Going public is the peak of efficiency in the life of a company. Becoming public introduces a business to capital gains from initial public offerings witch are traded on an open market. There is also a cost to have this access and potential loss of control over the business when a formally private company goes public. The requirements for going public are governed by regulations enforced by state local and federal laws. Public companies have the obligation of additional reporting and procedures in operations that have to be followed in accordance with the Sarbanes Oxley act section 404.
Public companies also have to reveal sometimes sensitive information on an ongoing basis to the Securities exchange commission. Section 404 requires internal controls over financial reporting and violation of these laws could lead to heavy fines and possible prosecution of Chief Management. LJB Company has asked for an evaluation of their system of internal controls because they are planning to go public. Management would like advisement on regulation requirements to be met if LJB is to go public. I have evaluated the LJB’s practices and have recorded the practices that are in accordance with SOX and those that are not.
This company is on the rite track however there are some changes that need to be made to receive a recommendation from the auditors that will approve this company for going public. Internal Control requirements for going public Sarbanes-Oxley Act of 2002 (SOX) requires all publicly traded U. S. corporations to maintain a system of internal controls. SOX expects responsibilities on corporate executives and boards of directors to guarantee that companies internal controls are reliable and honest. Companies must put into practice principles of control over financial reporting and handling.
Independent outside auditors must review and approve the level of internal controls. To safeguard assets and enhance the accuracy and reliability of its accounting records, companies follow internal control principles. The following six internal control principles apply to most companies. Establishment of Responsibility There is a governance on assignment of responsibility to specific individuals. One person is responsible for a given task and authorization or approval of transactions For that one person should come from another. Segregation of Duties
The work of one employee should provide a basis for evaluating the work of another employee. The responsibility for related activities should be assigned to different individuals. The responsibility for record keeping for an asset should be separate from the holder of the asset. Documentation Procedures Documents provide evidence that transactions and events have occurred. Source documents for accounting entries should be forwarded to the accounting department to ensure fast recording of the transaction and event. Physical, Mechanical, and Electronic Controls
Physical controls relate to the protection of tangible assets. Mechanical and electronic controls monitor assets and enhance the reliability of the accounting records. Use of physical, mechanical, and electronic controls is needed to minimize shrinkage. Independent Internal Verification Independent internal verification involves the review of data prepared by employees. Verification should be made on a surprise basis. An employee independent of the people being watched should do verification. Discrepancies should be reported to a management.
Internal auditors are employees of the company who evaluate the effectiveness of the company’s system of internal control. Presidents Advise on what the company is doing wrong The accountant who serves as Treasurer and Controller that purchases all of the supplies and pays for these purchases and receives the checks and completes the monthly bank reconciliation has too much on his hands. When one individual is responsible for all of the related activities, the potential for errors is increased. Related purchasing activities should be assigned to different individuals.
Related purchasing activities include ordering merchandise, receiving goods, and paying for merchandise. Related sales activities also should be assigned to different individuals. Related sales activities include making a sale, shipping (or delivering) the goods to the customer, and billing the customer. Record Keeping Separate from any one who has access to the purchased or sold. The holder of the asset is not likely to convert the assets to personal use if one employee maintains the record of the assets that should be on hand and a different employee has actual asset.
Bond personnel who handle cash and deposit all cash in bank daily. All employees should not have access to the petty cash and accurate and non hand written receipts must be used. Only designated personnel are authorized to handle cash receipts. Different individuals receive cash, record cash receipts, and hold the cash. Use cash register tapes, and deposit slips. Physical, mechanical, and electronic controls – Store cash in safes and bank vaults; limit access to storage areas; use cash registers.
Supervisors count cash receipts daily; treasurer compares total receipts to bank deposits daily. Bond personnel who handle cash deposit all cash in bank daily. The company does not assign individual passwords witch is a violation an administrative application should be attached to IT that will monitor and separate access to users in separate classes. This would have made it easier to catch the employee who was viewing pornography on a company computer. How did a convicted felon who served time for molesting children find his way threw human resources?
An important and inexpensive way any business can take to reduce employee theft and fraud is to conduct thorough background checks. Check to see whether job applicants actually graduated from the schools they list. Never use the telephone numbers for previous employers given on the reference sheet, always look them up yourself. Presidents Advise on what the company is doing correct 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.
Safes, vaults, and safety deposit boxes for cash is a ractice that relates to the Physical, Mechanical, and Electronic Controls principal and is defiantly on of the better practices of LJB and is in accordance with SOX section 4. The accountant has recently started using pre-numbered invoices and wants to buy an indelible ink machine to print their checks. Documents should be pre numbered and all documents should be accounted for. The indelible ink machine eliminates the possibility of someone forging a hand written check. The President expressed his frustration because both he and the accountant both interview and approve all of the new hires.