Introduction As the LJB Company moves forward with their vision of becoming a public company they must look at the different changes that they need to undertake. Not everything about the way that they conduct themselves needs to change. There are some very good attributes about the company that they should be very proud of. Along with the good there are also some things that do need to change. All of the aspects of the LJB Company, whether good or bad, will be pointed out and brought to the forefront.
Do Not Change the Good Every company has their share of things that work for them. LJB Company is no exception to this. One of the greatest aspects that the company has going for them is that they are a lean organization and have a great deal of faith in their long-term employees. This shows that not only do people like the company that they are working for, but that the company also respects the employees. The owner and accountant also show that they have a lot of trust in the employees with the current petty cash scenario. The accountant is also taking the right steps toward maintaining some internal controls by using pre-numbered invoices. The use of the pre-numbered invoices makes it easier to record the invoices and also maintains some order to the system that he is trying to establish. He has expressed interest in purchasing an indelible ink machine to print the checks. The use of indelible ink to print the company’s checks would be a great step towards combating any type of fraud that may happen. The purchase of an indelible ink machine is advised, especially with the company planning to go forward with becoming a public company.

Changes to Be Made Before going into the detailed requirements of meeting the guidelines to become a public company, there are some obvious changes that should be made. Since there has been an issue in the past concerning a former employee, it is suggested that the company consider having any potential employees go through a pre-employment screening process that should include a background check. By requiring a background check, the company could avoid any possible embarrassment like they have experienced in the past. This also protects the company from hiring anyone who may be looking to defraud the company in any way as well. It is also suggested that the employees be assigned and required to use a password to access any of the computers or other equipment located in within the business. Not only does this protect the company, but it also protects the employee from being accused of wrong doing when they have not. Every company has their issues; it is best that they learn from them and move on.
Internal Control Planning To move forward with the plan to become a public company, the requirements must be met that adhere to the Sarbanes – Oxley Act of 2002 (SOX). The SOX requires that all publicly traded companies have and maintain an adequate system of internal controls. To do this there are five components that should be included. The number one item is a controlled environment. The CEO must make it clear that any type of fraud or deception will not be tolerated. The second component is risk management and should be looked at to determine the risks for the company and how to manage the risks. Within the LJB Company, the risks that are evident pertain to the accountant and the employees. Since one person is doing multiple jobs dealing with the finances, there is a greater risk of fraud occurring. There is also a risk with the employees and the petty cash drawer. There is a chance that an employee could remove funds and not leave a note stating they did or even misinterpret the amount that they removed. Controlling activities is the third component that needs to be viewed. To reduce the risk of fraud, management needs to take control of some of the aspects dealing with the way that things are done and enforce them. Information and communication, the fourth component, is as important as the first one. Making sure that everyone is informed and communicating with one and other will help to run a smoother operation and also combat and situations of fraud that may arise. The last component, but equally important, is monitoring of the internal control. By monitoring the internal control management will be able to see what is working and what is not. They will also be able to determine in what areas there is a higher risk for fraud and institute changes. The monitoring process is one that needs to be consistently ongoing. (Paul D. Kimmel, PhD, CPA; Jerry J. Weygandt, PhD, CPA; and Donald E. Kieso, PhD, CPA, 2011, pp. 337 - 338)
Principles of Activity Control Even though all of the components of internal control, the most important is most likely activity control. The activities are what makes the company run smoothly and combats the risks and problems that they may face. The principles of activity control are where there is the most problems with LJB Company. The six principles need to be applied going forward to become a publicly traded company. The first thing that should be established is the responsibilities. Each employee should be aware of exactly what their responsibilities are and how they should be implemented. “Control is most effective when only one person is responsible for a given task.” (Paul D. Kimmel, PhD, CPA; Jerry J. Weygandt, PhD, CPA; and Donald E. Kieso, PhD, CPA, 2011, p. 338) When too many people are doing the same task there can be confusion and overlapping of job duties. This can also cause certain tasks to be done multiple times. In cases where