Internal Control and Accounting Systems - Case Study Example

A Review of the Accounts Receivable of ICAS Executive Summary Central Taxis Limited (CTL) is a company that was initiated in 2004. The company has its main offices in Birmingham city. CTL’s current internal control systems have had some flaws and advantages which exposes the company to fraudulent activities. As a result, this is a report that outlines some of the current systems offers recommendation as well as cost benefit analysis for the recommendations. The current system lacks secrecy and confidentially of information as the records in the computers can be accessed by everyone hence exposing it to potential fraud. The fueling system is also prone to fraud as the drivers do not have to account for the fuel consumed. Most of the clients are non-corporate members who do not demand receipts for services offered which then makes the company vulnerable to possible deceit from the drivers. The records are not updated and most employees’ lack proper training while some work for limited time making it difficult to track the records. Some of the recommendations provided include training, installation of latest version of accounting packages and making the employees accountable for their actions. The costs related to the new recommendation shave been analyzed and their respective benefits outlined for the benefit of the company in this report. A Review of the Accounts Receivable of ICAS Introduction Central Taxis Ltd (CTL) was started in 2004. The business is one of the largest taxi firms in the central region of England. The head office of the company is found in Birmingham. CTL has about 10 call centers and hires approximately 130 people. As a result of recession experienced in the recent past, the firm was obliged to put to a closure about a third of their call centers and minimize the head office employees by a similar margin. The company has a turnover of about £8 million and it’s projected to make £300,000 net profit this year. The main purpose of this report to produce a review of the accounts receivable of the firm, discuss the weakness or flaws in the system as well as provide recommendations for the better working of the system. Analysis and evaluation of current system The company’s internal stakeholders include the employees and two directors while the external directors are the customers, banking institution, tax agencies and suppliers among others. The accounts division of the company is situated at the head office in Birmingham and comprises of the finance director, accounting Technician, accounts receivable clerk, general ledger clerk, accounts payable clerk, payroll clerk and costing technician. The departments are accountable for preparation and processing of invoices for the suppliers, sending the customer invoices, monitoring or checking credit for new customers, banking of cheques from customers, control of credit, staff wages, and reconciliation of bank statements. The departments are also responsible production of targeted and actual cost analysis and review of the systems of accounts. The accounts divisions have the responsibility to interact will all control centre heads, the purchasing managers and the directors of the company to execute these roles assigned efficiently. The organization of the company is not complicated like any other organization. The CTL makes use of the Sage Line 50 as an accounting package and has approximately 10 user license which is incorporated with the Sage Payroll for salaries and wages that has a 2 user license. The access to the departments may be limited on the roles of jobs assigned even though this is not the scenario with CTL Company. Anybody has access to the general ledger and has the ability to make changes as well to the system of payroll based on the fact that one password is applied in the entire company. The company prepares and produces three main financial statements; the income statement, the statement of financial position and statement of cash flows. The income statements of the firm are used to disclose the profitability of the firm as sales performance is tracked revealing the profit margins and the gross margins. The statement of financial position is produced by the company to reveal the state of financial condition of the business. The statement shows the liabilities and assets of the firm. Besides, the statement is applied to show the gearing ratio, liquidity and return on capital employed. In addition the statement of cash flows prepared by the firm is used to reveal the amount of cash that is generated and used by the company in a specific time period of reporting. The company uses the statement of cash flows to explain the variations in the cash position of the business, the sources of funds and the type of investments undertaken on assets. Therefore the company is able to determine the liquidity of the business as well as its working capital. CTL Company conforms to the UK Generally Accepted Accounting Principles as well as the Companies Act. These are the accounting regulations which cover the preparation and reporting of the financial statements mentioned above. The firm has a duty to comply with protection of data Act in terms of protection of information from customers and the staffs. The company is stipulated to adhere to any rules set out by Human resource management Commission when paying the staffs as well as determining the tax obligations of the company’s operations. Furthermore, the company is no under any obligation to abide to Sarbanes Oxley Act as this only applies to the companies listed with the New York Stock Exchange or the NASDAQ. The strength and weaknesses of the Company’s Accounting function The strength of the Accounting Function The Company’s accounting function has in place separation of roles and duties, level of authority limits and the limit by the director involvement in signing off payments to the company’s suppliers and distributors. This ensures there is no conflict of interests among the employees and that every employee within the department executes his or her duties according to job description. Moreover, this also ensures accountability on the part of the employees and directors in meeting the interests of the company and its stakeholders. The roles are assigned according to the qualifications and ability of every employee best on the field of specialization. The process of recruiting and hiring the personnel is normally an intense and objective process to ensure that proper screening is done to find the best employees. In addition, the accounts receivable clerk is very experienced in her role. This is good for the company in such away that she does not need further reminder of training of what is expected of her. The entire members of the accounting function team are either AAT certified or are very experienced in their respective roles. Some of the employees are currently under training to meet the qualities and qualification of AAT certification. The company has as well sorted the