Internal Controls
Internal Controls
Report
Introduction: I was asked by the president of LJB Company to write a report on the current internal control measures of LJB Company and required internal control measures after becoming public company.
Main Report:
New internal controls requirements
The internal controls of public company or listed companies play an important role in the integrity, professionalism and the compliance of corporate governance codes. According to the corporate governance codes, it is very important for the public companies to have proper and legitimate internal control department. The internal control department is also known as internal audit department. Due to the interest of general public, shareholders and all the stakeholders, it is very important to make sure that the internal audit department of LJB Company is independent. Another internal control requirement for the public or listed company is that the company must have non executive directors (NED’s), The role of NED’s is to ensure that the rights of shareholders are protected and the directors are not generating any personal gain from the decision making of the business. Furthermore, after the stock exchange listing of LJB Company, it will be exposed to several industry and market risks. Therefore, the NED’s will guide and inform the operational and executive managers regarding any risk associated with the business, so that the management takes proper measurements accordingly. (Youhong, 2001)
Strong points of LJB and indelible ink issue
The main strong point of LJB Company is that the organizational structure and the culture of the organization are very friendly and cooperative. The management of the business accepts the suggestions and the recommendations from the lower staff. This attitude of the management will increase the motivation level and the integrity of the employees. (James)
The invoices must be generated by computers at the time of actual sale or purchase and these invoices must be authorized by two different officers. The demand of pre-numbered invoices from the accountant is a weak control tactic. Moreover, the salaries of the employees must be made via bank transfer or the accountant must write the bank check on the arrival of the employee to enhance the safety of checks. The indelible ink printer proposal is a strong control and it will reduce the chances of tempering the bank checks or the invoices. However, it is very important to state that the management of the business must not give the full authority to the one accountant to sign all the purchase and selling invoices. Therefore, to maximize the internal control, the management must appoint another individual to inspect and verify the reason of invoices. The internal audit department and the NED’s can help the directors in improving the control over invoices by confirming from the third party. Therefore, the indelible ink will insure that the amount on invoices and the name on the invoices cannot be tempered and the authorized signature of different accountant will double check the validity of the invoices. (James)
Weak Controls and Recommendation for improvements
In the case of LJB Company, the management of the business must implement the controls over the petty cash of the business because it is highly probable that the employees can use the identity or the name of other employee via note slip and steel the cash. Moreover, the accountant of the LJB Company has a lot of power regarding the cash management of the business. (Sadiq, Governatori & Namiri, 2007)
The management of the business must hire a new accountant for the purchase department or the new accountant must clear the payments of the suppliers. This control will reduce the risk of bogus purchases and returns. Moreover, the new accountant must reconcile the bank statements separately to keep an account for the transactions made by the old accountant. (Sadiq, Governatori & Namiri, 2007)
The payment of salaries of the employees is the weak point of LJB Company. In case of a corporation, it is very important to assure that the salary checks must be delivered to the correct employee. To improve the control of the payments, the accountant must check the employee identity card or the identification code issued by the organization to make sure that the payment check is given to the right employee. Moreover, it is highly probable that the due to human error the accountant may lose any or few checks. Therefore, to insure that the checks are not lost, accountant must return all the checks back to the main department before leaving the office. Keeping the checks in the safe in his office will increase the liability on the accountant. Therefore, the accountant must return the uncollected check to the main accounting department. (Sadiq, Governatori & Namiri, 2007)
The directors of the company must place and install the filter on the internet connection of the company. This filter must block the unethical or adult content to insure that the other employees do not get distract due to the actions of any employee. The company must install more accurate and secured standards for the computer system of the business. Every employee must have his own computer password and in case of any unethical action at workplace, the management of the business must take actions. In the listed companies, it is very important to maintain the reputation and the image of the corporation. Therefore, the directors of the business must implement the standards of the corporate governance and the ethical behavior in their organization to insure that the employees of the company behave and act according to the professional ethics. (Sadiq, Governatori & Namiri, 2007)
Summary and Conclusion:
The management of LJB Company must have an internal auditing department and the NED’s after the listing of the business at the stock exchange. Moreover, the management of the business must not give excessive controls to one individual to minimize the chances of manipulation.
References
Youhong, Y. D. Y. (2001). Tentative on the Construction of Internal Control Framework [J].
Accounting Research, 2, 001.
James, K. (n.d.). Five Common Features of an Internal Control System of Business. Retrieved
November 30, 2014, from http://smallbusiness.chron.com/five-common-features-internal-control-system-business-430.html
Sadiq, S., Governatori, G., & Namiri, K. (2007). Modeling control objectives for business
process compliance. In Business process management (pp. 149-164). Springer Berlin Heidelberg. Chicago
