SEPTEMBER 30, 2014

ACC504

INTERNAL CONTROL

DR. MICHAEL ABNER

PREPARED BY NELLY OYANE

Table of Contents

Introduction

I. Internal Control Requirements

II. What the Company is Doing Correct

III. What the Company is Doing Incorrect

Conclusion

References

Introduction

LBJ Company is presently conducting a decision to go public or not and with that they will also be familiar with their internal controls inside their systems, particularly with regard to Accounting and Human Resources and the way it will affect them and their workers and of course the way they operate.
There have been some encouraging and bad issues arise regarding their internal controls. Nevertheless, LBJ Company needs to be recognized for what they are doing right, but must also need to address matters that are harmfully affecting them and their business and will remain to damagingly impact them if they choose to go public, which will negatively drive down the cost of their shares etc.
This case study will examine these matters and make recommendations for what LBJ Company can do to strengthen their internal controls.

I. Internal Controls Requirements

Inform the President of any new internal control requirements if the company decides to go public.
Internal controls are mechanisms, policies and procedures used to decrease and control operational risk. In order to prevent employees from committing a fraudulent or deceitful act, controls must be comprehensive and complete. Still, internal controls by themselves are not sufficient. They will only be effective if they are strengthened by culture, policies and procedures, information systems, training and supervision of staff.

The principal objectives of internal controls are: • They assist to offer consistent data by making sure that the information is recorded in a consistent manner that will allow for useful financial reports • They also help avoid fraud and loss by protecting assets and vital records • Internal controls support operational efficiency by decreasing pointless duplication of efforts and protecting against a misallocation of resources. • They encourage loyalty to management policies and funding source requirements. Internal controls can be broken into two categories, accounting and administrative controls, which is precisely what the issues are with the LBJ Company.

In Accordance with the Sarbanes-Oxley Act of 2002, all American publicly traded companies are required to preserve acceptable system of internal control at all times. As LBJ President, he or she must know that an organized environment must be current at all times, and that "Contrary to the activity ethics will not be accepted." The Company must detect and examine the numerous factors that could generate risk for the company and how the team can succeed those risks. The whole System of internal control should show and communicate all information relating within the organization, to guarantee that the information provided has reached the organization. According to the textbook, "It is very significant to have testing and verification of controls to build a sustainable organization. (Kimmel, 2009)

II. What the Company is Doing Correct?

Advise the President of what the company is doing right (they are doing some things well) and also recommend to the President whether or not they should buy the indelible ink machine. When you advise the President, please be sure to reference the applicable internal control principle that applies.

The company is doing well in creating a stable environment for employees, because of long-term employees that are presently; it is a great thing for LBJ Company. From what is being presented, managers and employees have a good balance, which maintains good control and encourages a team oriented environment within the business. Another good thing is that the accountant is responsible of the checks and also stores them safely in his office, but the manager must have the only key to the vault to increase the checking of the checks and also would create a check and balance system. Also, if the accountant is not there for some reason and someone needs their check, the manager can handle this and not violate any employment laws by not giving an employee their check in a suitable manner. The President of LJB Company also made a good thing for wanting employees to be conscious of any new regulations necessary of the company if they decide to go public. It is extremely important the president have different individuals work as an accountant, treasurer and controller which will benefit streamline several of their processes. This way, the accountant will not be blamable for all financial transactions and again this will create checks and balances that are needed to go public.

III. What the Company is Doing Incorrect?

Advise the President of what the company is doing wrong (they are definitely doing some things poorly). Please be sure to include the internal control principle that is being violated along with a recommendation for improvement.

In this situation, LBJ Company has demonstrated a flagrant violation of the principle of internal control and is running important risks by not including more inaccuracy and checks and balances. First, they have only one accountant who serves as both treasurer and controller which is an area of excessive risk. The controller and treasurer are intended to play opposite roles in which they offer oversight and checks and balances to the other. Both positions must be complete by separate employees, and this change should be applied as soon as possible. In the current configuration, the only one accountant has too much power over the processes. Another problem is the principle of cash drawer which also leaves the company exposed to fraud and manipulation fund. For example, even if an employee of the company were to act freely, an employee could certainly remove a significant amount of funds that are not allowed, and it would not be easy, if not difficult to find out who did it as any employee the company could have been guilty. An example of the problems arising from the privacy that the employees of the company have in the organization, is obviously illustrated in the case of the worker who was fired for looking at pornography on the company computer. Not only does this present jeopardy of damaging the company reputation, and download viruses, but it also highlights how the absence of individual user accounts and responsibility ensures that an employee can hide their nasty actions with unrecognizability.

Here are some recommendations for LBJ Company.

1) In order to establish a culture of corporate concern, the CEO must begin to apply single user accounts for its computers, as well as a formal system of cash withdrawal, which necessitates that company employees enroll themselves with another person or a computer system.
2) The role of an accountant who serves as treasurer and controller should be separated into two so as not to violate the principle of internal control, and to diminish the risk of fraud.
3) The checks must not only be left in the office of the accountant, but in a safe where only two people have admittance, such as the accountant and the manager. In this way, more than one person is responsible.
4) The accounting taking checks the weekend is a welfare subject and introduces more chance for fraud. This manner must be stopped and more precautions must be taking in place. It is also an interrogation about the individual identifying information on checks of employees and whether controls are missing or stolen, while the information is visibly available now.
5) The book has also been involved in the discussion process for new staff is disturbing because of the level of control he has over the serious characteristics of the day to day businesses of the company. If he were to employ an assistant, he could definitely use that person's position in order to influence the accounts and withdraw important funds from the company before it was ever taken.
6) Human Resource departments should also implement more comprehensive checks as part of their employing process history. (Bell, 2010)

Conclusion

Now that LBJ Company received recommendations to correct problems with their internal controls, they will probably be able to go public and succeed. LBJ Corporation should also reassess their processes from time to time to ensure that these new systems for their internal controls are effective. They should re-examine from time to time when necessary to make changes as well.

References

Bell, E. (2010, March 10). Internal Control Checklist: 5 Anti-Fraud Strategies to Deter, Prevent, and Detect Fraud. Retrieved June 6/5/2013, 2013, from Comporate Compliance Insights:

http://www.corporatecomplianceinsights.com/internal-control-checklist-deter-prevent-detect-fraud/ Internal Controls Checklist. (n.d.). Retrieved June 5, 2013, from Compasspoint:

http://www.compasspoint.org/internal-controls-checklist Kimmel, W. a. (2009).

Financial Accounting Tools for Business Decision-Making. New York: John, Wiley and Sons Inc.