Case Study 2: LJB Company’s Internal Controls
Michael Del Toro
FI504 - Accounting
This paper shall focus on the criticalities involved in LJB’s transactions and how it may implement internal controls to the business processes while increasing the accountability of individuals involved in its ‘lean business process.’ With the advent of the Sarbanes-Oxley Act and its repercussions to the manner in which businesses must prevent fraud (both external and internal) to not misrepresent any of its financial data to its investors – the same applies to LJB’s Company since it has plans of going public and hence goes under the scrutiny of everyone (aka the investors and the larger business community looking for investment opportunities). Case Study 2: LJB’s Internal Controls
“Independent internal verification is especially useful in comparing recorded transactions with existing assets… Large companies often assign independent internal verification to internal auditors. Internal auditors are company employees who continuously evaluate the effectiveness of the company’s internal control systems. They review the activities of departments and individuals to determine whether prescribed internal controls are being followed. They also recommend improvements when needed. In fact, most fraud is discovered by the company through internal mechanisms such as existing internal controls and internal audits. For example, the fraud at WorldCom, involving billions of dollars, was uncovered by an internal auditor (Kimmel, Weygandt & Kieso, 2009).” Therefore, as the authors have stated in the book titled – Financial Accounting: Tools for Business Decision Making, it is a good practice to have independent review of each of the company’s financial transactions since this can help any business, especially a business like LJB to continue to keep a high ethical standard in its accounting responsibilities. “Internal control frameworks (ICF) provide a basis for understanding controls in an organization and for making judgments about the effectiveness of controls. The Sarbanes-Oxley Act of 2002 (SOX) requires companies to report, on an ongoing basis, the effectiveness of their internal controls in their annual filings. The Securities and Exchange Commission (SEC) recommends companies use ICF to help achieve compliance with SOX. ICF provide a useful tool for management and auditors evaluating and addressing the adequacy of controls in their organization (Cereola, S.J, & Cereola, R.J., 2011).” Therefore, the discussion naturally tends to the issue of not having any employee within the company (LJB) not having their own username and password; thus, fraud is easily done with any of the systems within LJB as whole. The company can’t continue to operate this way due to the many opportunities for theft to occur. Most companies in the modern economy have new employees set-up their passwords, but give each new employee individualized employee ID’s from the outset of their employment. This enables the companies to see who is accessing what type of information and it increases the accountability of the users by letting them know that their web-browsing information should be for work and not for ‘pleasure’ (if you will). Especially in the case of our client’s company (LJB) since they had an employee viewing pornography on one of their computer terminals. However, without individualized usernames and passwords the company will never know when a computer is being accessed by a certain employee. If the employees did have usernames and passwords then it would be easier to track who was viewing pornography on one of LJB’s computers and take the required actions by the company (whichever the decision of the management team may be up to this particular point). Now, as many changes are being considered for LJB Company, it is wise to ensure that not only financial requirements are being met by the firm but also the HR issues are being correctly handled as...
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