internal controls - Investment & Finance Definition
The means by which a company monitors its accounting systems for conformance with an expected behavior. Before the Sarbanes-Oxley Act of 2002, the term was used mainly in an accounting sense to refer to financial controls that a company established. Now, an extra layer of internal controls has been added with the emphasis on making sure that management is carrying out its internal auditing duties. The Securities and Exchange Commission, which was charged with writing rules to implement the Sarbanes-Oxley Act, requires that companies include an internal control report in their annual reports. The report should outline management’s responsibilities for establishing and maintaining internal controls and procedures for financial reporting. A company also has to evaluate how effective the controls are, and the chief executive officer has to certify that the company’s internal controls have been followed. The company’s outside auditors have to verify management’s evaluation in writing.