Within the field of accounting, internal controls are processes and procedures that direct, monitor and measure a company's resources so that financial goals are met while all appropriate regulations are followed. While the use of internal controls has a number of obvious advantages for a company or organization, there are also disadvantages.
Internal controls are put into place so an organization's activities, policies and plans are efficiently integrated to best achieve business goals. Other purposes of internal control are to protect a firm from mismanagement or fraud, to ensure the company's actions are within the bounds of the law, and to compile financial and managerial data that can be evaluated so that feedback can be given and implemented. Ultimately, the information gathered will be presented to the company's directors, board and/or shareholders.
History of Internal Control
The "internal control" was first defined in 1948 by the American Institute of Accountants, but internal control practices have existed since ancient times. According to the website joeinvestoronline, Hellenistic Egypt had a dual system of internal controls in place for tax collecting, with one set of bureaucrats collecting taxes while another oversaw them. Since 1977, all American publicly owned corporations are legally required to abide by a strictly defined and enforced set of internal-control standards.
The advantages of internal control are obvious, since they lead to a more efficiently run organization. Strong internal controls will ensure a company's resources are utilized only for their intended purposes, greatly minimizing the risk of resource misuse. Internal control also prevents any financial irregularities by detecting them quickly and thus resolving any issues that arise in a timely manner. In addition, having strong internal controls in place can prevent a company's employees from being accused of any irregularities or misappropriations of funds.
Internal control also has the potential for disadvantages. If internal controls are badly planned or executed, employee frustration or apathy may result. In addition, an internal control system that is too rigidly designed to allow for adaptation to a particular organization may be difficult to sustain. Perhaps the biggest disadvantage to internal control is that it may cause a company's auditors to become over-dependent on the internal control system, which may lead them to relax other measures of checking for fraud and errors.