Internal Control Requirements for Publicly Traded Companies

In a meeting last week, the president of LJB expressed interest of passing game public in the near future and asked us about the familiar enclose requirements for such action. To become publicly listed, LJB must follow the Sarbanes-Oxley forge of 2002 (SOX), which requires all US publicly traded companies to maintain an adequate system of informal hold in. Under SOX Section 404, a confederation must report on versed pictures over financial reporting in its annual report. iv key elements must be included in this report (Smith, Ledyard) 1. parameter of responsibility by the company management (CEO and CFO) for establishing and maintaining an adequate ingrained check into structure and procedure for financial reporting. 2. Statement identifying the framework used by management to evaluate the effectiveness of the companys internal control over financial reporting. 3. Managements assessment of the effectiveness of internal controls over financial reporting. 4. Attestation by the companys out-of-door auditor on managements assessment of the effectiveness of the companys internal controls and procedures for financial reporting. As the president of LJB, he and opposite executives and board of directors must ensure that the internal controls are reliable and effective. In addition, he must hire nonparasitic outside auditors to attest to the enough of the internal control system. LJBs Proper Internal Controls To become publicly listed, LJB must ensure and maintain an adequate and effective internal control system.After evaluating LJBs current internal controls, I engage put several positive acts. First, the restrainer of LJB has recently started to use prenumbered invoices, which I gestate to be a right decision because all companies, including LJB, should establish fitting documentation procedures. LJB should document minutes and events when they occur. The use of prenumbered invoices tummy help to impede a transaction from being recorded more than once, or conversely, from not being recorded at all (Kimmel, Weygandt, & Kieso, 2011, p. 341).In addition, an effective internal control system should require that all source documents be like a shot forwarded to the accounting department for accounting entries this helps to ensure agely recording of the transactions and contributes directly to the accuracy and dependableness of the accounting records (Kimmel, Weygandt, & Kieso, 2011, p. 341). So when the control has asked for acquire an indelible ink machine to print checks, I believe it depart be a wise and necessary purchase. Second, the accountant does a sizable job of moving all checks into a safe in his map during weekends.This is in compliance with physical controls, which relate to the safeguarding of as set outs and enhance the accuracy and reliability of the accounting records (Kimmel, Weygandt, & Kieso, 2011, p. 342). By moving the checks into the safe, they are secured during nonbusiness hours and not access ible to no wiz, this prevents potential fraud and theft. LJBs Improper Internal Controls On the other hand, at that place are several other controls which LJB is not doing properly. First, the accountant is right off serving two roles as both treasurer and controller.This is a impact of segregation of duties. Different individuals should be answerable for related activities, however, the accountant is responsible for both supply purchases and payments for these purchases, and this increases the potential for errors and irregularities (Kimmel, Weygandt, & Kieso, 2011, p. 339). Since the accountant basin entertain orders of supplies without supervisory approval, he may be tempted to receive kickbacks from suppliers (not saying he will) he may authorize payments for fictitious invoices since he likewise has payment authorization.Moreover, the accountant should not be responsible for both receiving checks and completing monthly coast reconciliations, because since he is the per son who shell outs record keeping for LJB, he should be incomplete responsible for physical duress of the received checks (which are basically capital) nor have access to them (Kimmel, Weygandt, & Kieso, 2011, p. 340). Both va toiletcies of segregation of related activities and segregation of record-keeping from physical custody controls leave a great potential of fraud for LJB, not mentioning there is a lack of independent internal verification (Kimmel, Weygandt, & Kieso, 2011, p. 343).Second, LJB is missing control over its junior-grade cash. If all employees have access to petty cash, it is a violation of establishment of responsibility (Kimmel, Weygandt, & Kieso, 2011, pp. 338-339). In addition, not just now no one is responsible for the petty cash, employees who use the money are only asked to leave a note, this violates the documentation procedures controls. Third, the firing incident indicates LJB is doing poorly on three controls human resource controls (Kimmel, Weygan dt, & Kieso, 2011, p. 344), physical controls, and establishment of responsibility. LJB did not take in a native primer check on the convicted employee.If a thorough background check was performed LJB should had found out that this person was convicted guilty and served time for molesting children. Also, since LJB does not assign individual passwords to employees, it was no affect that it had difficulty acquiring the convicted employees confession of viewing pornography on company computer. Last, the accountant should not be engaged in interviewing and approving new hires, since he is already responsible for other tasks. Instead, the human resources department should be knotted in the hiring process, along with the president.Recommendations for Improvement These poor internal controls indicate LJBs vulnerability to frauds, which not only serve as threats to LJB but also hinder the companys capability of going public. neertheless, actions dirty dog be taken to fix such flaws. First of all, LJB should assign polar individuals to handle supply purchase and payment tasks. If the accountant is responsible for making orders of supplies, he should receive approvals for these purchases, and should not be granted payment authorization. If he authorizes payments, he should not be made responsible for purchasing supplies.Also, since he prepares brink reconciliations, he should not have custody of the received checks a different individual should be appoint for such task. In addition, for enhanced security, LJB can assign another employee who is independent of the personnel responsible for the activities to conduct independent internal verification. He/she can compare the payment checks to invoices he/she can also compare total responses to bank deposits on a monthly basis to see if there is reconciliation between the cash balance per books and the cash balance per bank.If there is any discrepancy, he/she can report to the management immediately for corrective a ction (Kimmel, Weygandt, & Kieso, 2011, pp. 343-344). Secondary, LJB needs to set up a petty cash storage (not sure one is existed currently) and appoint a custodian who is responsible for such fund. Size of the petty cash fund should be determined, expenditures from the fund should be limited and trustworthy types of transactions should not be permitted from the fund. The custodian of the und should have authority to make payments from petty cash that conform to these prescribed policies (Kimmel, Weygandt, & Kieso, 2011, p. 367). Also, for documentation purpose, instead of a note from users of the petty cash, each payment from the fund must be documented on a prenumbered petty cash receipt, signatures of both the custodian and the individual who receiving payment must be on the receipt. If other financial backing documents such as an invoice are available, they should be attached to the receipt (Kimmel, Weygandt, & Kieso, 2011, p. 367).Furthermore, internal control over petty c ash fund can be strengthened by (1) having a supervisor make surprise counts of the fund to ascertain whether the paid petty cash service and fund cash equal the designated amount, and (2) canceling or mutilating the paid petty cash receipts so they cannot be resubmitted for reimbursement (Kimmel, Weygandt, & Kieso, 2011, p. 369). Lastly, from now on, LJB must conduct thorough background checks on all new hires. Two things can be verify to support the checks (1) Check to see whether job applicants actually graduated from the schools they list. 2) Never use the telephone numbers for previous employers given on the quote sheet always look them up (Kimmel, Weygandt, & Kieso, 2011, p. 344). The human resources department should be held responsible for all background checks. In addition, all employees should be assigned individual passwords for signing into company computers, and these passwords should only be known to the individuals whom they are assigned to. LJB may also consider in stalling an advanced firewall weapons platform on computers which prohibits users from logging in external indecent websites.