LJB Company: Evaluation and Development of Internal Controls

Porsche S. Middleton
Evaluation of LJB Companys current system of internal controls, with recommendations for improvements and an explanation of federal regulations required for the company to go public.

Accounting 504 Managerial Use and Analysis Professor Apledoorn

10/5/2012

Contents
Introduction .................................................................................................................................................. 2 Overview ....................................................................................................................................................... 2 Summary and Conclusion ............................................................................................................................. 3 Works Cited ................................................................................................................................................... 4

Introduction
The requested assessment of LJB Companys internal controls has been completed and our firm has also researched current regulations regarding publicly traded firms to help ensure that your company makes a smooth transition into the public market if you decide to pursue this option. Publicly traded corporations are required to implement and follow the guidelines for internal controls and procedures for financial reporting, set forth by the Sarbanes-Oxley Act (SOX) of 2002. This means that upper management and executives at LJB are responsible for ensuring that the controls are effective and reliable, furthermore the company must periodically use outside auditors that will be able to confirm the accuracy of the internal controls. This information is recorded each fiscal year in the internal control report and will be included as part of the annual Exchange Act report. This act helps to reduce the possibility of corporate fraud by ensuring that all corporations follow specific procedures for financial reporting.

Overview
Our firm recommends that your company adopt the necessary framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) so that the company will be in compliance with SOX Act. There are five principles of internal control that LJB should implement and adhere to: Establishment of Responsibility Segregation of Duties Documentation of Procedures Physical Controls Independent Internal Verification Human Resource Controls

After assessing the current level of internal controls at LJB, we have noticed that there are several good practices in effect and there are some areas that could use improvement. The accountant at your company is practicing physical control by keeping pay checks locked in the safe at the end of the day. A higher level of internal control can be established keeping the checks secure at all times unless being distributed, or the company should consider requiring all employees to receive their salary via direct deposit. It is a good idea to switch to pre-numbered invoices and our firm agreed with the purchase of the indelible ink machine. This will give your company higher physical control when it comes to disbursement of checks and will give the company higher security against check fraud. Controls need to be established for the management of petty cash. Currently LJB has no way to manage or determine if funds are being used properly or if they are being stolen because the

company is operating solely on the principle of the honor system. This shows that LJB has great confidence in the integrity of its employees, but if the company should decide to go public then higher levels of controls have to be established. LJB has a very lean staff which helps to keep the companys overhead low. It is recommended that clear job descriptions and duties are established to allow for a stronger system of accountability. The duties of the accountant should be divided so that one individual is not responsible for the entire accounting process. This will allow for a better system of check and balances, that will further ensure accuracy in the accounting process. Before any employees are hired a background investigation should be conducted. This will require that LJB hire an HR employee. This would have saved the company time, money and frustration in regards to the employee who was viewing inappropriate sites on company equipment and would have eliminated the risk of hiring an individual with a felony background. Further controls will need to be established in this area because background checks only offer information about previous issues. The computers at LJB do not require any type of employee authentication and do not monitor they length of time spent on equipment or what type of material is being viewed. Our firm suggests that the following computer controls are implemented: Firewalls that restrict material that is not necessary to conducting company business Assign user names and passwords for employees to gain access to company computers Assign user names and passwords for employees to gain access to the internet

Summary and Conclusion

In conclusion, your company will have to meet certain requirements should it be decided to go public and these include internal control policies that are regulated by law. LJB has several good practices in place and needs to further develop controls in regards to human resources, separation of duties and company funds. It is important that LJB realize that although these controls will have an upfront cost associated with them, these changes will result in a stronger more effective system. This system will help the company to detect losses sooner, correct errors and cost the company less in the long run.

Works Cited
Kimmel. Financial Accounting, 6th Edition. John Wiley & Sons. Retrieved from <vbk:9781118233634#outline(1)>. Committee of Sponsoring Organizations of the Treadway Commission. Enterprise Risk Management Integrated Framework, 2004.