Acct504 Lbj Company Internal Controls

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LBJ Company
“Going public in today’s environment”

Table of Contents

Preface…………………………………………………………….…Page 1 Introduction………………………………………………………Pages 1-2 Control Environment…………………………………………….Pages 2-3 Risk Assessment…………………………………………………….Page 4 Control Activities………………………………………………..Pages 4-9 Information & Communication………………………………...Pages 9-10 Monitoring……………………………………………………..Page 10-11 Summary……………………………………………………...Pages 11-12 References…………………………………………………………Page 13

Preface

In the late 1990’s and early 2000’s the country witnessed accounting scandals in several large companies like Enron (which included Arthur Anderson), WorldCom, Rite Aid and Bristol-Myers Squibb. These companies were faced with satisfying investor’s desire for profits, trying to obtain loans on non-existing profits and they had to keep investor confidence high to keep revenues flowing in. However, in doing so, they cut corners and ultimately collapsed due to the lack of mitigating controls within their organizations, lack of management oversight and other acts of fraud. In 2002, Congress passed the Sarbanes-Oxley Act of 2002, also known as (SOX) to help circumvent these issues as it was having a devastating impact on the world economy. This legislation, specifically section 404, changed the face of how publicly traded companies handle their financial matters and the role of executive leadership within the organization in regards to the management assessment of internal controls. This is interpreted by the U.S. Securities and Exchange Commission to mean “controls that pertain to the preparation of financial statements for external purposes that are fairly presented in conformity with generally accepted accounting principles as addressed by the Codification of Statements on Auditing Standards §319 or any superseding definition or other literature that is issued or adopted by the Public Company Accounting Oversight Board”. (http://www.sec.gov/rules/final/33-8238.htm) While there are many sections within the act the concentration of this review is section 404 dealing with managing assessment of internal controls. Prior to any company moving forward with publicly trading a company they should study all aspects of the SOX act and pertinent sections related to this legislation.

Introduction
LBJ has an interest in going public in the future and would like to know what steps it would need to take to be in compliance with any and all regulations regarding internal controls. This evaluation is to provide recommendations to the leadership of LBJ Company for consideration of its internal controls according to the Sarbanes-Oxley Act of 2002. SOX states that companies must develop sound principles of control over financial reporting and continually assess that the independent controls are working (Kimmel, Page 337). Creating an atmosphere of controls internally with employees, customer and investors inspires confidence that the company is providing the mitigating controls necessary to prevent fraudulent activity. In reviewing these items the goal is to provide the leadership of LBJ the resources and knowledge they need to make fact based decisions it needs to move their company forward so that they can start trading its company publicly. The areas of internal controls that we will review involve the establishment of a control environment, risk assessment, control activities, information and communication, and monitoring (Kimmel, Page 338). In reviewing these components current practices of LBJ that are in compliance and other items that need to be reviewed in order to meet current regulations will be studied. Control Environment

As part of SOX, LBJ will have to establish a control environment within the company. The control environment reflects top management’s awareness and commitment to the importance of controls throughout the organization, and encompasses management integrity, ethical values, and operating philosophy....
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