Accounting Foundations: Internal Controls

Introduction

• Increasing financial statement integrity

1. The Types of Problems that Can Occur in Financial Statements

• Classic cases: WorldCom
• Errors in the reporting process
• Disagreements in judgment
• Fraud: Theft and fraudulent financial reporting

2. Safeguards to Minimize Financial Reporting Problems

• The fraud triangle
• The control environment
• Segregation of duties and physical control
• Proper procedures and documents plus independent checks

3. The Motivations Behind Earnings Management

• Classic cases: Enron
• Why do companies manage earnings?
• The earnings management continuum
• Is earnings management ethical?

4. Sarbanes Oxley

• Accounting credibility crisis in 2002
• Public Company Accounting Oversight Board (PCAOB)
• Constraints on auditors
• Constraints on management

5. The Role of Auditors, Both Internal and External

• Classic cases: Arthur Andersen
• Internal auditors
• External auditors
• What do auditors do?
• Are external auditors really independent?

6. The Role of the Securities and Exchange Commission (SEC)

• Classic cases: Stock market crash of 1929
• What is the job of the SEC?
• Common SEC filings: Registration statement, 10-K, and 10-Q
• Common SEC punishments

Conclusion

• Internal controls and management credibility