It has come to the attention of the president of LJB Company that an evaluation is needed to determine the reliability and level of compliance of the company’s internal controls. It is imperative if the company is going public that it follow the regulations set forth by governing bodies. The punishment for violation of these regulations can be up to 20 years in prison.
The Sarbanes-Oxley Act of 2002 helps to ensure that shareholder investments and the general public are protected from fraudulent practices within accounting. According to SOX there are five components: 1) Assessment of Internal Control- An internal control report must be included in the company’s annual report. 2) No Altering of Financial Documents- If anyone falsifies or alters financial documents they are subject to criminal penalties that includes up to 20 year in prison. 3) Must Disclose Periodic Reports- Financial statements are required to be accurate as any items off-balance could be used in a fraudulent manner. 4) Data in a timely manner- Financial data must be presented within a reasonable timely manner. The information must be written in a way that any investor could make an educated decision about investing. 5) Types of disclosure controls- Each company or organization must have policies and procedures set forth that explains guidelines that will ensure proper financial disclosure. Internal Controls-Strengths
The LJB Company does show some strengths in their internal controls including: 1) Using pre-numbered invoices- This allows for the company to account for all purchases and aide in making sure all purchases are recorded properly. This also enables the company to track any fraudulent cash disbursement in the event that invoices are missing. 2) Retaining employees- It reduces turnover time and the conflicts associated with being under staffed. LJB appears to have long standing commitments with their employees which is great for staff morale. 3) The suggestion of the use of an indelible ink machine for printing checks is a great idea as the ink cannot be erased or altered in any way. This aides in keeping fraudulent activities to a minimum and is a great way to incorporate more checks and balances to ensure compliance. Internal Controls- Opportunities for Improvement
There are a few opportunities for improvement that a plan of correction should be put into place quickly to correct. 1) Segregation of Duties: The Treasurer and Controller should have separate duties. There should be at least one more employee to work alongside the account who has specific supervision over the accounts receivables and accounts payable functions. 2) Physical controls- It is required that companies keep physical controls such as documentation related to assets. From a risk management perspective it would be beneficial for the company to immediately place the printed payroll checks in the safe instead of them being left in someone’s office. IT should also set up specific employee log-in and passwords in order to be able to track what is being viewed by each employee and IT guidelines should be given to staff to ensure clarity of what is required of them. It is also recommended that there is a procedure for properly handling petty cash.
Employees should not be able to just leave notes but have to request and justify the need for petty cash. A proper tracking mechanism should be put into place- a recommendation would be to use employee numbers to log the expense. 3) Human Resource controls- It is recommended that a thorough background check be completed on all eligible applicants. This will provide and verify information regarding the applicant, as well as confirm/deny any criminal activities. This should be implemented as soon as possible as this is a great way to aide in protecting the company’s assets. In conclusion, if these recommendations are adhered to and all issues addressed appropriately it is very likely that the LJB Company will be less prone to fraud and reduce errors and mistakes.
Harrison, W.T., Horngren, C.T., Thomas, W.
(2013). Financial Accounting, 9th Edition. Pearson Education, Inc.
(2006). The Sarbanes-Oxley Act 2002. In A Guide to the Sarbanes-Oxley Act. Retrieved June 3, 2014 from www.soxlaw.com.