LJB Internal Control Procedures And Recommendations
Analysis of LJB Internal Control Procedures and Recommendations
Table of Contents
Introduction 3
Internal Controls Before Going Public 3
Correct Internal Control Procedures 4
Internal Control Discrepancies 4
Indelible Ink Recommendation 6
Summary 6
Works Cited 8
Analysis of LJB Internal Controls and Recommendations
Introduction Assigned to review the internal control procedures for LJB, I will take a close look at specific responsibilities that must be taken into consideration and action taken on before the company can go public. There are certain laws that must be followed as well as a set of control measures that are maintained. Currently, …show more content…
LJB has implanted specific control measures well but are lacking in many others. These violations of specific internal control principles could have major implications on going public and could have even worse effects on the company once it has gone public. I will take a look at their current status and make recommendations based on what measure they are using as well as whether or not they should make a future purchase that could improve the company’s success financially.
Internal Controls Before Going Public First and foremost, when taking into consideration that LJB wants to go public, they must be very familiar with and adhere to the Sarbanes-Oxly Act very closely. Internal controls are an extremely important part of any business, especially when the company is public that has the interests of the general public and investors. I would strongly advise to create a board of senior leadership that can help develop their internal controls. According to the Sarbanes-Oxly Act, a Board of Directors should also be established with over half of the members residing outside of the company. (Soxlaw, 2006) It should be noted that a mandatory report of internal control procedures must be included in the annual Securities and Exchange Commission (SEC) report. Once these controls are developed and established, an external auditor should be brought in to review the internal control procedures. Their review will also be included in the annual SEC report. From a human resources standpoint, one important aspect of the company that needs to be improved and implemented should be thorough background checks of all employees and potential new employees. This falls under the human resources internal control principle. Since it was found out that a fired employee was a convicted felon, conducting proper background checks will help prevent future embarrassment for the company. Once public, any information like this could drastically change the public and investors’ perception of the company. Screening all employees is a must to prevent this situation from happening in the future.
Correct Internal Control Procedures Despite a number of incorrect procedures, I’ll discuss actions that are being done correctly. First, using pre-numbered invoices is a great step towards proper documentation procedures of all invoices. All invoices should always be pre-numbered in order to keep proper records of all transactions. Establishing good documentation procedures can also help the accounting department with their organization and processing of transactions. One good example of physical security is employee checks being locked up in a safe. Employee checks are considered important business papers that contain personal information and therefore should always be kept secure when not in the presence of the person designated responsible for them. However, it is important to note that these checks should not be just sitting in the office of this designated person. Checks should either be distributed right away or left in site of this person. If the person needs to leave their office, the checks are either given to another responsible designated person or locked up using physical security control principles.
Internal Control Discrepancies The first item to address that LJB is doing wrong is allowing a single employee to serve as dual roles of Treasurer and Controller. This is an obvious violation of the establishment of responsibility principle. Serving in these two positions allows them to make purchases and then pay the invoices without anyone else seeing the transactions. This employee could be making purchases that are unrelated to the company’s needs and paying for them using company funds. Because they are the sole person seeing these transactions, it may be difficult for anyone else to realize the situation. This is a clear violation of the internal control principle called segregation of duties, which states two things. “First, different individuals should be responsible for related activities. Second, the responsibility for record-keeping for an asset should be separate from the physical custody of that asset.” (Kimmel, 2011, p. 339) That is, the accountant should not have both the supplies in hand as well as the record keeping for them. In this scenario, there should be different employees for each role to ensure transactions are legitimate to the business and payments being processed are being sent to the correct company. The activities of purchasing and paying are closely related which should require different employees to handle each task. This accountant should also not be completing the bank reconciliation statement since he has direct access to cash. According to the independent internal verification control principle, this responsibility should be for a different employee. This scenario starts with segregation of duties by having two different employees conduct purchases and making payments, and finishes with a different employee conducting their internal verification. The next item for discussion relates to LJB’s petty cash system.
