(1) If the LJB Company should decide to become a publicly traded company, a few internal controls should be implemented to comply with the Sarbanes-Oxley Act (SOX). * Management will need to provide periodic quarterly reports to evaluate the effectiveness and reliability of LJB’s internal controls over financial reporting procedures. * Management should certify the accuracy and fairness of presentation of their financial statements. * Independent auditor(s) outside of LJB will need to attest to management’s assessment of said internal controls.
Additionally, non-audit services between these two parties (LJB and said independent auditor) are prohibited. (2) There are a few internal control measures that LJB already has in effect and are better for it: the use of pre-numbered invoices by the accountant and your (the President’s) involvement in the approval and hiring process of new employees. I also recommend the purchase of the indelible ink machine as per the accountant’s request. As this applies to the Internal Control Principle of Physical Control, future check fraud will be more difficult to be accomplished.
3) There are several internal control weaknesses that I assess LJB currently has. Following each weakness I list below is a recommendation from myself to rectify these internal control weaknesses. * One is risk is the accountant who serves as Treasurer and Controller. Although I understand this is to streamline many processes, it possesses a risk where an opportunity is created for this employee to commit fraud. This also violates the Segregation of Duties Principle of Internal Control Principles.
I recommend that these two responsibilities be segregated 2 different employees. * When the accountant in charge of payroll leaves employees’ checks in his office unsupervised and unsecured, it presents an opportunity for theft. This violates the Internal Control Principle of Physical Control, as though checks are not constantly kept in the accountant’s office safe prior to pick up. I recommend that these checks remain physically secured at all times (by the accountant, or by delaying delivery to the accountant until he reaches his office).
Due to the unorthodox honor system of dealing with petty cash, any single employee can withdraw a substantial amount of petty cash in relative anonymity. This violates two Internal Control Principles: Physical Control and Establishment of Responsibility. It violates the Physical Control Principle because the petty cash is easily accessible with no form of physical protection of theft, and it violates the Establishment of Responsibility Principle because no single person is in charge of the Petty Cash Fund (rather everyone is).
This can be remedied by assigning a custodian to be responsible for the fund, as well as creating a secure area to store said funds. * These previous points additionally bring up another weakness, though not actually part of the Internal Control Principles. Though it seems to be LJB’s unofficial policy to trust long-term employees, when a desirable opportunity to commit fraud/theft arises, it becomes at the discretion of the employee to commit these acts for their personal benefit. Another weakness is LJB’s lack of individual passwords which allows personnel to anonymously use the company computers and databases.
This lack of individual accountability will prevent most attempts to track suspicious employee activities on company computers and databases. This instance violates the Internal Control Principle of Physical Control. I recommend assigning employees individual accounts and passwords, as well as creating a form of digital control to prevent future unauthorized activities, such as viewing pornography on company computers.
Lastly, because LGB unknowingly hired a convicted felon, it can be deduced that LGB’s Human Resource Department may be lacking, due to the fact that a background check should have caught his criminal history. This may violate the Human Resource Control Principle of the Internal Control Principles. I recommend that the Human Resource Department reevaluate their policies and staffing procedures to prevent future incidents from happening. Thank you for taking the time to read this letter and please consider my recommendations before going public with the LGB Company.
Courtney from Study Moose
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