Case Study 2

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Internal Control: Avoiding the Next Catastrophe
To quote Edmund Burke “Those who don’t know history, are doomed to repeat it”. Here we are, thirteen years removed from the Enron scandal. The aftermath led to the Sarbanes-Oxley Act of 2002 and stricter regulations on companies going public. People have a tendency to believe that things like this can only happen to massive companies, but we must remember that Enron once started off as a small company, a company like LJB. In 1985, they were just a pipe line company, and by 1999 they were the biggest online trading company in the world. Why can’t LJB grow to be as massive as Enron? Except this time, let’s do it the ethical way. Let’s make sure we don’t hurt our shareholders, our employees, and most importantly, let’s make people believe in big corporations again. I see a company with potential. I see a company with employees who believe in their employer, and want to come to work every day. Unfortunately before we can begin issuing IPO’s we need to make some changes. These changes may seem drastic, but they need to be made to protect the company. To stop make sure it follows the guidelines put forth by the Sarbanes-Oxley Act of 2002. In this report I will detail some examples of changes that will need to be made before we can go public. Again, you may not like them, but we’ll have to bite the bullet on this, and get it done. What is required for Sarbanes-Oxley Section 404?

On your LJB’s annual report you are required to report on internal controls over your financial reporting. Four major things must be included in this report: Statement of Responsibility by company Management (CEO and CFO) for establishing and maintain an adequate internal control structure and procedures for financial reporting. Statement identifying the framework used by management to evaluate the effectiveness of the Company’s internal control over financial reporting. Management’s Assessment of the effectiveness of Internal Controls over financial reporting. Attestation by the company external auditor on Management’s assessment of the effectiveness of the company’s internal controls and procedures for financial reporting. (Gray, Lawrence) Heading in the Right Direction

First off, I would like to say, it’s not all bad. There are some things LJB is doing correctly when it comes to internal control, mainly using pre-numbered invoices.
You should always use pre-numbered invoices when billing customers to avoid any issues with the IRS. If the invoices are not pre-numbered they may assume that you may not be reporting all your income, but by having them pre-numbered you eliminate this hassle. My only real suggestion to you in this area is to make sure to keep all voided invoices, so they won’t again assume your hiding any unreported income.
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