The LBJ Company is currently making a decision to go public or not and with that The LBJ Company will also need to become knowledgeable about their internal controls within their systems, specifically in regards to Accounting and also Human Resources and how it will affect them and their employees and of course how they conduct business.
There have been some positive and negative issues arise in regards to their internal controls. However, the LBJ Company needs to be acknowledged for what they are doing right, but will also need to address the issues that are negatively affecting them and their business and will continue to negatively affect them if they decide to go public, which will drive down the cost of their shares etc.
This case study will review these items as well as make recommendations for what the LBJ Company can do to tighten up their internal controls.
Part 1: Internal Controls Requirements Inform the President of any new internal control requirements if the company decides to go public.
Internal controls are mechanisms, policies, and procedures used to minimize and monitor operational risks. In order to deter employees from committing a dishonest or fraudulent act the controls must be thorough and comprehensive. However, internal controls by themselves are not enough. They will be effective only if they are reinforced through culture, policies and procedures, information systems, training, and supervision of staff.
* The primary objectives of internal controls are to: Internal controls help to provide reliable data by ensuring that information is recorded in a consistent way that will allow for useful financial reports * They also help prevent fraud and loss by safeguarding assets and essential records. * Internal controls promote operational efficiency by reducing unnecessary duplication of effort and guarding against misallocation of resources. * They encourage adherence to management policies and funding source requirements. Internal controls can be broke down into two categories- accounting and administrative controls, which is exactly what the issues are with the LBJ Company. (Internal Controls Checklist)
According to the Sarbanes Oxley Act of 2002, all publicly traded U.S. corporations are required to maintain an adequate system of internal control at all times. As LJB Company President, he or she should be aware that a controlled environment must be present at all times, and “that unethical activity will not be tolerated.” The LBJ Company must identify and analyze the various factors that could create risk for the business and how the team can manage those risks. The overall internal control system needs to show and communicate all appropriate information within the organization, to ensure that the communicated information has reached the organization. According to the textbook, “It is very important to have testing and auditing of controls to build a long lasting organization. (Kimmel, 2009)
Part 2: What the Company is Doing Right? Advise the President of what the company is doing right (they are doing some things well) and also recommend to the President whether or not they should buy the indelible ink machine. When you advise the President, please be sure to reference the applicable internal control principle that applies.
The company has been doing well by creating a balanced environment for employees, due to the long-term employees that are currently there is an excellent thing for LBJ Company. From what is being shown, the managers and employees have a great balance, which keeps good control and promotes a team oriented environment within the company. Another good thing is that the accountant is in charge of the checks and also stores them into safe in his office, but the manager should have the only key to the safe to increase the monitoring of the checks and would also create a checks and balance system.
Plus if the accountant is not there for whatever reason and an employee needs their check, the manager can handle that and not violate any employment laws by not giving an employee their check in a timely manner. The President of LJB Company, has also done a good thing for wanting the employees to be aware of any new regulations required of the company if they decide to go public. It is incredibly important the President have different individuals serve as an Accountant, Treasurer and Controller which will help streamline many of their processes. This way, the Accountant will not be responsible for all financial dealings and again this will create checks and balances which are required to go public.
Part 3: Advise the President of what the company is doing wrong (they are definitely doing some things poorly). Please be sure to include the internal control principle that is being violated along with a recommendation for improvement. (20 points) This situation for LBJ Company has shown that it is in clear violation of the internal control principle and is running significant risks by not including more oversight and checks and balances. First of all, that they have one accountant who plays the role of both Treasurer and Controller is an area of great risk. The Controller and Treasurer are meant to play opposite roles in which they provide oversight and checks and balances to the other. The two positions should be filled by separate employees, and this change should be implemented as soon as possible.
In the current setup, the one accountant has too much power over the processes. Another issue is the cash drawer principle also leaves the company vulnerable to fraud and manipulation of funds. For example, even if a company employee were to act independently, an employee could easily remove a substantial amount of unauthorized funds, and it would be difficult, if not impossible, to find who did it as any of the company employees could have been culpable. An example of the problems that arise from the anonymity that company employees have within the organization, is clearly exemplified in the case of the worker who was fired for viewing pornography on the company computer. Not only does this introduce risks of damaging corporate reputation, and download viruses, but it also highlights how the lack of individual user accounts and accountability makes it so that one employee can hide their malicious actions with anonymity. Below are some recommendations for the LBJ Company. Recommendations:
1) To introduce a culture of corporate responsibility, the CEO should begin to implement individual user accounts for its computers, as well as a formal cash withdrawal system, that requires that company employees register themselves with another person or a computer system.
2) The role of the one accountant who acts as Treasurer and Controller must be separated into two so as not to violate the internal control principle, and in order to minimize the likelihood of fraud.
3) The checks should not just be left at the accountant’s office, but in a safe where only two people have access such as the accountant and the manager. That way more than one person is responsible.
4) The accountant taking checks home over the weekend is a security issue as well as introduces more opportunity for fraud. This practice must be stopped and more safeguards put in place. This also is an issue regarding personal identifying information on the checks of the employees and if the checks become lost or stolen, then that information is available to the public now.
5) The accountant also being involved in the interview process for new employees is disturbing because of the level of control he has over critical aspects in the company’s day to day business. If he were to hire an accomplice, he could easily use that individual and his position in order to manipulate accounts and withdraw significant funds from the company before he is ever caught. 6) The HR Departments should also run more thorough background checks as part of their hiring processes. (Bell, 2010)
Conclusion Now that the LBJ Company has received the recommendations to fix the issues with their internal controls, they will no doubt be able to go public and be successful. The LBJ Company should also re-evaluate their processes every so often to make sure that these new systems for their internal controls are successful. They should re-evaluate every so often in case they need to make changes as well.