Accounting Information Systems: The Processes and Controls, 2nd Edition

RISKS AND CONTROLS IN CAPITAL AND INVESTMENT PROCESSES (STUDY OBJECTIVE 4)

For both source of capital processes and investment processes, the important control is the specific authorization and oversight by top management. The very close supervision of these transactions helps prevent risks of theft or misuse of the cash related to capital and investment processes. In addition, the large sums of money involved in capital and investment decisions usually dictates that the cash not be handled by regular company employees. For example, a stock sale to raise capital might result in millions or billions of dollars in proceeds. Company employees are not likely to handle any cash from the result of a stock sale. Instead, the funds would probably be transferred electronically. The broker would electronically transfer funds to the company bank account.

Since these transactions are authorized by top management and the funds are not necessarily handled by employees, the underlying risks are not the same as other processes. Generally, the risks are not related to employee fraud, but are instead related to management fraud. That is, top management is much more likely to conduct fraud by manipulating capital or investment processes. Internal controls aimed at preventing and detecting employee fraud are not as effective in capital and investment decisions. This does not mean that typical internal controls should be ignored, but that in addition to any regular controls in place, the company must ...