Final answer:
Internal controls are designed to ensure that transactions are executed in accordance with management's authorization, as part of a broader set of objectives that include compliance, financial reporting accuracy, and operational efficiency. The Sarbanes-Oxley Act highlights the crucial role of internal controls in corporate governance and protecting investors from accounting fraud.
Step-by-step explanation:
Internal controls are mechanisms within an organization designed to provide reasonable assurance regarding the achievement of various business objectives, including compliance with laws and regulations, the reliability of financial reporting, and the effectiveness and efficiency of operations. Specifically, internal controls aim to ensure that transactions are executed in accordance with management's authorization, which is a critical component in preventing unauthorized or inappropriate actions that could harm the organization.
The importance of effective internal controls was highlighted by historical accounting scandals involving major corporations such as Enron and WorldCom. These events eventually led to the establishment of the Sarbanes-Oxley Act in 2002, which aimed to protect investors from accounting fraud and increase confidence in the financial information provided by public corporations. The act reflects the significance of internal controls as part of corporate governance, alongside oversight by the board of directors, auditing firms, and outside investors.