Accounting Control

Accounting control is the methods and procedures that are implemented by a firm to help ensure the validity and accuracy of its financial statements. The accounting controls do not ensure compliance with laws and regulations, but rather are designed to help a company comply.

An example of an accounting control would be limiting management's involvement in the preparation of financial statements. Sometimes it is helpful for management to be involved since they generally know the company better than anyone. But final say on numbers should be in the hands of an accountant, because management may have the incentive to distort numbers to inflate the company's performance.

Following several high profile corporate accounting scandals at Enron, Tyco, and WorldCom from 2000 to 2002, regulators wanted to usher in a new era of heightened financial and operational protocols. To restore investor trust, it was widely accepted that a new culture was required. A host of accounting and financial reporting breakdowns were known but most pressing were issues involving auditor conflicts of interest, weak boardrooms, conflicts among security analysts, limited resources at regulatory agencies and executive compensation to name a few.

To help address these issues, the U.S. Congress passed the Sarbanes-Oxley Act in 2002. The federal law established new or expanded requirements for all U.S. public company boards, management and public accounting firms. The bill set forth expected responsibilities of a public corporation’s board of directors, added criminal penalties for certain misconduct and required the Securities and Exchange Commission to create regulations which defined how public corporations could comply with the law.

Accounting control systems do not work under one size fits all scenarios. Research on the relationship between business strategy and accounting based control systems finds organizational design and corporate culture play a big role in business success. Consensus agrees: to maximize firm performance; accounting control systems should be designed specifically to suit the unique business strategies of different entities.