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Observation
We understand that the preparation of an accounting and procedures manual is currently in process. The following
recommendations will assist in the compilation of this important internal control document.
or
Accounting procedures are not documented in a written manual. Although employees are familiar with the
accounting procedures, a manual would serve to supplement their knowledge and is especially useful during periods
of transition.
or
At present, accounting policies are not standardized and procedures are not documented in a written manual. This is
particularly critical for the Company since a single person performs substantially all accounting functions and
should that person leave the Company, the transition to new personnel could be very difficult.
Recommendation
As a long-term project, an in-depth written manual of accounting policies and procedures should be prepared, which
at a minimum, should include:
• A chart of accounts containing adequate explanation of account purpose, use and content;
• A list of standard forms used in the Company with detailed explanations of their purpose and preparation;
• A list of data processing reports, including appropriate descriptions of source, content, production frequency
and purpose;
• A list of standard and other journal vouchers with adequate explanations of their purpose;
• Appropriate descriptions of all financial policies and accounting procedures and routines regarding, but not
necessarily limited to, the following:
1. Monthly review of internally generated reports, which may vary in complexity from a simple scan of
transactions to detailed analysis or reconciliation work;
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2. Policies related to cash which would include preparation of bank reconciliations, controls over cash
disbursements and cash receipts, and procedures regarding the investment of excess cash on hand;
3. Purchase and capitalization of fixed assets and related procedures for computation of depreciation
thereon;
7. Policies related to the recognition of revenues and expenses with particular attention paid to year-end
cutoff procedures regarding deferred income and marketing expense; and
The accounting manual should be updated periodically and should be distributed to all accounting personnel and key
operations managers. The manual should evolve to meet the needs of the Company and should provide an accurate
reflection of the current system of accounting. All changes in the manual should be subject to written management
approval.
Benefit
or
An up-to-date accounting manual provides a tool for training accounting personnel in new positions, increased
standardization of the accounting effort, clarification of accounting responsibilities and consistent application of
management's policies and procedures. In addition, preparing a manual may reveal accounting procedures which
are inefficient or duplicated elsewhere. A well developed manual serves as a ready reference source for employees
and provides a sound base to continually monitor and assess the Company's internal operations.
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I.A.2. Policies and Procedures Manual
Observation
The Company contracted an outside consultant to perform a limited review of the system of internal controls.
Numerous internal control weaknesses were noted in this limited review which appeared to result from the lack of
experience of the personnel performing the functions, inadequate training and nonexistent procedures manuals.
Recommendation
We understand the Company has contracted this same outside consulting firm to prepare an in-depth written policies
and procedures manual and to provide training for the personnel as determined necessary. We concur with these
actions and recommend that once the manual is completed, it continue to be updated periodically to meet the needs
of the Company.
Benefit
A meaningful procedures manual provides an established method to communicate policies and procedures and
would help to facilitate continuity of the operations process during turnover periods.
Observation
We noted that the procedures followed by the domestic and international order processing departments differed,
even though their functions are fairly similar.
Recommendation
Both international and domestic order processing departments should follow the same general processing and
control procedures.
Benefit
Standardizing procedures for international and domestic sales will ensure that both departments use the most
efficient methods in performing their jobs. As a result, personnel could work in either department. This might be
helpful when an employee is lost due to vacation time, retirement or resignation.
Observation
The Directors serve as the audit committee at the present time, although there are no clearly defined responsibilities
related to this function.
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Recommendation
The Company should establish an audit committee with specific responsibilities concerning external and internal
audit objectives. These responsibilities should include, but are not limited to, audit timing, scope of audit
procedures and disclosure reporting.
Benefit
Implementation of this recommendation should facilitate more efficient audits. Additionally, audit performance,
results evaluation and reporting should be more directly achieved in accordance with Company objectives.
Observation
The Company could not locate Board of Directors meeting minutes for the month of October nor did the minutes for
the first meeting in November indicate approval of the previous meeting's minutes.
Recommendation
Minutes should be taken at all Board of Directors meetings. Cancellation of a meeting should also be documented
and included in the minutes book. Minutes of each meeting should be approved by the Board at the following
meeting.
Benefit
A complete record of approved minutes provides management with a record of subjects discussed at Board
meetings.
Observation
Minutes at the Board of Directors meetings were not recorded during 19XX.
Recommendation
Minutes should be recorded and retained indefinitely for all Board of Directors meetings.
Benefit
Actions by the Board of Directors will be recorded and the Company will be in compliance with the corporate law
that minutes of the Board of Directors meetings be recorded.
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I.B.3. Dated Minutes of the Board of Directors
Observation
The Board of Directors held meetings in 19XY, 19XX and 19XZ, for which the minutes were not dated with respect
to the month and day.
