This report will inform you of any new internal control requirements required for LJB to go public, advise you of what the company is doing right, recommend that LJB purchase an indelible ink machine, and advise you what areas the company can improve. Introduction After observation LJB’s operations, I have determined LBJ needs to make changes regarding its internal controls system. All publically traded companies operations’ must comply with the Sarbanes-Oxley Act (SOX) accounting standards.As cited in by Kimmel (2011), complying with the internal controls practices set forth by the SOX act prevents fraud, encourage efficiency and effectiveness of operations, and insure a company is in compliance with applicable laws. The internal control standards outlined by the SOX act include a control environment, risk assessment, control activities, information and communication, and monitoring. Be informed that companies that fail to comply are subject to fines, and company officers can be imprisoned (Kimmel).
LJB’s Encouraged PracticesMany of LJB’s operations comply with the SOX standard, and should continue to be practiced and enforced. One practice that LJB is doing right and should continue doing is using pre-numbered invoices prevents transactions from being skipped over or recorded more than once. The use of renumbered invoices employs the control activities component of internal control. Interviewing new hires is a good practice; however, additional precautions need to be made when bringing new members on the LBJ team and will be addressed later in this report.
LJB’s Areas of Development, Improvement, and Recommendations Although LJB is doing many things well, there are many areas internal control structure needs improvement. Control activities are an internal control structure component that ranks most important. Control Activities: Establishment of Responsibility One control activity in LJB that needs to be addressed is the establishment of responsibility. According to Kimmel (2011), “Control is most effective when only one person is responsible for a given task” (p. 338).
Petty cash responsibility needs to be assigned to one custodian to be most effective, and that employee should keep it under lock and key as well as keep a detailed journal of use; this practice also goes along with physical control activities. Each transaction of petty cash needs to be documented on pre-numbered receipts, as well as signed by the custodian and the person receiving the payment. Doing so will allow audits to verify the amount in the account and the payments and be able to track if there is money missing at any given time.Another area that needs to establish responsibility is implementing personal passwords to access the company’s network.
Using unique passwords will help identify a fraud or company violation should one occur. Using unique passwords also allows only those employees who are authorized and/or qualified to carry out specific tasks. Control Activities: Segregation of Duties Improvement in the segregation of duties needs development. It is unacceptable for the accountant to be both the holder and controller of cash and funds. Related duties should be delegated to different employees to deter theft.
It would be easy for the accountant to commit fraud, and he/she would likely not be caught because of the current lack in segregation of duties. Likewise, the accountant should not be assigned to both purchasing and receiving supplies. Theft would go unnoticed because one employee was accountable for inter-related duties with no outside supervision or witness. The accountant should not be responsible for receiving the checks and completing the monthly bank reconciliation.
The employee responsible for record keeping should neither receive checks or have access to funds or be the custodian.Receiving checks needs to be assigned to a different employee. The cash custodian needs to be separated from accounting duties also. Whoever is assigned to be the custodian of assets should not have access to accounting records Control Activities: Physical Controls Physical control activities also need improvement. I recommend changes in paycheck procedures for LJB. With the current system, an employee can mistakenly or purposefully pick up someone else’s paycheck.
If the accountant is assigned to distribute the paychecks, he/she needs to keep them within sight or locked up and distribute them as individuals collect them.Using direct deposit would streamline this process and lessen the workload of the accountant who is already overloaded. Management should write the check for the accountant because writing one’s own check violates internal control procedures. Recommendation to Purchase Indelible Ink Machine I recommend purchasing an indelible ink machine. Using indelible ink to print checks will add further security of company funds.
The use of indelible ink will provide both organization and simplification of accounting duties. Using indelible ink provides additional physical control activity to company assets. Control Activities: Human Resource ControlsHuman resource controls under control activities should be further developed. Although it is commendable that LJB is a relatively lean organization and has a lot of faith in their long-term employees, background checks of all new employees should be required. Public companies are also required to verify educations and certifications of their employees to ensure they are qualified for the positions they hold (Kimmel); please implement a standard of maintain qualified employees. Practicing good human resource controls puts the right people in the right positions as well as prevents hiring criminals.
Conclusions LJB is a top notch organization that I think will succeed when taken public. Continue using renumbered invoices and taking a personal approach when handling your company. Please implement improved internal control procedures in the areas discussed in this report. Making these adjustments will not only protect your organization, but improve overall operations and general success. References 2.
Kimmel, P. , Weygandt, J. , Kieso, D. , (2011). Financial Accounting [6] (VitalSource Bookshelf), Retrieved from http://devry. vitalsource.
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