Internal controls are vital to any company’s business and financial sustainability. Internal controls consist of measures taken by a company safeguarding against fraud, and theft. Internal controls ensure accuracy and reliability in accounting data, and secure policies within the organization. Further, internal controls evaluate all levels of performance. These are addressed with five principles of internal control: Establishment of responsibility, Segregation of duties, Documentation procedures, Physical controls, Independent internal verification, and Human resource controls.
The 2002 Sarbanes-Oxley Act stresses importance upon guidelines of necessary internal controls for any publicly traded company or corporation. There are several practices LJB Company currently have in place, these will be addressed and should be continued. Finally, steps designed to strengthen the fiscal future of LJB Company and continued growth.
IPO and Internal Controls
Strict, multi-step requirements necessary for a company going public can be daunting and intimidating. A strong game plan involving the tightening of internal control policies is often the best place to start. These essential steps leave the company with a stronger foundation with many benefits to the company and their future stockholders.
Prior to 2002 the necessary steps were not required. Congress addressed concern at growing corporate fraud with the introduction of the Sarbanes-Oxley Act of 2002. Sarbanes-Oxley Act seeks to govern publicly traded companies and created auditing standards most specifically addressed are internal control audits. Title III and title IV specifically address internal controls.
Title III Section 302 of the Sarbanes-Oxley Act pertains to the “Corporate Responsibility for Financial Reports”. Certification of financial reports must be signed and reviewed by the CEO and CFO of the company ensuring the following have occurred: no misleading statements or omissions. The company officers must certify the design and evaluated their internal controls within ninety days of their annual and quarterly reports.
Title IV Section 404 of the Sarbanes-Oxley Act pertains to the “Management Assessment of Internal Controls”, addresses the responsibility of management for the existence of internal controls, and the evaluation of the effectiveness of them. Section 404 requires an external auditor to review the controls in place and prohibits management from certifying their internal controls if there are any weaknesses located by the external auditors report.
Successful Existing Internal Controls
Based upon information provided to us by LJB Company, there are several internal control procedures that are already in place, addressing several of the basic five principles of internal control.
LJB Company has established responsibility of duties, in having the accountant solely pick up the company paychecks. These paychecks are available in his office for pick up by employees. At the end of the day remaining checks are secured inside a safe effective use of physical control principle.
Pre-numbered invoices are effective documentation controls. The proposed idea of purchasing an indelible ink machine for printing of company checks is recommended for LJB Company. Disbursement of signed checks imprinted by a check writing machine, which can be compared to corresponding invoices, should also be implemented with the purchase of the indelible ink machine.
Internal Controls for Consideration
Segregation of duties needs to be in place. The accountant serving as both the Treasurer and Controller, places too many duties upon one person. We recognize that in smaller organizations many employees must balance many duties and responsibilities. However, one person acting as accountant, treasurer and controller places an imbalanced access to the companies invoice process, ordering process, check cashing process, and he alone decides what of these activities gets recorded in the Company books. We recommend that two other employees be assigned the respective Treasurer and Controller duties.
Establishment of responsibilities must be outlined and assigned. At this point there is concern over the accountant being solely responsible for the ordering of supplies, and paying for supplies. There are no current controls in place to ascertain what supplies are being ordered and paid for against supplies that are actually received. One employee needs to be assigned the job of ordering supplies and creating a purchase order. The accountant can check the invoice received by the supply company against the purchase order and then pay for the supplies.
Several physical controls should be immediately executed for LJB Companies. Restrictions need to be in place on the petty cash fund, adequate documentation for use of petty cash funds must be implemented. The purchase of the indelible ink check printing machine should reduce the need for petty cash access. Password protection on all computers should be required, with an identification and unique password for each employee. Restrictions of access to pornographic websites should be considered.
Human Resource controls are necessary. Currently there are limited background checks being conducted on potential new hires. LJB Company must outline what desirable qualifications they require. A human resource position should be considered especially in the interviewing and hiring process of new employees. Currently LJB hiring process is completed by the President and the accountant, on top of being a human resources internal control principle, this falls under the classification of segregation of duties and establishment of responsibility principles.
Independent internal controls must be put in place to check that the above principles are being met. The needs to ensure that checks received are reconciled with the end of month bank statements. Currently this is the sole responsibility of the accountant.
Internal controls are simply good business practices and strengthening existing policies and procedures should be considered prior to any public offering. While designing and implementation of effective internal controls isn’t often accomplished through quick fixes, however, once in place they significantly reduce risks associated with error, irregularities, and greatly strengthen asset protection. Strong internal controls and compliance with the Sarbanes-Oxley Act are useful for potential stockholders investment, signaling that LJB Company will protect their investment.
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Addison-Hewitt Associates. (n.d). A Guide to Sarbanes-Oxley Section 302, and 404. Tuesday, November 27, 2012. http://www.soxlaw.com/s302.htm
Deloitte. (n.d.). Ready for the IPO Spotlight? Strategies for Going Public, Being Public. Tuesday, November 27, 2012. http://www.deloitte.com/view/en_US/us/Services/audit-enterprise-risk-services/financial-instrument-valuation-securitization/financial-accounting-reporting/ipo-spotlight/index.htm
Kimmel. Financial Accounting. 6. VitalSource Bookshelf. John Wiley & Sons, , Tuesday, November 27, 2012. http://devry.vitalsource.com/books/9781118233634/id/B7-2