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Importance of Internal Controls
provided by Capt. Smith and the custodial function was accomplished by Lt.Col.
MacKay. This principle remains the cornerstone of an effective system of internal
controls today.
HISTORICAL INFLUENCES ON CURRENT INTERNAL CONTROLS
The previous review of actual Civil War documents emphasizes the importance of maintaining an
efficient system of controls. The army’s control based accounting system was later replicated by
American businesses. Many of the senior officers from both Union and Confederate armies
entered the business world following the war. They logically employed the accounting and
internal control systems that were familiar to them. Most of these men were graduates of West
Point who were perhaps the best-trained minds in these subjects. According to Hoskin and Macve
(1988), a new form of “managerialism” emerged with these men. In particular, attention to
financial details and a serious attempt to safeguard assets resulted from the emergence of these
military officers as executives in numerous U.S. businesses.
The accounting control system utilized by the army in the Civil War was documented in three
instructional guides. One of these was the “Revised Regulations for the Army of the United
States” published in 1861 (Regulations, 1861). According to Simon Cameron, Secretary of War,
this was the “sole and standing authority” for military operations. The Regulations contained a
description of the many types of accounting internal controls used by the army. The second
instructional text was “The Quartermaster’s Guide” that was issued near the end of the war (Case,
1865). The third and final publication issued for the benefit of company accounting clerks was
titled “The Company Clerk” authored by August V. Kautz in 1865. These three publications
emphasized the need to safeguard all of the army’s assets and produce accounting reports that are
accurate and reliable. Even at this early time in our history, the army realized that it needed a
system to safeguard all of its assets and allow it to operate more efficiently.
The importance of internal controls has continued to increase in business firms today. In 1985,
the Committee of Sponsoring Organizations (COSO) was formed to sponsor the National
Commission on Fraudulent Financial Reporting. One of their first recommendations was that a
comprehensive framework of internal control be developed (COSO, 1985). The COSO definition
of internal control included five components that are discussed in a majority of modern auditing
texts (Rittenberg, 2008). First, the “control environment” or “tone at the top” involves the ethical
climate within the firm. If an ethical climate does not exist at the top management level, the
quality of internal controls is likely to be poor.
The second COSO component of internal control is “risk assessment.” This involves the
identification of material risks within the organization that would hinder the firm from
accomplishing its objectives. The third and fourth elements are “information and communication”
and “monitoring.” These stress the preparation of needed information in the form of reports and
statements that are communicated to the appropriate managers. The key is “getting the right
information to the right people.” Monitoring involves ongoing efforts to provide feedback on the
effectiveness of the entire internal control system. The fifth and final component of internal
control is the area of “control activities.” These represent a number of pervasive internal control
activities that were utilized by the U.S. Army during the Civil War and continue to be of prime
importance today (Arens, 2008). These include segregation of duties, proper authorization policy,
independent checks, physical safeguards, and adequate documents and records. These activities
are also especially important is the effort to reduce the opportunity for fraud within an
organization (Albrecht, 41).
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