What Are the Limitations of Internal Control in Accounting?

by Kathy Adams McIntosh; Updated September 26, 2017

Internal controls provide a level of confidence in financial information reported on the financial statements. Internal controls limit individual employee access to manipulating the data or misrepresenting the financial data. Internal controls are critical for accounting staff who work regularly with the company’s financial data. However, internal controls are not foolproof. There are limits to internal control policies and procedures implemented by companies.

Lack of Training/Communication

Employees who do not understand the purpose of the internal control or the proper procedure to follow can limit the effectiveness of internal controls. Management communicates the purpose of incorporating internal controls and assigns specific employees the responsibility of training the rest of the department. If management miscommunicates the purpose of implementing internal controls, employees feel mistrusted, swamped with additional work and find opportunities to sidestep the internal control system. If the trainers do not train employees to use the new internal controls, the employees will create their own methods or ignore the system altogether.

Collusion

Accounting staff colluding to fraud the company find ways to work around current internal controls. When two or more employees work with the same financial information, they can manipulate the data for their own purposes. They might swap passwords allowing each other to access information without anyone else reviewing the work. They can create false transactions to steal money from the company and approve each other’s transactions.

Lack of Management Support

Managers who lack support for the new internal control system communicate this lack of support to their staff. Employees react to the manager’s nonverbal cues and limit their own support of the internal control system. These employees perform the minimum level of work necessary for the internal control system. These managers often allow employees to use management overrides without investigating the reason an override is necessary. Instead, they blame the system. Employees can take advantage of their manager’s lack of investigation to enter fraudulent transactions.

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