All minutes of board meetings should be dated. Dated minutes provide both the Board and management with a
complete and accurate record of the time meetings were held and the effective date of Board resolutions.
Observation
The bonuses of certain employees and the amount of the Company's contribution to the Employee Profit-Sharing
Plan were not approved in the minutes of the Board of Directors meetings.
Recommendation
All employee bonuses and contributions to the Company's Profit-Sharing Plan should be authorized by the Board of
Directors and such authorization documented in the minutes of the Board of Directors meetings.
Benefit
Documenting the approval of employee bonuses and contributions to the Company's Profit-Sharing Plan enhances
the Board of Directors' accountability to the shareholders.
Observation
Salaries and bonuses of officers and key personnel were not approved in the minutes of Board of Directors meetings.
Recommendation
Salaries and bonuses of officers and key personnel should be authorized by the Board of Directors and such
authorization documented in the minutes of the Board of Directors meetings.
Benefit
Documenting the approval of the salaries and bonuses of the officers and key personnel enhances the Board of
Directors' accountability to the shareholders.
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I.B.6. Board Authorization of Significant Transactions
Observation
The Company has had few Board of Director meetings despite the numerous transactions entered into regarding
loans, stock options, warrants, financing, etc.
Recommendation
All major transactions should be authorized by the Board of Directors and such authorization documented in the
minutes of the Board of Directors meetings.
Benefit
Documenting the approval of major transactions enhances the Board of Directors' accountability to the shareholders.
Observation
The Company did not record minutes of its Board of Directors, partners or management committee meetings on a
timely basis.
Recommendation
Minutes should be taken at all Board of Directors, partners and management committee meetings. Minutes of each
meeting should be approved by the appropriate individuals on a timely basis and maintained as a permanent record.
Benefit
A complete record of approved minutes prepared on a timely basis provides a permanent record of subjects
discussed, support for significant transactions and compliance with corporate laws.
Observation
The Company did not have copies of all its leases on file. The Company also did not have signed copies of notes
between the Company and the President (Owner) of the Company on file.
Recommendation
The Company should retain copies of all appropriate documentation, as well as any amendments to these
agreements, on the premises.
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Benefit
The Company would be better prepared to assess its position with respect to commitments and contingencies and be
maintaining proper accounting documentation.
Observation
We noted that no formal agreements existed for a large number of loans receivable and payable for Company
management. The agreements were not signed by the proper executive authority and lacked documentation of other
pertinent information such as the borrower's signature and address. We also noted that these observations are
applicable to lease agreements.
Recommendation
We recommend that when management is involved in borrowing or loaning funds, complete documentation is made
of the transaction.
Benefit
This will insure that funds borrowed or loaned have been properly approved by management. Proper documentation
will also aid in having accurate accounting records and in supporting any litigation disputes that may arise because
of defaults. These recommendations and benefits are also applicable to the Company's lease agreements.
Observation
Several Individual Program Plans (IPP) contained in the Company's client files do not bear the signatures of the
supervisor and appropriate Company representative as required by the policy manual.
Recommendation
In order to be in compliance with the established policies, a procedure should be implemented whereby a review of
each client file and the related IPP is performed before approval of the IPP is granted.
Benefit
The Company will attain a greater level of assurance that only authorized clients receive services and consequently
avoid potential future problems with funding from the State.
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I.C.4. Lack of Supporting Documentation
Observation
The Company enters into several significant non-documented transactions. For example, no written partnership
agreements exist for the partnerships that the Company has entered into. In addition, many contracts entered into
are not properly executed with the appropriate signatures.
Recommendation
Before the Company gets involved in a significant transaction, a signed, binding, and legal document should be
obtained from the parties involved. This document should disclose all of the terms, responsibilities and obligations
of each party, and any other important and necessary terms.
Benefit
• Legal, written proof of the terms of the agreement in the event of litigation;
• Reduction in the risk of error in the recording of the transaction as the Company would have a document
to refer to when booking the transaction;
• Management and its legal counsel would have a document to review in order to determine whether or
not the Company should enter into this transaction.
Observation
Included in other assets is the cash surrender value of certain life insurance policies, the beneficiary of which is not
the Company. It is our understanding that the Company has an informal agreement with the beneficiary that such
funds would be paid to the Company by the named beneficiary.
We recommend that such agreement be formalized in order to substantiate the Company's interest in and the
realizability of the assets. A formalized document will designate proper ownership of the asset.
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I.C.6. Proper Documentation of Acquisitions, Dispositions, and Equity Contributions
Observation
In the course of our testwork, we noted several instances where proper documentation for property acquisitions and
dispositions and equity contributions was either incomplete or not available. Examples include incomplete sales
documentation for the sales of the two buildings, incomplete documentation for acquisitions, and the lack of an
updated partnership agreement denoting the allocation of the equity contributions. Also, missing or unexecuted
lease agreements were prevalent throughout all of the Partnerships.