finances are involved this could cost the company money because a creditor could be paid multiple times. To establish the responsibilities there should be a segregation of duties, with brings us to the next principle. While it is nice that the company is trying to be a lean company and depend on their long-term employees, depending on one person to do all of the accounting work is not a good idea and raises the level of risk. There should be separate employees for different accounting tasks. Different purchasing activities should be assigned to different people. In the case of LJB Company, some of the duties for purchasing, receiving, and record keeping should be done by several people, not just one. The person that orders supplies, should not be the same person that pays for or receives the supplies. The same process should also be done with the other activities. By segregating the job duties, there is less likelihood that fraud could or would be committed. If the same person is ordering, paying for, and receiving items, there is a chance that they could alter the records to benefit themselves which would constitute fraud. In the same terms, all of the purchases should be approved by a separate person. Segregation of the records would also be similar. The person that does the record keeping would be different than the person that has physical custody of the records. By doing this there is less of a chance that they would be able to reroute money to help them. Having one person handle the actual money and the other person preparing any statements dealing with the money would give more security to the cash flows. The person handling the cash could match the cash with what is on the records. Having two different people involved makes it less likely for one of them to commit fraud. For every transaction that the company incurs there should be a document to record it. Documents should be pre-numbered to ensure that each transaction is not recorded more than once or not at all. Having an indelible ink machine to print checks would come into play with the records as well. Not only does this prevent fraud by thwarting any efforts to do check washing, this also services as a process of recording checks more accurately. When dealing with the recording of financial items these items the accounting department personnel should also be made aware of transaction immediately so that everything can be recorded promptly. By doing this there is a more accurate and up to date version of the financial situation of the company. In the case of the LJB Company and the situation that they have encountered in the past they need to implement some new physical controls. The implementation of physical controls includes issuing passwords to employees that they must use to access computers and other equipment. By doing this it will ensure that they do not have a problem with proving an employee did something wrong. This will also work in the case of the petty case as well. By placing the petty cash in a password secured vault any employee that obtains cash will need to use their password. In this case if they forget to leave a note there will be a record of who entered the vault/safe and so it will be traceable. The use of security cameras is also another way to utilize physical control. Security cameras will not only benefit the employer, but will also benefit the employees. Being able to view the actions of the employees can make it easier to determine if any fraud is being committed and by who. The addition of the added physical controls also helps to lower the risks that may be determined when the risk assessment was performed. Performing an independent internal verification is also one of the principles that need to be enacted. Having an employee that is not involved in any of the financial process should perform an internal audit to determine if all of the numbers add up. By having a second person look at the paperwork and numbers it not only ensures that there aren’t things missing or not recorded, but it also will catch mistakes that otherwise might not be noticed. The final principle of activity control would be human resources controls. Since this has been an issue in the past for the LJB Company, they should consider revising their hiring process. The first thing that needs to be doe would be having background checks done for each employee. Many companies that do background checks do the minimum, which is generally at the state level. Going beyond that and having a FBI clearance done would do more to combat any criminal records that could be from a different state than that of the company. Background checks with show up when a person has been convicted of a serious crime and what the nature of the crime is. Had LJB Company instituted background checks, they could have avoided the embarrassment that they experienced in the past. The also can protect the company financially in the end.
Closing Remarks The LJB Company is an overall good company that seems to have respect and trustworthy employees for the most part. Finding a company that wants to have a solid foundation with their employees is a wonderful start to moving forward with going public. Implementing some of the changes that have been suggested could have a very favorable impact on anyone that is looking to invest in the company. The better the internal controls, the more faith that they will put into the company.

References
Paul D. Kimmel, PhD, CPA; Jerry J. Weygandt, PhD, CPA; and Donald E. Kieso, PhD, CPA. (2011). FINANCIAL ACCOUNTING. John Wiley & Sons, Inc.