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 many different goals, such as quality control, fraud prevention, and legal compliance. One example of a detective control is a physical inventory count, which can be used to detect when actual inventories do not match those in accounting records.
In small firms, internal controls can often be implemented simply through management supervision. At large firms, however, a more elaborate system of internal audits and other formalized safeguards is often required to adequately control the company's operations.
- A detective control is a type of internal control that seeks to uncover problems in a company's processes once they have occurred.
- Examples of detective controls include physical inventory checks, reviews of account reports and reconciliations, as well as assessments of current controls.
- Preventive controls stand in contrast to detective controls, as they are controls enacted to prevent any errors from occurring.
- The Sarbanes-Oxley Act was established in the U.S. in 2002 to enact stricter measures around internal controls in light of the many accounting scandals at the time.
Understanding a Detective Control
Detective controls are just one of many types of accounting controls that companies use to ensure their processes are compliant and that they are reporting accurate financial statements. Accounting controls of all types are designed to help companies comply with accounting rules and regulations. In contrast to detective controls are preventive controls. While detective controls may uncover losses after they occur, preventive controls are designed to keep them from occurring in the first place.
Preventive controls are considered to be more pragmatic, as they are put in place to prevent any problems from occurring, and as such, aid in helping to prevent losses or other negative outcomes. Detective controls are after the fact, so if the issues they uncover are not remedied quickly, it can lead to additional losses to the losses already incurred.
The presence of adequate internal controls is important to investors as an assurance that financial and other disclosures are accurate, and that they are not being defrauded by managers or employees. In the early 2000s, there was a slew of accounting scandals in various companies, such as Enron and WorldCom, that led to the need for more stringent controls, which were finally enacted under the Sarbanes-Oxley Act of 2002.
In the U.S., the Sarbanes-Oxley Act of 2002 imposes a variety of legal requirements on public companies that are designed to ensure that firms have adequate controls in place. The Act amended and created laws dealing with securities regulation and other Securities and Exchange Commission (SEC) laws.
The Act focuses on four key areas: corporate responsibility, increased criminal punishment, accounting regulation, and new protection. Companies are meant to regularly evaluate the effectiveness of the controls in relation to the Act. External auditors are also required to evaluate the effectiveness of internal controls over financial reporting.