Recommendation
Periodic reviews (i.e., monthly or quarterly) by the General Partner of the accounting records and support thereon
should be made to identify those areas which need additional documentation or updating in general.
Benefit
A concerted effort to maintain current and complete documentation will result in more accurate accounting of
property transactions and in turn expedite the audit process.
Observation
Recommendation
The Company should prepare a detailed written job description to document the responsibilities and procedures
followed by the Treasurer.
Benefit
A written job description would provide continuity and consistency of operations from year to year and aid in the
unforeseen event of a change in Treasurer during the year.
Observation
There are currently no written job descriptions which describe the duties and responsibilities of accounting and data
processing positions. Job descriptions provide employees with an understanding of their procedures and
responsibilities, especially during periods of transition.
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Recommendation
Written job descriptions should be prepared for each accounting and data processing position. These descriptions
should be provided to each employee and should serve as guidelines in the hiring and evaluation of personnel.
Benefit
Definition of duties and responsibilities should increase employee productivity as well as reduce the possibility of
errors due to misunderstanding of procedures or responsibilities.
Observation
Recommendation
Employee evaluations contribute towards ensuring the competency of employees and should therefore be performed
for all employees at specified intervals and documented on a standard form.
Benefit
Implementation of formal employee performance evaluations may improve the competency of employees.
Observation
The Company does not prepare written employee evaluations for all employees after their initial probationary period
evaluation.
Recommendation
The Company should consider implementing a policy to require written performance appraisals for all employees on
a yearly basis, at a minimum. The evaluation should be prepared by the employee's immediate supervisor, signed by
the employee and filed in the employee's personnel file.
Benefit
Formal employee evaluations can be beneficial to improving the performance and maintaining the morale of the
Company personnel by providing feedback and recommendations for improvement. This will also provide
documentation of the supervisor's recommendation for improvement.
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I.F. Budgets and Forecasts
Observation
The Company prepared formal financial budgets but placed no reliance on them.
Recommendation
The Company should institute the utilization of budgets. Comprehensive financial and operating budgets provide
further direction for the achievement of Company goals as well as a means of measuring performance and efficiency
of Company activities and specific events.
Benefit
Budgets provide management with an invaluable tool for conveying its goals and for monitoring the Company's
progress and the profitability of specific events.
Observation
Annual financial and operating budgets are prepared based upon a period differing from the Company's accounting
year. This policy does not facilitate monthly and year-to-date comparisons between budgets and actual performance.
Recommendation
We recommend that the annual budgets be prepared based upon the accounting year instead of a different fiscal
year-end.
Benefit
Annual budgets based upon the Company's accounting year will improve comparability to actual performance and
provide management with a valuable tool for monitoring monthly performance.
Observation
The Company does not utilize formal financial and operating budgets.
Comprehensive financial and operating budgets should be prepared to provide further direction to the achievement
of Company goals and a means of measuring performance. Budgets should be the product of input from all
department managers and should be prepared to provide you with the ability to assess progress periodically. If used
effectively, budgets can help the Company identify potential problem areas and provide a basis to measure operating
results and departmental performance.
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I.F.4. Financial and Operation Budgets
Observation
Our audit resulted in adjustments to the financial statements at December 31, 19XX. These errors went undetected
as the Company does not have adequate policies and procedures to assure that monthly financial reports, used by
management for decision making purposes, contain complete and accurate information. Although budgets are
prepared, they are not yet used effectively to produce variance reports which management should use in evaluating
the operating results.
Recommendation
All journal entries prepared by the accounting department should be reviewed and approved by a superior. In
addition, comprehensive financial and operating budgets should be used to compare monthly and year-to-date actual
results to expected results. Significant variances should be investigated, explained and documented. Data prepared
outside the accounting department should be compared to financial data as another source of information to assess
the accuracy of the monthly financial reports.
Benefit
Budgets provide management with an invaluable tool for conveying their goals and for monitoring the Company's
progress. If used effectively, budgets can help the Company immediately identify potential problem areas and
provide a basis to measure and assess the reliability of the monthly and financial operating reports. As key
management decisions are based on the Company's operating results, reliable information provided in the monthly
reports becomes a increasingly critical factor to the Company's success.
Observation
The Company does not have a documented long-range business plan extending one to three years beyond the current
year.
A business plan complete with forecasted financial results should be documented which extends at least three years
beyond the current year. Detailed business plans provide management with an invaluable tool for determining the
Company's direction, personnel needs, growth and profitability, goals, etc., and for monitoring the Company's
progress. The forecasted results and comparisons to actual results also serve as a practical accounting tool to justify
the continuing value of long-term assets such as capitalized software, patents, etc.
