Detective Control: Definition, Examples, Vs. Preventive Control
What Is a Detective Control? Detective control is an accounting term that refers to a type of internal control intended to find problems within a company’s processes once they have occurred. Detective controls may be employed in accordance with various goals, including quality control, fraud prevention, and legal compliance. Here are key points about detective controls:
- Detective controls aim to uncover problems after they have occurred.
- Examples of detective controls include physical inventory counts and reviews of account reports and reconciliations.
- In small firms, management supervision may suffice for implementing internal controls, but larger firms require more formalized safeguards such as internal audits.
Understanding a Detective Control Detective controls are part of a broader range of accounting controls that companies use to ensure compliance and accurate financial reporting. Here are important insights about detective controls:
- Detective controls are distinct from preventive controls, which are implemented to prevent errors from occurring.
- Preventive controls are considered more proactive in preventing losses and negative outcomes.
- Failure to address issues uncovered by detective controls promptly can result in additional losses.
Sarbanes-Oxley Act The Sarbanes-Oxley Act of 2002 was enacted in response to accounting scandals like Enron and WorldCom. It imposes legal requirements on public companies to ensure adequate internal controls. Key points about the Sarbanes-Oxley Act:
- The Act focuses on corporate responsibility, increased criminal punishment, accounting regulation, and new protections.
- Public companies must regularly evaluate the effectiveness of controls in accordance with the Act.
- External auditors are required to assess the effectiveness of internal controls over financial reporting.
By implementing detective controls and adhering to the Sarbanes-Oxley Act, companies can enhance their internal control systems, protect investors, and ensure accurate disclosures.
Websites and Online Resources:
- U.S. Securities and Exchange Commission (SEC) – The official website of the SEC provides valuable information on internal controls, including detective controls, as well as resources related to the Sarbanes-Oxley Act. Visit the SEC website
- American Institute of Certified Public Accountants (AICPA) – The AICPA offers resources and guidance on internal controls, including detective controls, for accounting professionals. Explore the AICPA website
Books:
- “Internal Control Procedures for Small Business” by Dr. A.M. Fouche – This book offers practical insights and guidance on implementing effective internal controls, including detective controls, for small businesses. Find the book on Amazon
- “Internal Control Audit and Compliance: Documentation and Testing Under the New COSO Framework” by Lynford Graham – This book provides comprehensive coverage of internal control auditing and compliance, including detective controls, in line with the COSO framework. Find the book on Wiley
Academic Journals and Research Papers:
- “Detective Control and Preventive Control: An Empirical Study on Their Interaction and Their Effect on the Quality of Internal Control Systems” by Brigitte Eierle and Lutz Tünschel – This research paper explores the relationship between detective controls and preventive controls, their impact on the quality of internal control systems, and provides empirical findings. Read the research paper
- “The Impact of Internal Controls on Firm Value and the Moderating Effect of the Sarbanes-Oxley Act” by Tammie Schaefer – This academic study investigates the relationship between internal controls, including detective controls, and firm value, considering the moderating effect of the Sarbanes-Oxley Act. Access the research paper
Reports and Studies:
- “Effectiveness of Internal Control Systems in the Context of the Sarbanes-Oxley Act” by Financial Executives Research Foundation (FERF) – This report examines the effectiveness of internal control systems, including detective controls, in light of the requirements set forth by the Sarbanes-Oxley Act. Access the report
- “Internal Control—Integrated Framework: Executive Summary” by Committee of Sponsoring Organizations of the Treadway Commission (COSO) – This summary provides an overview of the COSO framework for internal controls, which includes information on detective controls, their purpose, and their relationship with preventive controls. Read the executive summary