Internal controls means all the processes and procedures designed by a company to ensure that the financial statements published by the company is fair, accurate, transparent and effective. A detailed definition is provided by New Rule 3a-8 implementing Section 404 of Sarbanes Oxley Act of 2002. In U. S, Sarbanes Oxley Act of 2002 was provides rules and regulations relating to internal control which are applicable to all companies having publicly traded shares or debt. Companies need to adopt internal control processes and procedures to ensure that the financial statements are reasonable and reliable.
Some of the internal controls that a company might adopt are recording all expenses and revenue with approval of management and directors, providing regular training to all the staff, assigning monitoring role to appropriate authority, designing montioring procedure, reporting any ommision to management recording transaction relating to acquisition or disposition of assets without any ommission and adopting ‘code of ethics’ for management. Internal controls are designed to prevent any fraudulent or unethical reporting of the financial statements and to protect the interest of investors, customers, creditors, employees and others.
The reporting requirements of final rules of SEC as directed by Section 404 of Sarbanes Oxley Act 2002 are ‘(1) a statement of management’s responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and (2) management’s assessment, as of the end of the company’s most recent fiscal year, of the effectiveness of the company’s internal control structure and procedures for financial reporting.
(3) a statement identifying the framework used by management to evaluate the effectiveness of the company’s internal control over financial reporting (4) and a statement that the registered public accounting firm that audited the company’s financial statements included in the annual report has issued an attestation report on management’s assessment of the company’s internal control over financial reporting. ’ Reference Securities Exchange Commision, final rule -Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports as required by Sarbanes Oxley Act 2002 , Section 404