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I.F.6. Profit Margin Analysis Reports
Observation
Currently, the Company's information system includes a product profit margin analysis report which provides a
helpful anlaysis of the profit margin by product line; however, certain modifications could greatly improve the value
of the report. For example, the report makes no allowance for demos sent to salespersons and "no-sales;" these are
treated by the report as sales for $-0-. Additionally, no labor, overhead or selling cost is included in costs over which
margin is computed.
This report should be modified to eliminate demos and no-sales and to include labor, overhead and selling costs
even if these are only estimates. As modified, this report, generated as a result of normal processing procedures,
would provide management with a better indication of product profit margins. This would facilitate informed
decisions on overall marketing strategy, product line management and commission structuring, as well as inventory
management.
Observation
The Company accrues at the end of the fiscal year expenses which reflect all purchase of services outstanding under
contract with the vendor but not yet invoiced or paid at year-end. This accrual typically exceeds the expenses that
have actually been incurred under the contract as of year-end, and thus overstates the accrual.
Recommendation
We realize your current accrual method is required by GAAP; however, we recommend that a better cutoff be
achieved for year-end financial statement purposes with actual expenses incurred before year-end but invoiced and
paid after year-end.
Benefit
This procedure would more accurately reflect the liability for purchase of services and expected reimbursement from
the State as of the year-end.
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I.H. Cutoff Procedures
Observation
The Company's month-end financial reporting is on a cyclical basis whereby activity through the fifteenth of the
following month such as: vendor invoicing, disbursements for services performed as of month-end and cash
transfers, is reflected in the current month-end financial statements. This practice distorts the financial position as of
a particular month-end due to inappropriate cutoffs, which are not in accordance with generally accepted accounting
principles. In addition, bank reconciliations are performed as of the fifteenth of the following month instead of the
current month-end.
Recommendation
We recommend that the Company change its current practice to reflect appropriate cutoffs for all general ledger
accounts as of the end of each month and perform bank reconciliations at that date to support the financial statement
presentation.
Benefit
This will more clearly reflect the financial position of the Company's at each month-end and allow the interim
financial statements to be in accordance with generally accepted accounting principles.
Observation
The Company does not maintain a shipping or a receiving log. Items could be shipped or received without being
recorded in the accounting records.
Recommendation
The Company should record all shipments and receipts in chronological order. Logs should be used to ensure that
all shipments and receipts are recorded in the proper period.
Benefit
By recording all shipments and receipts in a log, the Company will be able to determine the proper period in which
to record items. Utilizing shipping and receiving logs to ensure that all inventory activity is accounted for will
assure a proper cutoff at year-end and inventory dates.
Observation
Bank statements received by the client are dated mid-month as opposed to at month-end.
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Recommendation
We recommend that the Company request their bank statements as of the last day of each month.
Benefit
Obtaining bank statements dated in this way will simplify the task of preparing bank reconciliations as of month-end
and year-end.
Observation
The Company maintains separate general ledgers for each major activity. The general ledgers are maintained using
manual processing techniques which is tedious and time-consuming.
Recommendation
The Company should consider purchasing a computer and the necessary software to automate the general ledger
system.
Benefit
This would enhance the accuracy and usefulness of the general ledger system. An important benefit would be that
monthly trial balances can be generated, reviewed, and modified to provide management with timely and reasonably
accurate information. In addition, since the Executive Director currently assists in maintaining the general ledgers,
an automated system would allow him to spend more time on other activities.
Observation
Recommendation
Benefit
A general ledger provides an ongoing accounting record of transactions to support the financial status of the
Company. It is the main component of accounting records in that it is a log which contains all transactions, ensures
that the accounts are in balance by requiring double-entry accounting entries, and is a reference to supporting
documentation.
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I.I.2.b. Maintenance of General Ledger by an Outside Accounting Firm
Observation
The Institute's general ledger is maintained by an outside accounting firm based on source documents submitted by
the Institute. The only copy of the general ledger received by the Institute in the current year was received after
year-end.
The Institute should request a copy of the general ledger be provided by the accounting firm on a quarterly basis at a
minimum. This will facilitate the Institute's review process, better enabling the Institute to identify problems with
the recording of entries and giving the Institute a more accurate picture of its financial position on a timely basis.
Observation
No general ledger system is in use. Currently, financial statements and information are compiled from cash receipts
and disbursements.
Recommendation
We recommend that the Company obtain a general ledger package and begin to maintain their general ledger "in-
house." We understand that several general ledger packages are currently being evaluated and that a system will be
purchased and implemented in the near future.
Benefit
The use of a general ledger system will improve the accuracy of the financial statements, improve and simplify
financial recordkeeping, and provide management with the means of evaluating the Company's financial condition
on a timely basis.
