LBJ: SOON TO BE A PUBLIC COMPANY
A Guide To Internal Control

Table of Contents
1. Introduction
2. Internal Control Standards
3. LBJ’s Successes
4. LBJ’s Opportunities For Improvement
5. Conclusion

Introduction

This is a report for the LBJ Company to better assist with the needs of internal control. Our findings are based off of what has been shared with us by the company president on how LBJ Company operates on a day to day basis. It does seem as if there is a form of some internal control although it may be ineffective. Internal control is defined by Washington State Administrative and Accounting Manual (SAAM, 2002) as “all the policies and procedures management uses to achieve safeguard assists, ensure reliability and integrity of financial information, ensure compliance, promote efficient and effective operations, and accomplish goals and objectives. In order for LBJ to continue their success and achieve the opportunity to become a public company there will be a need to improve current practices and strengthen the internal controls.” If LBJ does not implement a strict code for internal control than the ability to go public may not be a successful outcome and the lack of policy and procedures may hinder the company overtime. These findings were made based off of the observations and conversations of how the day to day business of LBJ Company operates. The scale of changes can be very small to some very drastic but we must remember it is for the greater good of the organization and the longevity of the careers of the LBJ Company and their associates.

Internal Control Standards

Over the years internal control standards have changed. We have seen that in the last thirteen years due to corporate scandal such as ENRON, Tyco, and Worldcom which are mentioned in Sarbanes-Oxley and the New Internal Auditing Rules (Moeller, 2004). Lack of internal controls and negligence have caused these changes to be necessary. Changes to privacy for clients and employees are required which was a change in the early 2000’s. When reviewing Internal Control–Integrated Framework by Committee of Sponsoring Organizations (COSO, 2013) the standards for internal controls have been set as such:
Control Environment:
1. Demonstrates commitment to integrity and ethical values
2. Exercises oversight responsibility
3. Establishes structure, authority and responsibility
4. Demonstrates commitment to competence
5. Enforces accountability
Risk Assessment:
6. Specifies suitable objectives
7. Identifies and analyzes risk
8. Assesses fraud risk
9. Identifies and analyzes significant change
Control Activities:
10. Selects and develops control activities
11. Selects and develops general controls over technology
12. Deploys through policies and procedures
Information & Communication
13. Uses relevant information
14. Communicates internally
15. Communicates externally
Monitoring Activities
16. Conducts ongoing and/or separate evaluations
17. Evaluates and communicates deficiencies
If these standards are followed they will not only keep LBJ in compliance within its own organization but also with the standards of outside auditors. Internal Control Standards such as these will help once LBJ decides to become public and will help with the growth and development of this organization. Ignoring these standards may effective the organization’s credibility and its financial standings or better yet possible investors.

LBJ’s Successes
LBJ Company happens to be a successful organization for the nature of business that they are in. The ability to trust in team shows that they are confident with the people they have hired to work for their organization which limits high turnover rates and throwing money into training every time they have to replace an employee. The organization is lean which also helps because they are able to reinvest the funds back into the organization for growth and development opportunities. It seems good that the accountant has the employees come pick up their checks to limit possible fraud opportunities. Due to the fact of how well you have been dealing with internal control thus far has allowed the company to be successful and establish itself. We also recognize the fact that the accountant is using numbered invoices which shows that he has assessed that there is an opportunity for risk if the pre-numbered invoices are not used. Purchasing an indelible ink machine to print checks could possibly be a good investment for the organization because it minimizes risk exposure due to the inability to alter the checks that are given out.

LBJ’S Opportunities for Improvement
After review of the organizations day to day operations we have found areas that need improvement that will help with the needs of the organization. First let us address the need for the indelible ink machine to print checks, we feel that this would be a good investment based on the size of LBJ Company. However we feel that it would be best to avoid check writing and move to electronic payments, invoicing, and direct deposit. Moving the organization to a paperless systems will limit the risk for the accounts that the organization has. It will also be cost effective overtime because checks will not be issued out and will eliminate the need to store checks in a one person controlled vault.
Now let us move to petty cash issue, the petty cash should not be accessible to all the associates and leaving notes can leave room for error and leaves the organization open to associate theft. It would be best that there are paper trials for all things needed in regards to the business for petty cash. It would be preferred to either issue out a check for organizational needs or move to using a company credit card for purchase so that these things can be reconciled monthly. There should also be requisition forms that need to be filed out and the accountant should be given advanced notice of the need and upon approval of business needs then a check should be issued.
Let us review associate computer usage, from the review of the most recent associate that has been released due to child pornography being viewed on the company computers. We suggest that each associate be assigned their own unique id and password for tracking purposes. The associates should sign a waiver stating that they understand that the computers are to be used for work related functions and any other use is not permitted. Monitoring the usage should be done periodically to ensure these standards are being meet so that any issues can be dealt with right away.
In regards to bank deposits and reconciliation, we feel that two people should be involved in the process of preparing the bank deposit for auditing purposes. This will eliminate the opportunity for associate fraud and risk to the bookkeeping of the organization. Allowing to associates to be involved in preparing the bank deposits under dual control will require that both associates count the checks and cash once the deposit is prepared both associates would be required to sign a log stating that they have prepared the bank deposit and date it. By doing this this will leave little room for error and theft. Also by creating a log for both associates to sign it monitors when deposits are made and the amounts that they are made for to later be verified by the accountant.

Conclusion
We feel that LBJ Company has a great deal of opportunity to become a successful public company. Once the internal control standards are implemented and adopted by the organization the opportunity for growth and development may be limitless. Because the organization has trusted in their team to be accountable for their actions also speaks to how the organization view their associates. Although there are some areas of improvement we believe the improvements will only make the organization greater that what it already is. The standards mentioned above are direction to move in quickly and lag in implementing them may hinder the timeline in when LBJ Company wants to go public.

References
COSO, 2013 “The 2013 COSO Framework & SOX Compliance: One Approach to an Effective Transition"
Moeller, Robert R., 2004 “Sarbanes-Oxley and the New Internal Auditing Rules”, John Wiley & Sons, 2004
SAAM 2002, “Washington State Office of Financial Management’s guide to internal control and auditing”