LJB Company, a local distributor, has asked your accounting firm to evaluate their system of internal controls because they are planning to go public in the future. The president wants to be aware of any new regulations required of his company if they go public, so he met with a colleague of yours at a local restaurant. The president of the company explained the current system of internal controls to your colleague. Your colleague has since been promoted to a tax position so she has passed on the information below so you can generate recommendations for the partner at your accounting firm to share with the president of LJB Company.
Since LJB Company is a relatively lean organization, they have a lot of faith in their long-term employees. They have one accountant who serves as treasurer and controller, which streamlines many of their processes. In this dual role, he purchases all of the supplies and pays for these purchases. He also receives the checks and completes the monthly bank reconciliation. The accountant is so busy that the company handles petty cash a bit differently. All employees have access to the petty cash in a desk drawer and are asked to only place a note if they use any of the cash.
The accountant has recently started using pre-numbered invoices and wants to buy an indelible ink machine to print their checks. The president is waiting to hear from you if this is a necessary purchase before authorizing.
On payday, the checks are picked up by the accountant and left in his office for pick-up. Before he leaves for the weekend, he will move the checks into a safe in his office.
The president is still quite embarrassed because he had to fire one of his employees for viewing pornography on a company computer. He later found out this individual was a convicted felon who served time for molesting children. The company had a hard time getting the employee to admit it was him because the company does not assign individual passwords. The president expressed his frustration because both he and the accountant both interview and approve all of the new hires.

What are the doing wrong?
While the company is not completely in the toilet, there are a lot of things they are doing that are not safe or in a good direction. There should be some accountability for the accountant to ensure that he is doing the best for the company and the funds are correct. Even if there is a lot of trust there, humans make errors and there should be accountability. Also it is a violation that he is the controller and treasurer and he is not segregated. Speaking of accountability there is none for the cash drawer and there most certainly should be, this way violates regulated internal procedures. The cash and all payments should be looked and transactions should be monitored electronically or in a much safer method. Also, the employee’s checks need to be secured all of the time. They should be passed out officially, and not open and unsecure at any time, this is a violation of physical control.

What are they doing right? While the time in the safe isn’t correct, using the safe is extremely important and is a great use of security, but it should be used all of the time. Also, having pre-numbered checks is a good way to do things. Getting the indelible ink machine is a good idea in order to help prevent fraud and manage checks and balances.

I would recommend- I would recommend that there be an indelible ink machine purchased. Also, it would be best to review the order in which things are done. There are regulations and things that need to be changed in order to abide by them. The paychecks need to be locked away and handled on a personal level to each individual. Also, the accountant needs to either be in control of the money or be the treasurer, but not both. There needs to be accountability for the actions of these jobs and internal control. Also, I think it would be best to have a control on passwords and use of Internet to help prevent unauthorized use of the Internet. As well as altering the way that background checks and interviews are done, because it is important to know who you are hiring.