Observation
The general ledger does not list monthly journal entries by numbered references. Thus, additional time is spent
tracing from the general ledger to supporting documentation.
Recommendation
The monthly journal entries should be numbered and these numbered references should be posted to the general
ledger for ease in tracing to financial information.
Benefit
Investigation of financial questions would be expedited through the use of improved general ledger referencing.
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I.I.5. Simplification of General Ledger
Observation
Accounts and sub-accounts in the general ledger are not grouped in a manner that simplifies report compilations.
Recommendation
We recommend that the general ledger be reorganized or the possibility of converting to a different data service
center be seriously investigated.
Benefit
Simplifying the general ledger presentation will result in easily accessible data and efficient report writing.
Observation
A review of the Company's general ledger shows numerous general ledger accounts that are not currently in use nor
have been used for several years.
Recommendation
We recommend that the general ledger be updated, eliminating the accounts that are no longer used.
Benefit
The elimination of these accounts would minimize possible general ledger account coding errors which provides for
more accurate financial information. Also, there would be a more efficient use of the computer's data base.
Observation
The accounts payable and accounts receivable subsidiary ledgers were not always reconciled to the general ledger
on a monthly basis.
Recommendation
The subsidiary ledgers should be reconciled to the general ledger on a monthly basis. Any differences should be
investigated and explained and the reconciliation reviewed and approved by an independent person.
Benefit
Following this procedure will provide assurance that accounts receivable and accounts payable are properly
reflected on both the general and subsidiary ledgers.
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I.I.8. Suspense and Clearing Accounts
Observation
During the course of our audits, we noted that at December 31, 1989 there were suspense accounts that contained
several unresolved dated balances.
Recommendation
Suspense accounts should be reconciled in a more timely manner and any items not cleared within 90 days should be
reserved for or expensed.
Benefit
Timely disposition of amounts contained in suspense accounts will provide greater control over disbursements and
the general ledger on an overall basis.
Observation
Recommendation
The Company should adhere to a strict policy of record retention such that all financial documents less than two
years old be kept on file on the premises while older critical records be maintained indefinitely in a safe and readily
accessible facility.
Benefit
Adherence to a record retention policy will result in improved accountability over historical financial information.
Observation
Discussions with various operating and accounting personnel indicate that while the Company has a formal record
retention program, monitoring compliance with the policy is inadequate.
Recommendation
The Company should review established formal record retention policies and procedures and consider redefining
these policies to accommodate current and anticipated requirements. Procedures should be developed to
periodically determine that the policies are being properly followed.
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Benefit
The Company would be assured of retaining documentation in compliance with legal and governmental
requirements, and costly storage expenditures would be avoided for unnecessary materials.
Observation
The accounting department does not receive copies of all legal documents and other significant Company
documentation. These documents are necessary to properly record property acquisitions, related liabilities, and
material events which take place at and after the formation of a joint venture.
Recommendation
The accounting department should receive copies of all pertinent documentation relating to joint ventures.
Benefit
The accounting department will be informed on a timely basis of events affecting the Company and have the support
to appropriately record the financial impact of those events.
Observation
The Company does not, in certain instances, maintain adequate critical accounting records. The Company has not
established a formal policy for the maintenance and retention period of the accounting records. During our testwork,
we noted the following specific instances in which accounting records were not properly maintained:
• Accounts receivable information is maintained on individual ledger cards, but a detailed aged listing of
accounts is not prepared from these cards;
Recommendation
The Company should establish and enforce policies for the maintenance and security of all critical accounting
records. These policies should be included in an accounting manual with appropriate guidance for those personnel
authorized to maintain such records. In addition, a retention policy for all accounting records should be formalized.
Benefit
The implementation of policies for the maintenance, security and retention of critical accounting records will
improve the accuracy of the financial reporting system and minimize the risk of loss of critical data.
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I.K. Accounting Department
I.K.1. Workload
During the past few years, the Company has experienced significant growth, both in the number of limited
partnerships and in the scope of operations. Furthermore, the more recently formed limited partnerships have
become increasingly complex. This growth, coupled with the recent loss of the former Chief Financial Officer, has
led to a significant strain on existing accounting department personnel. With future growth or increased activity, it
will become more difficult for the accounting department to stay abreast of day-to-day activities as well as
non-recurring "special projects."
Recommendations
We recognize that current financial conditions do not warrant a significant expansion of the accounting staff.
However, we do recommend the following:
• All workloads of accounting personnel should be thoroughly reviewed. Tasks should be reassigned if
deemed appropriate to provide for maximum efficiency.
• It is our understanding that the Company does not intend to hire a replacement for the Chief Financial
Officer position until later in the year. We would recommend that in selecting an individual for this position,
the candidate should be capable of and responsible for the overall operation of the accounting department,
the supervision of accounting managers, and the review of financial reports for accuracy and unusual trends.
