What Is Management Override of Internal Controls?
Internal controls are the safeguards companies put in place to protect their financial resources from fraud and abuse by employees. Executive management is responsible for ensuring the internal controls are followed by employees.
Management override of internal controls is the intervention by managers in handling financial information and making decisions contrary to internal control policy. Managers may think they have the ability to operate outside of the internal controls, but this is not true.
Three types of specific situations are common management overrides: back-dating financial documents, adjusting entries during the financial close process and improperly reclassifying information based on activity or financial condition.
Management override of internal controls may be a major violation of a company’s accounting policy. Most companies use their managers as reviewers of employee work, meaning the managers are unable to make changes to financial information.
Companies seeking to avoid management override of internal controls will implement internal and external audits to review their financial information. These audits are objective views on how the company’s accounting policy is being used in the accounting workflow.
The American Institute of Certified Public Accountants (AICPA) provides various information regarding the functions of internal and external audit processes, including how to control management override situations.