Case Study 2: Internal Control
Table of Contents
Part 1: Internal Control Requirements
Part 2: What the Company is Doing Right
Part 3: What the Company is Doing Wrong
The LBJ Company is currently making a decision to go public or not and with that The LBJ Company will also need to become knowledgeable about their internal controls within their systems, specifically in regards to Accounting and also Human Resources and how it will affect them and their employees and of course how they conduct business.
There have been some positive and negative issues arise in regards to their internal controls. However, the LBJ Company needs to be acknowledged for what they are doing right, but will also need to address the issues that are negatively affecting them and their business and will continue to negatively affect them if they decide to go public, which will drive down the cost of their shares etc.
This case study will review these items as well as make recommendations for what the LBJ Company can do to tighten up their internal controls.
Part 1: Internal Controls Requirements
Inform the President of any new internal control requirements if the company decides to go public.
Internal controls are mechanisms, policies, and procedures used to minimize and monitor operational risks. In order to deter employees from committing a dishonest or fraudulent act the controls must be thorough and comprehensive. However, internal controls by themselves are not enough. They will be effective only if they are reinforced through culture, policies and procedures, information systems, training, and supervision of staff.
* The primary objectives of internal controls are to:
Internal controls help to provide reliable data by ensuring that information is recorded in a consistent way that will allow for useful financial reports * They also help prevent fraud and loss by safeguarding assets and essential records. * Internal controls promote operational efficiency by reducing unnecessary duplication of effort and guarding against misallocation of resources. * They encourage adherence to management policies and funding source requirements. Internal controls can be broke down into two categories- accounting and administrative controls, which is exactly what the issues are with the LBJ Company. (Internal Controls Checklist) According to the Sarbanes Oxley Act of 2002, all publicly traded U.S. corporations are required to maintain an adequate system of internal control at all times. As LJB Company President, he or she should be aware that a controlled environment must be present at all times, and “that unethical activity will not be tolerated.” The LBJ Company must identify and analyze the various factors that could create risk for the business and how the team can manage those risks. The overall internal control system needs to show and communicate all appropriate information within the organization, to ensure that the communicated information has reached the organization. According to the textbook, “It is very important to have testing and auditing of controls to build a long lasting organization. (Kimmel, 2009)
Part 2: What the Company is Doing Right?
Advise the President of what the company is doing right (they are doing some things well) and also recommend to the President whether or not they should buy the indelible ink machine. When you advise the President, please be sure to reference the applicable internal control principle that applies.
The company has been doing well by creating a balanced environment for employees, due to the long-term employees that are currently there is an excellent thing for LBJ Company. From what is being shown, the managers and employees have a great balance, which keeps good control and promotes a team oriented environment within the company. Another good thing is that the accountant is in charge of the checks...
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