Benefit
Implementation of the above recommendations would result in increased reliability and greater accuracy of
accounting and financial reporting data, along with reduced risk of not recognizing potential negative financial
trends and missed tax implications/benefits.
Observation
During the past few years, the Company has experienced significant growth. This growth has led to an increased
flow of information through the accounting department and appears to have created a workload strain on existing
accounting department personnel. With future growth or increased activity, it will become more difficult for the
accounting department to stay abreast of day-to-day activities as well as a non-recurring "special projects."
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Recommendation and Benefit
We recommend that the workloads of accounting personnel be thoroughly reviewed and the accounting staff
expanded and/or tasks reassigned where appropriate. This would ensure efficient and effective utilization of the
accounting staff and enable the Chief Financial Officer to concentrate more on budgeting, forecasting and other
"special projects" necessary for the future growth of the Company.
Observation
The merger has placed a significant strain on the general accounting department workloads. Short-term surges in
workloads can typically be managed through the use of overtime. However, extensive overtime for sustained
periods can result in reduced productivity, increased errors, job dissatisfaction and turnover.
We understand that the Company has provided for an increase in its general accounting staff within its operational
plan for 19XX. We also understand that overtime will diminish as the integration of the two companies' accounting
systems draws toward completion. We recommend that management continue to review the workloads of general
accounting personnel to assure that staffing levels are appropriate for the volume of work assigned.
Observation
The Company currently uses the services of an outside bookkeeper to maintain accounting books and records.
As the Company continues to grow, management should consider bringing such functions in-house. There are
several over-the-counter minicomputer programs available which could be utilized by the Company. Our
management consulting department would be happy to discuss various computer alternatives with you.
Observation
The Company currently has many facilities which house several franchises. In addition, the Company has
purchased more land and has plans to add additional franchises in the same location. At present, each of the
facilities has a business manager and accounting staff. Due to the centralized accounting nature of these dealerships,
it may be possible to eliminate unneeded positions.
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Recommendation
As the new facilities are completed, consideration should be given to centralizing the accounting function for these
dealerships.
Benefit
Better economies of scale would be achieved by consolidating the accounting function in one location and
eliminating any unneeded positions.
Observation
We noted that employees are not cross trained to perform a variety of tasks within the accounting department.
All accounting department employees should be cross-trained to perform a variety of tasks in addition to their
primary responsibilities. Such a policy will help reduce disruption in the day-to-day operations of the accounting
department in the event of a planned or unplanned absence of an employee.
Observation
While working with the accounting department, we noted that numerous schedules are prepared manually (e.g.,
fixed asset records, summary of consolidated accounts). Manual preparation of such schedules can be very
repetitive and time consuming for the accounting staff.
Recommendation
The Company should have this information generated through the EDP department or on a microcomputer that is
already at the Company's disposal.
Benefit
The use of microcomputers and/or well planned programming by the EDP department should reduce time spent on
routine schedules and thereby increase efficiency.
Observation
Miscommunication, delays or even lack of correspondence between the accounting, property management and
acquisition departments result in accounting errors or the untimely recording of transactions. Some specific
problems noted during our testwork were:
• The recording of checks written by property management to vendors is not timely. This may result in
double payment to vendors.
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• Delays exist in the relaying of information from property management to accounting of construction
activities, sales and acquisitions of properties, new leases, etc.
• Loan extensions are negotiated and loan costs are incurred by property management without the
knowledge of accounting. This results in unrecorded loan costs or loan costs not properly amortized
over the extended life of the loan.
Recommendation
In general, the communication between the departments could be improved by frequent meetings of key department
members where updates of activities and plans could be given. In response to the specific problems cited above, we
recommend the following:
• Separate vendor files should be maintained where everyone from both departments would be required to
record payment activities.
• Any documentation received regarding construction activities, sales and acquisitions of properties, new
leases, loan costs etc., should be distributed to both the responsible property manager and the project
accountant.
Benefit
Improved interdepartmental communication would improve the accuracy and timeliness of the financial data.
Observation
The Company functions without a full-time accounting manager/controller. As a result, certain fundamental tasks
are not being performed on a consistent basis:
With continued growth and increased activity, it will become increasingly difficult for management to stay abreast of
the day-to-day activities, as well as devote attention to non-recurring "special projects" without experienced
leadership and guidance.
Recommendation
The need for assistance in the area of accounting must be balanced with the overall needs of the Company. We
believe, however, that the addition of a knowledgeable and experienced accounting manager/controller should be of
immediate concern to the Company.
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Benefit
A properly staffed accounting department will ensure that fundamental tasks are performed on a consistent basis, as
well as ensure increased reliability and greater accuracy of accounting and financial reporting data.