First and foremost, the petty cash box should be under some degree of physical security. This directly relates to the physical controls internal control principle. “Physical controls relate to the safeguarding of assets and enhance the accuracy and reliability of the accounting records.” (Kimmel, 2011, p. 342) The petty cash box should not be left in an unlocked drawer and needs to be kept in a secure place so not anyone has access to it. There should only certain people who have access to the box, which falls under the principle of establishment of responsibility. Once the petty cash box is secured and it is determined who has access to the box, proper documentation procedures should be implemented versus using hand written notes. This will insure that all cash transactions, regardless of the amount, are properly documented. All of the above implementations fall more specifically under cash distribution procedures. “To prevent those who have access to the petty cash box, a supervisor should conduct random inspections of the box to make sure receipts and/or proper documentation correctly reflects the amount in the box.” (Kimmel, 2011, p.
351) Finally, to prevent instances regarding misuse of the computers and network, LJB should require unique profiles for each employee that requires a password in order to login to the system. LJB could not prove who was logged onto a computer in a previous occurrence and this could have been prevented with a login identification and password combo. Requiring a password is a form of physical security but will also assist human resources if a course of action has to be taken against an employee.
Indelible Ink Recommendation Purchasing this indelible ink machine to print company checks could be a sound financial investment that is not my judgment to make. However, I would be cautious over the motive of the accountant wanting to purchase the machine, which could be in his own personal interest in an attempt to print checks for his own personal gain. If LJB believes this is a necessary purchase, I would advise to strongly look at the segregation of duties principle, making sure that the person with physical custody of the machine is not the person printing the checks but also ensuring that there is oversight on the check printing with supervisor or manager approval. It could be a much needed investment, but one must prevent fraudulent activity through the above mentioned principles.
Summary LJB has both positive and negative internal control issues that must all be dealt with before going public with the company. Even the positive controls could seek improvement to better facilitate the business. Overall attention to detail with physical security must be kept at high professional levels to prevent unwanted people from getting their hands on information they shouldn’t be also to maintain good trust amongst employees. The control measures that are being violated come down to a matter of common sense when dealing with cash. At all times, there must be multiple set of eyes looking over cash related reports and transactions. There must be established leadership, who working with a Board of Directors , must design, implement, be familiar with and carry out these control measures in order to be a successful public company.
Works Cited
Kimmel. Financial Accounting. 6. VitalSource Bookshelf. John Wiley & Sons, Retrieved on February 11, 2013. http://devry.vitalsource.com/books/9781118233634/id/P3-62
The Sarbanes-Oxly Act. www.soxlaw.com (2006) Retrieved on February 11, 2013.
Table of Contents
Introduction 3
Internal Controls Before Going Public 3
Correct Internal Control Procedures 4
Internal Control Discrepancies 4
Indelible Ink Recommendation 6
Summary 6
Works Cited 8
Analysis of LJB Internal Controls and Recommendations
Introduction Assigned to review the internal control procedures for LJB, I will take a close look at specific responsibilities that must be taken into consideration and action taken on before the company can go public. There are certain laws that must be followed as well as a set of control measures that are maintained. Currently, …show more content…
LJB has implanted specific control measures well but are lacking in many others. These violations of specific internal control principles could have major implications on going public and could have even worse effects on the company once it has gone public. I will take a look at their current status and make recommendations based on what measure they are using as well as whether or not they should make a future purchase that could improve the company’s success financially.
Internal Controls Before Going Public First and foremost, when taking into consideration that LJB wants to go public, they must be very familiar with and adhere to the Sarbanes-Oxly Act very closely. Internal controls are an extremely important part of any business, especially when the company is public that has the interests of the general public and investors. I would strongly advise to create a board of senior leadership that can help develop their internal controls. According to the Sarbanes-Oxly Act, a Board of Directors should also be established with over half of the members residing outside of the company. (Soxlaw, 2006) It should be noted that a mandatory report of internal control procedures must be included in the annual Securities and Exchange Commission (SEC) report. Once these controls are developed and established, an external auditor should be brought in to review the internal control procedures. Their review will also be included in the annual SEC report. From a human resources standpoint, one important aspect of the company that needs to be improved and implemented should be thorough background checks of all employees and potential new employees. This falls under the human resources internal control principle. Since it was found out that a fired employee was a convicted felon, conducting proper background checks will help prevent future embarrassment for the company. Once public, any information like this could drastically change the public and investors’ perception of the company. Screening all employees is a must to prevent this situation from happening in the future.
