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King and Case
The first control activity mentioned in the previous paragraph is often considered the cornerstone
of an entity’s internal control system. The separation of incompatible duties including custody,
authorization, and recordkeeping continues to be one of the most critical tasks that a firm must
accomplish if it expects to safeguard all of its assets. The army during the Civil War was very
aware of this fact. For example, three different soldiers were normally involved in the completion
of the three incompatible duties of custody, authorization, and recordkeeping. The accounting
clerk typically prepared the reports (recordkeeping), an officer of the company or regiment signed
the documents (authorization), and quartermasters normally were had possession (custody) of all
forms of tangible personal property. This allowed the army to safeguard all of its assets including
arms, clothing, and supplies of all types.
In addition to a system that segregated incompatible duties, the military accounting structure
required that a higher-ranking officer authorize all transactions and reports. This second control
activity exists today when business firms require proper authorization of all financial transaction
by a supervisor. The third control activity of utilizing independent checks also existed during the
Civil War when officers conducted surprise audits of various assets and prepared an assortment of
reconciliations in an effort to safeguard all assets. The majority of business firms utilize this
policy today when surprise cash counts or regular reconciliations of receivables and other assets
are completed. The use of physical safeguards over all assets (fourth control activity) was also
employed during the Civil War. The U.S. Army required that most tangible assets be under the
control of a quartermaster who managed a locked inventory storeroom. The quartermasters
provided limited access to items ranging from arms and ammunition to clothing in an effort to
minimize losses. This policy is used by modern businesses as they use various security measures
to limit the loss of inventory.
The fifth and final control activity is the use of adequate documents and records. U.S. Army
military regulations contained hundreds of pages pertaining to the proper preparation of various
statements. Reports were required to document the use of supplies, clothing, camp and garrison
equipage, horses, fuel, forage, straw, bedding material, stationery, and numerous other items.
Other statements described the activities and compensation of the men. Current accounting and
internal control systems also consider this to be critical. The importance of these five control
activities has continued to increase with the complexity of modern business operations. With each
advance in technology, the opportunity for employees to commit a fraudulent act increases.
Modern accounting texts also emphasize that a good accounting system ensures that all financial
transactions are valid, properly authorized, complete, properly classified, recorded in the proper
period, properly valued, and summarized correctly (Albrecht, 40). These characteristics also
existed in the U.S. Army Regulations of 1863. They reflected the education provided to the
officers at West Point and set a quality standard at the early date in our history. As mentioned
earlier, these officers used this knowledge as they entered the business world following the
conclusion of the war. Each of these army documents was designed to accomplish the objectives
mentioned above. Each report was prepared with the goals of safeguarding assets and ensuring
accurate accounting records in mind. This philosophy has continued today as firms strive to
accomplish this difficult objective.
SUMMARY
This paper has reviewed the importance of internal controls from the Civil War period to the
present. History provides us with insight into the rationale for systems currently in use. This is
especially true with the typical internal control systems of modern business enterprises. Military
leaders in the 1860’s instituted an accounting system that they learned at institutions such as West
Point. This was a very advanced control system for its time. Modern auditing texts discuss control
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