Establishing internal control systems is an effective tool and means for modern enterprises to strengthen economic management, improve economic efficiency, safeguard property security, and achieve operational objectives. Internal control systems have been widely adopted by enterprises in economically developed countries and are increasingly perfected, playing a positive role within these enterprises. As China's economic system reform further intensifies, especially after the establishment of the grand goal of building a socialist market economy, the processes of enterprise groupization and internationalization are gradually accelerating, thereby objectively demonstrating the necessity of establishing and perfecting internal control systems. Currently, China is listing the establishment of a modern enterprise system as a significant task in economic system reform, with the primary implication of modern enterprises being the scientific management of enterprises. To this end, implementing effective internal control systems within enterprises can help achieve the goals of expanding production internally and improving efficiency. Therefore, establishing and implementing internal control systems should become a consensus among China’s enterprises.
The survival and growth of enterprises depend on both internal and external factors. How to enhance the effectiveness of internal controls, where lies the solution process for enterprise internal controls, and how to improve the mechanisms and systems of enterprise internal controls are practical issues that theoretical researchers and industry professionals cannot avoid. These are also the issues under discussion in this article.
### Theoretical Development of Internal Control Systems
The evolution of the concept of internal control can roughly be divided into four stages: before the 1940s; from the late 1940s to the 1970s; from the 1980s to the 1990s; and after the 1990s.
#### (1) Before the 1940s
Before the 1940s, people were accustomed to using the concept of "internal checks." According to the explanation in *Cok's Accounting Dictionary*, internal checks refer to: “business process designs that provide effective organization and operations while preventing errors and other illegal transactions. Its main characteristic is the division of responsibilities within the organizational structure so that no single individual or department can solely control any one or part of business rights. Each transaction undergoes cross-checking or cross-control through the normal functioning of other individuals or departments.” Designing effective internal checks ensures that all transactions are completely and accurately processed through prescribed procedures, and within these prescribed procedures, internal checks remain an indispensable component.
Generally speaking, the execution of internal check functions can be roughly divided into the following four categories:
1. **Physical Checks**: For example, handing over the safe keys to more than one staff member so that the safe cannot be opened unless these multiple keys are used simultaneously.
2. **Mechanical Checks**: For instance, the safe door cannot be opened unless the correct procedure is followed.
3. **Systematic Checks**: Dual control is adopted to prevent errors and fraud.
4. **Bookkeeping Checks**: Periodically verifying subsidiary ledgers against general ledgers.
Internal checks are based on the following two fundamental assumptions:
1. The chance of two or more people or departments unconsciously committing the same error is very small.
2. The possibility of two or more people or departments consciously colluding in fraud is significantly lower than the possibility of a single individual or department committing fraud.
Practice has proven these assumptions to be reasonable, and internal check mechanisms have effectively reduced errors and fraudulent behavior. Thus, in modern internal control practices, internal checks still hold an important position, forming the basis for organizational structural controls and job responsibility separation controls.
#### (2) From the Late 1940s to the 1970s
In 1949, the Auditing Procedures Committee of the American Institute of Certified Public Accountants issued a report titled *Internal Control: An Integration of Control Components and Its Importance to Management and Independent Certified Public Accountants*. In this report, internal control was defined authoritatively for the first time as: "Internal control includes the design of organizational structures and all mutually coordinated methods and measures adopted within the enterprise. These methods and measures are used to protect the enterprise's assets, verify the accuracy of accounting information, improve operating efficiency, and promote adherence to established management policies."
This broad definition and its corresponding explanation were then widely regarded as a major contribution to understanding the concept of internal control, as it had never received such attention before.
In October 1958, the committee announced *Auditing Procedures Announcement No. 29*, which redefined internal control, dividing it into accounting control and management control. Internal accounting control includes all methods and procedures in organizational planning that are directly related to asset security and the reliability of financial records. This control includes authorization and approval systems, the separation of duties between those responsible for financial record-keeping and auditing and those responsible for operations or asset custody, physical control of assets, and internal auditing.
Internal management control includes organizational regulations...
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