Internal Control And Information Quality

What is Internal Control

Internal control can be defined as a systematic accounting and auditing process through which reliable financial information can be managed and controlled in order to attain specific objective in the business enterprise (Assarlind and Gremyr, 2016). Effective control assists in reducing the risk of asset’s loss and helps in ensuring that plan information is complete and accurate as well as financial statements are reliable. Along with that, it assesses that whether the plan complies with laws and regulations or not. According to the case, Toshiba was recently accused of providing misleading information of its earning. So, this project defines various important framework of internal control through which firm can reduce its negative impact on business. In addition to this, report provides literature review to define internal control and its roles in financial reporting integrity by the use of four different academic journal articles.

TASK 1

Internal control is a systematic measure such as reviews, checks and balances as well as methods and procedures instituted by corporations to conduct their business in an orderly and efficient manner and to safeguard its assets and resources. In other words, it can be said that internal control is a business practice, policy or procedure that is established within business enterprise to create value or minimise risk. With assistance of internal control methods, company can ensure the integrity of financial and accounting information to meet operational and profitability targets (Bo and et.al., 2015). For this concern, company have to documented to create an audit trails. Furthermore, management of an entity is responsible for the establishment and maintainable of internal control. In order to get in-depth knowledge about the internal control in financial reporting, various journal articles can be used. According to the (), system of internal control provides assurance to management of dependability of accounting data used in decision making of corporation. It has been discovered that due to lack of internal control, several banks have been discovered to have defrauded its customers. In the organisation, management uses internal control as a tool to check its staff due to the fact that managers are not able to monitor the activities of corporation (Chaudary, Zafar and Salman, 2015). It therefore adopts the internal control in such a way that the system checks itself, management can use devices such as segregation, supervision of work and acknowledgement of performance. The effective arrangement and implementation of this control system would ensure proper management. According to the (Haider and et.al., 2015), effective internal control system plays an important role in ensuring achievement of organisation’s objectives.

As per the viewpoints of (Jacobs, Swink and Linderman, 2015) success of any company is dependent on its management which reflects their ability to control cost to minimum level and hence, profits can be made. In this manner, author stated that internal control system is effective and helpful because this system has been recognised in most of the organisations as one of the most essential ingredients that is necessary for the survival of business enterprise and government agencies. Author defined that internal control is the process by which manager assures that resources are obtained and used effectively and efficiently in the accomplishment of company objectives.

Garrison and Norren has stated two different definition for internal control in which one is that steps taken by management that attempt to increase the likelihood. The objective set down at the planning stage are attained and to ensure that all parts of the organisation function in a manner consistent with organisational policies. Further, the authors have asserted Internal control as that set of organisational activities which includes planning, coordination, communication, evaluation and decision making as well as informal processes aimed at enhancing the effective resources to attain goal of company (Ji,  G.H and Sun, 2015).

According to the article journal of (Kim, Kumar and Kumar, 2012) only an effective internal control in the enterprise is able to help objectively assessing the potential development and tendencies of enterprise performance and thus to detect and eliminate the threats and risk in due time as well as maintain a particular fixed level of risk and to provide for its reasonably security. It may also help to elaborate a structural scheme of generalised concept of internal control. On the other hand, in the specialized dictionary of economic terms, control is defined as performance with a definite influence on the management of an enterprise, as right based on laws and contract that involve proprietary right to the whole property or its part or any other right that enables to exert a significant influence on the management and performance of the enterprise or state supervision.

According to the journal article (Reijers, Mendling and Recker, 2015) it has been stated that  internal control provides a systematic arrangement of monitoring the accounting operational activities of business enterprise. With assistance of internal control system, company can easily control its financial reporting and its uses in the business.

Task 2

Toshiba is a Japanese multinational conglomerate corporation headquartered in Tokyo, japan. Its diversified products and services includes information technology and communication equipment and systems, electronic components and material. Cited venture was founded in 1938 as Tokyo shibaura electric K.K through the merger of shibaura seisaku sho and tokyo denki. Toshiba is organised into four business grouping the digital products group, the electronic devices group, the home appliances group and the social infrastructure group. The group expanded rapidly driven by a combination of organic growth and by acquisition, buying heavy engineering and primary industry firms in the 1940 and 1950 ( Henry and Adewale. 2013).Toshiba first announced in may 2015 that it was investing an accounting scandal and it might have to revise its profit for the previous three year.

Task 3

In the Toshiba company there have various issue related to the internal control and misleading information. According to the observation the investigation committee observe that according to the division of duties rules of Toshiba the corporate audit division is in charge of auditing the corporate division the companies, branch companies and affiliated companies.