Observation
During the course of our review we noted that many audit adjusting entries were of a recurring nature. In addition,
the magnitude of these adjustments indicates that reliance by the Company on monthly general ledgers for
preparation of financial statements may not be warranted.
Recommendation
The Company should make adjusting entries for items on a monthly basis where possible. At a minimum, these
entries should include estimated depreciation, amortization of prepaid expenses, accrual of accounts payable and
payroll taxes. Also, the involvement of a part or full-time controller to review the accounting entries and financial
statements would help ensure that the entries are properly made on a timely basis.
Benefit
Monthly journal entries would improve the usefulness and accuracy of the general ledger. The addition of a part or
full-time controller to review these entries would also help the Company improve its management reporting systems.
More accurate management information would provide better information for management decisions.
Observation
We noted that certain journal entries were not reviewed and approved prior to entry into the general ledger system.
All entries should be reviewed and approved by the Controller or person with similar supervisorial responsibility
over the employee preparing the entry prior to posting to the general ledger. Adequate documentation should be
attached to the entry so that an effective review can be performed. Implementation of review and approval
procedures will reduce errors in the general ledger and improve financial reporting.
Observation
Standard monthly journal entries are not performed by specific individuals, but are assigned to staff accountants as
available.
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Recommendation and Benefit
Standard journal entries should be assigned to specific staff accountant positions responsible for proper preparation
and timely input of the entries. All journal entries should then be approved by the Controller or Accounting
Manager prior to input into the general ledger system. Implementation of these controls over standard journal
entries should reduce errors in the general ledger and improve financial reporting. Standard journal entries should
also be used whenever possible to expedite the closing process.
Observation
Management reports do not appear to meet user needs in terms of content, format, level of detail, frequency and
timeliness. It is the opinion of management that the reports do not focus attention on those items requiring attention,
nor do they satisfy management's information needs.
Management and other reports generated by the computer system should be evaluated to determine usefulness of
different reports, necessary format changes to accommodate the needs of management, as well as developing the
required timing of the reports to ensure the usefulness and adequacy of the reports. Such report changes should be
approved by management prior to implementation by the accounting department.
Observation
We are aware that since June 30, 19XX, the Company has fallen several months behind in the preparation of
monthly financial statements. We recognize that this is due in large part to the conversion of the accounting records
to a new system.
Timely monthly financial statements are an important management and internal control tool. We strongly
recommend that action be taken promptly to get up-to-date and stay current in monthly financial reporting.
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I.M.3. Financial Reporting System
Observation
The Company maintains a general ledger system that merely allows the user to input entries in order to produce a
basic trial balance and simplistic income statement. Most other accounting functions are substantially manual.
Additionally, the Company does not have in place a formal financial reporting system which incorporates timetables
for completion of the following:
Due to the Company's significant growth since inception, the current financial reporting system is not adequate for
providing management with complete, accurate and timely information for decision making purposes.
Recommendation
We are aware that the Company is in the process of implementing a new computerized accounting system. The
Company has recently developed a formal financial reporting system which will compliment this new accounting
system. The financial reporting system should define the types of reports and information to be generated and the
timetable for their completion. The Company should also incorporate budget preparation and analysis to highlight
variances from expected operating results.
Benefit
Development and implementation of a formal financial reporting system will improve the timeliness and accuracy of
financial information and thereby provide management with a reliable tool for monitoring the Company's progress
and making informed management decisions.
Observation
Recommendation
The Company should consider using the microcomputer to prepare the financial statements as the capabilities
currently exist.
Benefit
The use of the microcomputer would help to eliminate the risk of mathematical errors and reduce time spent on
preparing the routine schedules and allow personnel to spend more time on other projects.
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I.M.5. Federal Financial Reports
Finding
We noted during our examination that the Financial Officer does not perform a periodic reconciliation of Federal
financial reports to the general ledger. In addition, we noted that quarterly billings to reimbursing agencies are not
being prepared in a timely manner.
We recommend that such a reconciliation be performed quarterly and that the Accountant prepare such bills in a
more timely manner. This should result in better financial management and improved compliance with interagency
agreements.
Observation
The Company uses a complex allocation process to create "external financial statements" (e.g., SEC reporting). This
allocation is performed outside the general ledger system, as it is currently incapable of handling these types of
complex interdepartmental allocations.
Due to the material reclassifications on the financial statements which result from the allocation process, the
allocation procedures should be fully documented. This documentation should provide enough information to allow
another individual to perform the allocation, should an employee transition occur. By documenting this allocation
and using it as a reference, the Company will have greater assurance of comparability of financial information
between accounting periods, thereby preserving the integrity of the SEC reporting.
Observation
One of the strongest procedures for verifying the accuracy of any set of financial statements is the periodic analysis
of account balances (particularly for balance sheet accounts) to ascertain the following:
• Are the balance sheet accounts supported by itemized listings of the components comprising the
financial statement totals?
