Corporate Governance and Internal Control

Corporate governance is the process through which a company ensures that it makes ethical decisions that benefit all stakeholders, including employees, customers, and shareholders.

Companies create corporate governance systems to ensure that they follow all applicable regulations. For example, the Sarbanes-Oxley Act of 2002 was passed in the wake of the Enron scandal. It made fresh improvements to existing corporate governance legislation as well as strengthening those that were already in existence. Senior executives must sign off on financial statements, and businesses must develop internal controls, according to the act.

Corporations today are generally open about their internal governance structures, presenting them online for shareholders, customers, and other interested parties to review.

The Importance of Corporate Governance

In recent years, there have been rising concerns about CEO pay and a lack of diversity on boards of directors, as well as poor work procedures that lead to issues such as sexual harassment, racism, and labor exploitation not being effectively managed.

Each new corporate controversy highlights the necessity of good corporate governance. While it would be nice to believe that businesses would choose to do what is best for their shareholders and customers, history shows that this is not always the case.

There is a greater emphasis than ever before on improving organizational processes, accountability, and controls - all in an effort to limit power abuses and improve the integrity of corporate decision-making. This is part of a broader trend toward transparency and accountability among public and private sector institutions.

Internal Controls

The practical aspects of corporate governance are internal controls. They are the rules and procedures that a company utilizes to ensure that its moral code is followed.

Internal controls can help enhance operational efficiency by improving the accuracy and timeliness of financial reporting, in addition to adhering to laws and regulations and prohibiting employees from stealing assets or engaging in fraudulent behavior..

Internal corporate governance controls usually have the following objectives:

Safeguarding assets:

Internal controls are implemented to assist prevent asset loss as a result of human error or fraud.

Mitigating errors:

People inevitably make mistakes. Internal controls ensure that financial data is thoroughly examined in order to reduce errors.

Increasing efficiency:

Internal controls can be time-consuming, which can reduce efficiency. Internal controls, on the other hand, can help to prevent errors, which enhances efficiency in the long term.

Keeping risk to a minimum:

Regular risk assessments may be part of internal control procedures to identify and improve areas where inaccuracies arise.

A company may participate in a variety of internal control actions to achieve these objectives, which fall into two categories:

Preventative:	Detective:
Preventative control operations, as the name implies, are intended to prevent fraud and mistakes from occurring in the first place.	These actions aid in the detection of errors that preventative measures may have overlooked.

Internal Control Mechanisms

Internal control mechanisms and governance arrangements differ from one organization to the next. Internal control activities that are common include:

Authorization

The process of ensuring that transactions are approved by the appropriate parties is referred to as "authorization." Purchases over a certain dollar amount, for example, may require approval from a department head.

Documentation

Keeping a record of a transaction is referred to as documentation. For example, A purchase order will normally include information on the things being ordered, such as the date, quantity, and agreed-upon price. When an invoice is paid, for example, you would preserve proof of payment in the form of a receipt or a bank statement.

Reconciliation

The process of reconciling transactions and activity with supporting paperwork is known as reconciliation. Reconciliation also entails comparing transactions to records and resolving any discrepancies.

Security

Physical security, cybersecurity, and procedural security measures, such as requiring several parties to sign off on major transactions, are all examples of security.

Separation of responsibilities

Transactions are made up of multiple steps. The term "separation of duties" refers to the practice of not enabling a single person to complete all of the steps in a transaction. For example, one person may record a transaction, while another authorizes it, and yet another reconciles it.

Even the most effective internal control efforts will not be able to prevent every error. However, a good internal control structure will help to reduce errors.

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