In following five internal control challenges are some of the most common found in the organisation-

Separation of duties- This is the major problem in the internal control management system in the organisation. Toshiba also faced this issue. The performance of citical function is typically divided among different employees. In the small businesses with limited human resources, it is not uncommon for a single employees to be soley responsible for completing multiple task in a critical process.

Policies and procedures-One another issue in the control auditing is policies and procedure,Toshiba has faced this issue because it are responsible to follow all policies and procedure related to the company which has made by the government.

Documentation- Maintaining accurate and relevant information is another issue for the company in order to maintain internal control. It can be difficult to demonstrate existence of transaction completed , procedure ,performed and control in place. Proper documentation can also make it easier and more efficient to reach and respond to question from customer and management and auditor.

Oversight and review- This is another major problem in the maintaining and conducting the internal control in Toshiba. Company have to face the issue related to pay enough attention to basic internal control monitoring procedure. Proper oversight is essential to the internal control framework and an important aspect of fraud prevention and detection.

User access right for information systems-Employees are often granted more access to information systems than they actually need to perform their job responsibilities. This may be done for ease of application or because the person granting access (often the IT administrator) does not fully understand the new employee’s role. However, providing such access can expose the business to additional risks that business leaders may not be aware of.

Task 4

As per the above discussion it has been ascertained that there are various issues which have faced by the Toshiba company in order to maintain and manage the internal control for financial reporting. In order to overcome this issues from the company, various strategies are to be followed which are as follows-

• Management personnels should have high integrity and ethical value and be committed to integrity performing key internal control procedure.
• Key control performed by management personnels can overcome the lack of segregation of duties. COSO suggest reviews of accounting systems reports, inspections of supporting documents.
• Company should develop its internal management system through which it can reduce the challenges regarding  internal control system. It should hire more talented and skilled accountant employees so as they can contributes their best participation in the maintaining and updating the financial information.
• The system of internal control should maximise effectiveness and efficiency by including that are tailored to the nature, size and complexity of the entity. Since the policies and procedures are usually informal for smaller entities management personnel should communicate internal control through frequent contact with accounting personnel.
• With these internal control prevent all error or fraud from occuring in business can minimise.
• Board of governance should have more hand on oversight involvement in the entity's activities. Some board members may even perform monthly entity level control such asd inspecting and approving supporting \documentation for check written.

Recommendations

As per the above discussion it has been ascertained that in order to maintain the internal control system company haver to effectively monitor its business activity and function related to financing and accounting. Further more, Toshiba should effectively monitor the activities of the financial department so as it can properly implement the internal control action.Management personnels should have high integrity and ethical value and be committed to integrity performing key internal control procedure.

Conclusion

Internal control can be defined as a systematic accounting and auditing process through which reliable financial information can be managed and controlled in order to attain specific objective in the business enterprise. Effective control assists in reducing the risk of asset’s loss and helps in ensuring that plan information is complete and accurate as well as financial statements are reliable. From this project it has been concluded that Company should develop its internal management system through which it can reduce the challenges regarding  internal control system. It should hire more talented and skilled accountant employees so as they can contributes their best participation in the maintaining and updating the financial information.

References

• Assarlind, M. and Gremyr, I., (2016). Initiating quality management in a small company. The TQM Journal. 28(2).pp.166-179.
• Bo, M. W. and et.al., (2015). Quality management of prefabricated vertical drain materials in mega land reclamation projects: A case study. Soils and Foundations. 55(4). pp.895-905.
• Chaudary, S., Zafar, S. and Salman, M., (2015). Does total quality management still shine? Re-examining the total quality management effect on financial performance. Total Quality Management & Business Excellence. 26(7-8).pp.811-824.
• Haider, H. and et.al., 2015. Sustainability evaluation of surface water quality management options in developing countries: multicriteria analysis using fuzzy UTASTAR method. Water Resources Management. 29(8). pp.2987-3013.
• Jacobs, B. W., Swink, M. and Linderman, K., (2015). Performance effects of early and late Six Sigma adoptions. Journal of Operations Management. 36. pp.244-257.
• Ji, Y., Huang, G.H. and Sun, W., 2015. Nonpoint-source water quality management under uncertainty through an inexact double-sided chance-constrained model. Water Resources Management. 29(9). pp.3079-3094.
• Kim, D. Y., Kumar, V. and Kumar, U., (2012). Relationship between quality management practices and innovation. Journal of operations management. 30(4). pp.295-315.
• Reijers, H. A., Mendling, J. and Recker, J., (2015). Business process quality management. In Handbook on Business Process Management 1. Springer Berlin Heidelberg.
• Reijers, H. A., Mendling, J. and Recker, J., (2015). Business process quality management. In Handbook on Business Process Management 1. Springer Berlin Heidelberg.

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