Internal Control

Internal control, as definied by accounting and auditing, is a process for assuring of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations, and policies. A broad concept, internal control involves everything that controls risks to an organization.

It is a means by which an organization's resources are directed, monitored, and measured. It plays in an important role in detecting and preventing fraud and protecting the organization's resources, both physical (e.g. machinery and property) and intangibles (e.g. reputation or intellectual property such as trademark).

At the organizational level, internal control objectives relate to the reliability of financial reporting, timely feedback on the achievement of operational or strategic goals, and compliance with laws and regulations. At the specific transaction level, internal controls refers to the actions taken to achieve a specific objective (e.g. how to ensure the organization's payments to third parties are for valid services rendered). Internal control procedures reduce process variation, leading to more predictable outcomes. Internal control is a key element of the Foreign Corrupt Practices Act (FCPA) of 1977 and the Sarbanes-Oxley Act of 2002, which required improvements in internal control in the United States publicly-listed corporations. Imternal controls within business entities are also referred to as operational controls. The main controls in place are sometimes referred to as "key financial controls" or KFCs.

Internal controls have existed in ancient times. In Hellinistic Egypt, there was a dual administration, with one set of bureaucrats charged with collecting taxes and another with supervising them. In the Republic of China (Taiwan), the Supervising Authority, one of the five branches of government, is an investigatory agency that monitors the other branches.

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