Metaphysics of Internal Controls

Abstract

A quality internal control system has been seen as a remedy for various corporate governance issues. Two pieces of legislation, the Foreign Corrupt Practices Act (FCPA) and the Sarbanes-Oxley Act (SOX) deal with very different corporate governance issues, but each argue for a similar remedy. Both the FCPA and the SOX legislation argue that improved (or proper) internal controls are necessary to root out bribery of foreign officials, in the case of the FCPA, and (in the case of SOX) to support the accurate preparation of financial statements. An issue that has yet to be resolved is that the quality of internal control systems is subject to subjective assessments of the internal control deficiencies and their impact. This paper presents a mathematical model of internal controls based on Gӧdel number of axioms. This results in the representation of quality internal controls in terms of an integer. This approach also allows for inferences about financial statements and various auditing judgements.