Ljb Company Case

Should LJB Company decide to go public, it is important to know that all publicly traded U.S. corporations and companies are required to maintain an adequate system of internal controls and procedures for financial reporting in accordance with the Sarbanes-Oxley Act Section 404. It is the responsibility of your executives to ensure there are reliable, efficient and effective controls in place, and auditors from outside the company must attest to the accuracy and adequacy of the internal control systems as well. This information must be recorded in an internal control report each fiscal year as a part of the annual Exchange Act report. The purpose of this act is to reduce the possibilities of corporate fraud by mandating specific procedures for financial reporting.

It is recommended that your company adopt the framework defined by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in order to comply with the SOX Act. The first of five components of this framework is to create the control environment. This refers to the significance that management places on a company's risk management and accountability processes and how they foster an environment of compliance with the company's internal control systems. Next, you should conduct a risk assessment which is the process of identifying potential threats to legal, financial or overall operational security. Control activities are another component, which includes the actions taken by a company through policies, procedures and best practices to keep assessed risks to a minimum. Information and communication methods should be used to inform and educate your employees on all of the control activities such as distributing employee handbooks and posting information on bulletin boards. The last component should be to conduct self-inspections in order to monitor the effectiveness of control activities.

In assessing your current level of internal controls, there are some good practices as well as areas that need significant improvement. First, your accountant is practicing good physical control in regards to keeping checks in the safe; however leaving them on his desk is not a good practice. Checks should be secured at all times until they are distributed to the intended parties. You should consider requiring all employees to receive paychecks through direct deposit. The switch to pre-numbered invoices is a good decision and I would also advise the purchase of the indelible ink machine. This allows for a good physical control in regards to disbursement and will aid in preventing check fraud.

Another control that needs to be established is the management of petty cash. There is no way to determine whether the funds are being stolen or mismanaged. It is operating by a complete honor system which leaves the fund vulnerable to theft. In addition to the suggested cash disbursement and physical control improvements, there are personnel controls that should be

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