Correct Internal Control Procedures Despite a number of incorrect procedures, I’ll discuss actions that are being done correctly. First, using pre-numbered invoices is a great step towards proper documentation procedures of all invoices. All invoices should always be pre-numbered in order to keep proper records of all transactions. Establishing good documentation procedures can also help the accounting department with their organization and processing of transactions. One good example of physical security is employee checks being locked up in a safe. Employee checks are considered important business papers that contain personal information and therefore should always be kept secure when not in the presence of the person designated responsible for them. However, it is important to note that these checks should not be just sitting in the office of this designated person. Checks should either be distributed right away or left in site of this person. If the person needs to leave their office, the checks are either given to another responsible designated person or locked up using physical security control principles.
Internal Control Discrepancies The first item to address that LJB is doing wrong is allowing a single employee to serve as dual roles of Treasurer and Controller. This is an obvious violation of the establishment of responsibility principle. Serving in these two positions allows them to make purchases and then pay the invoices without anyone else seeing the transactions. This employee could be making purchases that are unrelated to the company’s needs and paying for them using company funds. Because they are the sole person seeing these transactions, it may be difficult for anyone else to realize the situation. This is a clear violation of the internal control principle called segregation of duties, which states two things. “First, different individuals should be responsible for related activities. Second, the responsibility for record-keeping for an asset should be separate from the physical custody of that asset.” (Kimmel, 2011, p. 339) That is, the accountant should not have both the supplies in hand as well as the record keeping for them. In this scenario, there should be different employees for each role to ensure transactions are legitimate to the business and payments being processed are being sent to the correct company. The activities of purchasing and paying are closely related which should require different employees to handle each task. This accountant should also not be completing the bank reconciliation statement since he has direct access to cash. According to the independent internal verification control principle, this responsibility should be for a different employee. This scenario starts with segregation of duties by having two different employees conduct purchases and making payments, and finishes with a different employee conducting their internal verification. The next item for discussion relates to LJB’s petty cash system.
First and foremost, the petty cash box should be under some degree of physical security. This directly relates to the physical controls internal control principle. “Physical controls relate to the safeguarding of assets and enhance the accuracy and reliability of the accounting records.” (Kimmel, 2011, p. 342) The petty cash box should not be left in an unlocked drawer and needs to be kept in a secure place so not anyone has access to it. There should only certain people who have access to the box, which falls under the principle of establishment of responsibility. Once the petty cash box is secured and it is determined who has access to the box, proper documentation procedures should be implemented versus using hand written notes. This will insure that all cash transactions, regardless of the amount, are properly documented. All of the above implementations fall more specifically under cash distribution procedures. “To prevent those who have access to the petty cash box, a supervisor should conduct random inspections of the box to make sure receipts and/or proper documentation correctly reflects the amount in the box.” (Kimmel, 2011, p.
351) Finally, to prevent instances regarding misuse of the computers and network, LJB should require unique profiles for each employee that requires a password in order to login to the system. LJB could not prove who was logged onto a computer in a previous occurrence and this could have been prevented with a login identification and password combo. Requiring a password is a form of physical security but will also assist human resources if a course of action has to be taken against an employee.
Indelible Ink Recommendation Purchasing this indelible ink machine to print company checks could be a sound financial investment that is not my judgment to make. However, I would be cautious over the motive of the accountant wanting to purchase the machine, which could be in his own personal interest in an attempt to print checks for his own personal gain. If LJB believes this is a necessary purchase, I would advise to strongly look at the segregation of duties principle, making sure that the person with physical custody of the machine is not the person printing the checks but also ensuring that there is oversight on the check printing with supervisor or manager approval. It could be a much needed investment, but one must prevent fraudulent activity through the above mentioned principles.
Summary LJB has both positive and negative internal control issues that must all be dealt with before going public with the company. Even the positive controls could seek improvement to better facilitate the business. Overall attention to detail with physical security must be kept at high professional levels to prevent unwanted people from getting their hands on information they shouldn’t be also to maintain good trust amongst employees. The control measures that are being violated come down to a matter of common sense when dealing with cash. At all times, there must be multiple set of eyes looking over cash related reports and transactions. There must be established leadership, who working with a Board of Directors , must design, implement, be familiar with and carry out these control measures in order to be a successful public company.
Works Cited
Kimmel. Financial Accounting. 6. VitalSource Bookshelf. John Wiley & Sons, Retrieved on February 11, 2013. http://devry.vitalsource.com/books/9781118233634/id/P3-62
The Sarbanes-Oxly Act. www.soxlaw.com (2006) Retrieved on February 11, 2013.