services of a Finance Director and Accounting technician to develop and enhance the systems of internal control and perhaps detect potential fraud whenever it is possible. These types of personnel employed by the company are well knowledgeable in matter concerning internal controls, fraud and signs of possible fraud as well as matter concerning safety of company records and assets. Weaknesses of the Accounting Function Just like any other company in the industry, CTL Company has its flaws in the accounting function which can be detrimental to the profitability of the company. The accounts receivable clerk has no qualifications in accounting hence not able to oversee the whole picture of how the division works within the company. Besides, the accounts receivable clerk works for only 18 hours every week giving her a limited time to finish her duties efficiently. And if she is away on sick leave or just absent, there is no staff in the department who will be better suited to step in based on the limited information and experience with the role as accounts receivable clerk. At the same time every employee is busy with their duties. The records within the department are not always updated because there is no enough time for the accounts receivable clerk to accomplish the tasks within the time limit of 18 hours she has per week. Consequently she is forced to work overtime to catch up on the heavy work load and hence no time is left to update the records. The entire process can lead ton numerous accounting errors like not be able to key in certain sale transactions. Furthermore, the cash and checks are not timely banked and eventually the cash flows are affected negatively. As a result the current system of accounting function is vulnerable to fraud given that the accounts receivable clerk is accountable for sending and posting credit notes and invoices to the company’s clients. She also conducts allocation of payments to accounts and banks checks received from customers. It is evident that there seems to be minimal cross verification and this can often result into accounting errors not being noticed. By having one person dealing with the entire process, it is difficult to notice any mistaken made by the person. The weaknesses and strength of the accounting software and hardware Strength of the accounting software and hardware CTL Company has about 20 computers where six of them are used in the accounting department. All the personal computers are in good shape taking into consideration that they were procured in the last five years. Effective and updated software have been installed in the computers to ensure good record keeping. The entire computers are operated on an incorporated basis and all linked to trusted networks and connected to printers. Sage 50 and Sage payroll software have been installed and integrated to give room for data sharing between the accounts department (AAT, 2014; p. 3). Besides, the management has made it a routine to back up the data stored in the computers twice a day upon entering data. There is also a protection password to computers to prevent information getting into the wrong hands even though the password is known by most employees for easier entering and accessibility of data from the computers. Whenever, the systems malfunctions or crashes the back data can easily be retrieved after making the necessary clean-up process to a certain that the system is back on its normal operation. Weaknesses of Accounting Software and Hardware As noted before the password installed in the computers is used for all computers which is a practice that been in existence since the company was formed in 2004. Every employee is aware of the password hence this is exposes the systems to potential fraud as anyone can easily access the company’s information and use it maliciously. The systems are not put to their maximum use given that from time to time data is misplaced where time is wasted in search for the missing data in times of retrieval. As far as the computers are not protected with different passwords based on the use, the internal control system is not adequate enough to minimize on the probabilities of fraud as well as detection of fraud incidences. The cheques and cash are banked on timely basis. This is because the policy of the company demands the cash and cheques to be banked twice a week as opposed to daily banking. This has the implication that a general ledger will not often disclose the true image of the financial position which will eventually result into cash flows being affected as the bank will continue to record an overdraft in the accounts. Besides, the receivable clerk spends more time on control of credit ending up with limited time to tackle issues related accounts receivable. More to the point, by spending more time on credit control and not making the invoices and sending them to the clients in a timely manner it will lead to delay in payments from the customers which mean that the bank accounts and cash flows will be affected negatively. Likewise, there is only one individual dealing with the entire process of sales ledger and the credit control. As a result there is cross verification where accounting errors are inevitable in due process. It is notable that nearly 75% of the customers are non-business clients who do not demand for receipts for services or products offered by the company. This gives lee way for possible fraud activities where the drivers can charge any amount of fare as they wish and finally prepare small figure receipts and pocket the entire receipts from the deal. At the same time they will not possibly report the activities or transaction where all these actions amount to fraudulent activities. Potential risks to the company The absence of adequate internal controls in the system of fueling leaves the company prone to fraudulent actions as the drivers can take advantage of the situation to meet their own interests such as fueling their own vehicles or buying their personal effects such as cigarettes. The fueling system should be printed on receipts to ensure accountability. Moreover for the 75% of the customers not being corporate customers, the drivers are not obliged to provide receipts for the services offered hence no record will be given leading to hoarding of the cash receipts from the clients. The outcome is excessive loss of revenues for the company and ultimately huge losses for the company’s operation. Due to the fact that there is lack of cross verification on the part of the accounts receivable clerk, there is huge motivation to commit fraud from the transactions. It is common sense that technology has enabled fraud activities to be easily detected through various software programs; however, the drivers are using the flaws in the fueling system at Shell only and ultimately Shell Company sending invoices straight to the company for billing. In case every taxi driver had his or her personal meter every fare charged would be recorded and accounted for. There is obligation for every petroleum supplier