University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Internal Controls in Accounting
This document is intended to serve as an informational piece regarding steps and procedures that would need to be followed for the purposes of bringing a privately held company into regulations with the intent of becoming a publicly traded company. The intended audience for said information will include all decision makers and accounting representatives, including but not limited to, the President of LBJ, CEO, CFO, controller, treasurer, and any applicable accounting personnel. This informational forum will include topics such as SEC guidelines, internal controls, rules and regulations, transparency and integrity, and investor relations. The overarching theme of this document will be how accounting principles will directly relate to shareholders interest. According to the financial advisory service McGladrey, “Going public marks the beginning of a new era for your company.
But before you go public, you need to examine your financial processes and control environment, focusing on the transparency of financial reporting processes and the strength of your controls over financial reporting”. http://mcgladrey.com/Financial-Advisory-Services/Financial-Process-and-Controls . This would include such preparations as a companywide risk assessment to identify potential risk and what controls are currently in place to minimize these risks. These assessments would also include ensuring regulatory and SOX compliances before the initial public offering should take place. All established controls, regarding accounting and financial regulations must then be certified by both the CEO and CFO to ensure that adequate and sufficient controls are in place.
Based on current internal controls for accounting procedures within the LJB Company, the following policies and procedures are recommended if intending to go public. First, LJB must adhere to all SEC rules and regulations which will include maintaining honest and transparent recordkeeping by utilizing an outside accounting firm for auditing purposes. Also, the SEC requires “managers to begin conducting annual evaluations of the company’s internal financial controls, and to include a copy of the resulting report with its annual filings.” http://www.ehow.com/list_7465442_sec-independence-rules-internal-controls.html
There are several items in terms of internal controls that will need to be addressed in an effort to become compliant before the IPO. First, certain protocols will need to be established. These protocols will need to be adhered to by all staff and outside consultants in an effort to maintain uniformity. All employees will need to be informed of established and will be expected to follow them throughout their day-to- day work duties. This will ensure that everyone within the company knows what is expected of them as outlined in the internal controls.
By establishing these internal controls, this will help to eliminate and prevent fraud and theft within LBJ. This will include such activities as reconciling of bank statements, internal audit reviews, and pinpointing any misappropriations by employees and / or management. Also, by ensuring that all employees are properly trained, this will help to eliminate or reduce errors in processes and procedures.
Another important aspect of internal controls is the separation of duties as well as organizing information. According to Miranda Brookins, of the Small Business Chronicle, “Organized data can increase productivity and better prepare your business if you need to produce documents for litigation or if you need to grab information for compliance reviews or audits. This might include giving each employee his own password to access files and data on the company’s computer, or creating a system for filing client data and financial documents, online or offline.”
Upholding the Sarbanes-Oxley Act, or Sox, is another integral part of the internal control process. “The Sarbanes-Oxley Act stresses the importance of public companies maintaining internal controls when it comes to their financial reporting. The act requires that public companies, small and large, include details on the company’s internal controls inside of their annual reports. This information is beneficial to investors and helps prove the integrity of a company’s financial data and the management of it.” http://smallbusiness.chron.com/purpose-internal-controls-company-12116.html
In reference to the accountant wishing to purchase an indelible ink machine and begin using pre numbered checks, while this is not necessarily a mandatory requirement of internal controls, it is certainly recommended. By using the indelible ink machine to print checks this will help reduce the possibility of fraud as well as help ensure more accurate recording keeping from the accounting department.
In summation, there are several items of business that LBJ needs to address as a company before they would be ready to go public in an IPO. First and foremost would be becoming SOX compliant and adhering to all SEC regulations. In addition, there are several internal controls that would need to be established such as creating protocols and training all staff accordingly to ensure uniformity across departments. There would also need to be internal controls put forth in regards to theft, fraud, and organization of data. Lastly, LBJ will need to make sure that they are creating a fiscal environment of transparency and integrity for the sake of both SEC adherence as well as stockholder assurance. Once these items of business have been established, LBJ will be ready to successfully go public and be subjected to unlimited growth potential.