• Is the detailed listing free of obvious errors (e.g., prepaid expenses which should have been charged to
expense, receivables for items previously collected, etc.)?
• Are there unusual reconciling items to the financial statement totals which suggest the need for
adjustment?
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• Are there mispostings or other clerical errors?
During the course of the audit, we noted that such analyses had not been prepared. We also noted that adjustments
were often readily identified once the appropriate analysis was completed as part of the audit.
We strongly encourage that all balance sheet accounts be analyzed as described above monthly. The analyses should
be retained and reviewed by a responsible official as part of the monthly closing cycle. This procedure will provide
improved assurance that accounting errors will be detected and corrected in a timely manner.
I.O. Agreements
Observation
Upon the acquisition of smaller companies, the Company does not always proofread the purchase agreements prior
to their execution. This may result in discrepancies within the document creating uncertainty as to the actual terms
of the agreement.
Recommendation
The Company should carefully draft all purchase agreements and proofread them prior to their execution.
Benefit
Careful drafting and proofreading of all purchase agreements will ensure that legally binding documents reflect the
intended terms.
Observation
The Company and a number of its officers did not agree on the interpretation of the terms of their employment
agreements. As a result, time-consuming negotiations were required in order to resolve these differences.
Recommendation
The Company and the officers should clearly define and understand each of the significant terms in their respective
employment agreements.
Benefit
Clear definition of employment agreement terms will avoid differing interpretations and time-consuming
discussions. This will enable the Company to monitor management's performance more accurately, and the financial
statements will more accurately reflect officer compensation.
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I.O.3. Unsigned Agreements
Observation
Certain product orders are shipped while the related sales agreement remains unsigned. The discount included in the
contract is deducted from the invoice prior to receiving a signed agreement.
We recommend that a signed agreement be required prior to product shipment. If that is not possible, then the
discount should be withheld until after the agreement is executed. This affords the Company the leverage to
expedite negotiations while protecting the Company with a signed agreement.
Observation
During our testwork of property management fees, we noted that management agreements were not on file for the
properties which are managed in-house by the Investment Manager.
Recommendation
The Trust should obtain signed management agreements for all properties, including those managed by the
Investment Manager.
Benefit
Observation
The Company does not circulate a conflict of interest questionnaire to its key employees nor do they have a written
Company code of conduct. Such a code is frequently used to emphasize the employees responsibility to the
Company.
The Company should adopt a code of conduct for its employees and annually circulate questionnaires to key
management personnel affirming their knowledge of the Company policy and disclosing their involvement with
other business interests. The Company would benefit by having its employees be more aware of potential situations
which would be contrary to the Company's best interest and would aid in the proper recording and disclosing of any
related party transactions occurring in the Company.
Management's Response
A conflict of interest questionnaire has been prepared and given to key employees to complete and return.
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I.O.6. Non-Documented Transactions
Observation
The Company enters into several significant non-documented transactions. As a result, the terms of the transaction
could be subsequently disputed.
Recommendation
Before the Company gets involved in a significant transaction, a signed, binding, and legal document should be
obtained from the parties involved. This document should disclose all of the terms, responsibilities and obligations
of each party, and any other important and necessary terms.
Benefit
• Legal, written proof of the terms of the agreement in the event of litigation;
• Reduction in the risk of error in the recording of the transaction as the Company would have a document
to refer to when booking the transaction;
• Management and its legal counsel would have a document to review in order to determine whether or
not the Company should enter into this transaction.
Observation
During the year, Company management entered into certain complex transactions which resulted in a significant
impact on the Company's financial statements.
Recommendation
We encourage management to discuss these complex transactions with KPMG Peat Marwick to determine the
accounting issues and potential results on operations before the transactions are consummated.
Benefit
Discussing these transactions prior to their consummation will provide management with a better understanding of
the potential accounting and auditing issues and effects on the financial statements.
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I.Q. Intercompany Transactions and Accounting
Observation
The Company did not consistently provide to its subsidiaries full documentation related to intercompany
transactions. Additionally, intercompany accounts had not been reconciled on a consistent and timely basis. As a
result, numerous intercompany transactions during the year were either unrecorded or misrecorded on the
subsidiaries' books and a number of adjustments were required at year-end to correct this situation.
Recommendation
The Company should adopt better communication and improved documentation of intercompany transactions and
establish intercompany channels of communication so that on a monthly basis, management at all entities ensure that
all intercompany transactions have been recorded. In addition, intercompany accounts should be reconciled monthly
on a timely basis with all reconciling items being resolved immediately.
Benefit
The above recommendation will simplify the reconciliation of intercompany accounts and will reduce the number of
adjustments and estimates of amounts at the subsidiary level.
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