to be authorized by at least one of the three shareholders in spite of the availability of credit. The company has also a duty to employ or recruit a credit controller on part time basis to prevent such potential risks. Potential impact to the company The company will probably encounter huge amount of losses based on misplaced records and absence of record verification. This is due to fact the internal control systems are not enough to prevent fraud. Concurrently, the financial statements reporting might be negatively influenced since majority of significant data or information is missing therefore the audit report issued will likely to be adverse opinion report giving the company a negative image in the eyes of the customers. The customers are likely to suffer based on tinted image and reputation of the firm. The value of the firm will also go down in the perception of the press and other investors. In addition, the firm is not likely to attract the best employees and professionals available in the market based on the bad image of the firm. Recommendations to the accounts department The following are some of the recommended actions to be adopted by the management and the stakeholders concerned; The records in terms of receipts, ledger accounts, sales tally and employee attendance records must be kept. This should be part of the company policy. In cases where customers do not require receipts, the management must hold the employees accountable for any transaction made. This can be implemented through installation of software to monitor sales made hence minimize on potential fraud. The staffs must also be trained on how to keep proper records, maintain the systems, and use the back up systems as well as conformity to the company policies. Cash and cheques should be banked on time. This means that there should a staff assigned to the responsibility of ascertaining that the cheques and cash are banked on time. For any possible delay, the employee should be held accountable. Since the receivable clerk spends more time on credit control and hence ends up not having enough time to deal with the receivable duties, there should be a separate employee to deal with the credit control and let the clerk deal with receivables. Given that an extra employee has been assigned the duty of credit control the sales ledger clerk should find no reason to be complacent to their duties Since most of the customers are non-business customers, technology has been invented to track the number of millage for the taxis which can be put into application to prevent possible frauds. In the event the employees or drivers decides to commit frauds they will have first of all to account for the millage of the taxis before remitting their daily sales revenue The staffs are likely to feel threatened by such changes due to lack of room to commit fraud hence some will react by working extra hard to get more commissions while are likely to begin search for new employment source. Some of the employees will feel they have plenty of work to do in terms of banking the sales revenues; keeping records and constantly being monitored hence become de-motivated. Training on keeping records, use of the computer systems, importance of regular banking of receipts and satisfaction of employees will be required to enhance accountability among the staffs. This change will be managed through empowering staffs to be responsible employees and conforming to the company policies for their welfare. Besides, use of motivation techniques will also work such as delegation of certain duties and commissions. Possible impact of the changes to the staffs In terms of maintenance of records and installation of software, the company will have to part with about £50 on every installation. Moreover, time will be needed for training as well as seeing to it that work is done appropriately hence longer working hours and costs related overtime pay. Some staffs might contemplate quitting due to tight controls hence less opportunities for their fulfillment of their own personal interests. The savings that will be made will be immense due to reduction in possible frauds hence saving the company from losses. Good image and reputation in the market because of precipitated accountability and reduction in fraud incidences. Cost benefit analysis To surpass or reach the target of £ 8 million in turnover and £ 300,000 in net income the company will have to part with some costs as outlined in the recommendations. To encourage proper record keeping by employees after work the company will allow an over time of £10 per hour on strict supervision. In case five employees in charge of accounts and record keeping get overtime this result into £ 50 overtime per hour. Training of staffs might be implemented inn stages where about 100 employees will be put to training programs to last a month in four groups. To train each employee will cost £ 100 in a weekend of training which leads to a total of £ 10,000. This training can be done only once in a year for a period of one month for the whole employees. The output of every trained employee will lead to a saving of £ 500 per day and £ 50,000 for the entire human resource by the company. Installation of up to date software and training the staffs how to use them will cost the company about £ 100 for every computer which will make a total of £ 150. The new software includes the latest version of Sage 50 accounting package, sales tracking software and employee attendance. The computers will have new passwords each with at least an employee with a password required to be kept confidential. In total this will save the company a great of revenue about £ 750 per month. The computers will also be linked through LAN and to the tracking devices in the taxis responsible for recording the millage of the drivers. Tracking devices installed in the taxis will boost the process of determining the extent to which the driver has travelled and for what reasons. The drivers will have to compile a report by the end of the day on the number of kilometers and units of fuel consumed which will be tallied with the records in the computers. The accounts receivable will have to have 40 hours per week to enhance record keeping and the training received will enable her to keep proper records as well as update the records on daily basis. The fueling systems will also be linked to the computers where the drivers will be required to sign for the number of liters taken at Shell, time and location to enhance accountability. Updating the fueling systems and ensuring that each driver is well accounted for will save the company about £2,250. The tracking devices in the taxis will lead to more accountability as drivers will have fewer opportunities to hide some of the revenues received. Therefore, the company will save £ 2000 per day in revenues out of the incurred cost of £ 10 for every taxi. Bibliography Association of Accounting Technicians. (2014). Internal control and accounting systems: A guide to writing your report. London: AAT Read More