Acct 504 Case Study 2

LBJ Company: Internal Control Evaluation

Accounting 504: Managerial Use & Analysis
Case Study 2
Written by:
8/10/13
This evaluation is being presented as an assessment of the
preparedness of the LJB Company to go public at a future date. By
researching current regulations regarding publicly traded firms we hope
to prepare for a smooth transition into the trading market.
The Sarbanes-Oxley Act of 2002 (SOX) has established the following
guidelines for publicly traded corporations and require adherence for
internal controls and procedures for financial reporting. Senior
management and executives will be responsible for ensuring that
controls are effective and reliable. Outside auditors must periodically
verify the accuracy of and adherence to the internal controls. As part of
the annual Exchange Act report, an internal control report will generated
along with the information recorded during each fiscal year.
It is recommended that the LJB Company adopt the framework set forth
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and remain in compliance with the SOX Act. This
framework will follow six principles of internal control.
1) Establishment of Responsibility
2) Segregation of Duties
3) Documentation of Procedures
4) Physical Controls
5) Independent Internal Verification
6) Human Resource Controls
Bruce Bulmer Consultations has completed its preliminary assessment
of the current internal controls at LJB Company. While there are several
good practices in effect there are some areas to be improved upon.
Currently LJB operates with a lean staff. While this is good to keep labor
expenses down, it is recommended that should the company decide to
go public that higher levels of controls be instituted. The first of those
controls being that clear job descriptions and duties be established
ensuring accountability. The fact that the accountant is practicing
physical control by locking pay checks into the safe at days end. A more
secure method would be to require employees to receive their pay
through direct deposit. My firm is in agreement with the LJB accountants
recommendation to purchase an indelible ink machine. The machine will
offer LJB increased security against check fraud and improve physical
control when disbursing checks. We also feel that it would be a good
idea to switch to pre-numbered invoices.
To further the practice of dividing duties to improve accountability we
recommend two more changes. The accuracy of the accounting process
is very important. One individual should not be responsible for the entire
process. Duties should be divided in the accounting process. We would
like to encourage LJB to either hire a full time HR employee or choose a
HR firm to manage the hiring of new employees. Simple background
checks can help reduce the risk of further incidents such as the one
described in the notes.
In-building security need to be improved. The current management of
petty cash does not allow for the monitoring of proper fund use. The
current computer system does not offer any security. The development
of computer security protocols including the assigning of user names
and passwords for employees to gain computer and internet access as
well as the construction of a firewall to restrict unauthorized material
from disrupting company business.
LJB Company has several good practices in place but does need
improvement before going public. The most important changes will be to
ensure they meet all requirements regulated by law. Although there will
be some increases to expenses in implement the suggested changes.
LJB will find they are in a stronger position to correct errors, detect
losses and ultimately save the company money in the long run.
Kimmel. Financial Accounting: Tools for Business Decision Making, 7th
Edition. John Wiley & Sons. Retrieved from
http://devry.vitalsource.com/#/books/9781118654507/pages/73123677