origin Energy also carries two audits in a year, one-half of the year the other for the full year making it easier to detect fraudulent activities. There are also internal and external auditors who are independent of the company management.

The company has also implemented policies that provide for regular risk assessment. It has established a risk committee that carries out oversight of the policies and the procedures governing risk management (Arwinge, 2013). These policies are not only meant at assessing the risk but also at addressing and monitoring their management. On a monthly basis, the committee is expected to report to the board on various risks.

Another internal control that the company has implemented is a code of conduct that guides behaviour and responsibility. It has also implemented different policies governing the behaviour of the various parties including shareholders, employees, customers, business partners, suppliers, stakeholders and even suppliers (Arwinge, 2013). The company also presents a platform for reporting any improper conduct by either of the parties or breaches of the code of conduct.

Internal control is an essential part of a company operation as an organization aims at reducing cases of fraud and improper behaviour.

References

ARWINGE, O. (2013). Internal control: a study of concept and themes.

LEITCH, M. (2008). Intelligent internal control and risk management designing high-performance risk control systems. Aldershot, England [u.a.], Gower.