The reporter analysis the accounting system of Cookridge Carpets with the aim to recommend on how the system and controls in the place can be improved to bring the organization to a less exposure to fraud and protect it.
In analysing these system and controls, the reporter also covers the organisation at large including the information needed from the system that it has. It also looks at key stakeholders both internal and external.
The recommendations made in terms of cots and benefits Cookridge Carpets are also investigated. The potential for fraud in terms of the risk to the organisation are also analyzed.
The report has been prepared as a requirement of the AAT Level 4 Diploma of the Internal Control and Evaluating Accounting System.
2. Executive Summary
2.1. The reporter investigates the accounting systems within Cookridge and makes recommendations to improve them. Conclusion taken is that centralised accounting system to be introduced that will cost about £7000. For this to operate staff should be trained as it will enable them to cover for one's absence. Section 9 of this report includes all cost benefit analysis of the recommendations.
2.2. This will help in finances of the organisation as will improve controls and reduce the risk of fraud. It will improve credit control to reduce overdraft by the organisation.
2.3. The reporter also recommends the use of less cash to use BACS payment system so that employees and suppliers are paid through their accounts hence improving control.
3. Methodology
3.1. To come up with this case study the researcher used internet, business magazines and reference books.
3.2. Case study is given concerning this organisation to help find what information is required from the accounts department and if information was received on time.
3.3. With a SWOT Analysis the researcher was able to recognize the strengths, weakness, opportunities and threads presented within that period since the organization was established.
3.4. A fraud matrix was arranged to find the potential of fraud within the accounting system and to analyse to control in place to prevent them.
4. Introduction to the Organisation
4.1. Ownership
Cookridge Carpets is a largely Private Limited Company owned by two brothers, Peter and John Cookridge. Its main purpose is to distribute carpets, soft furnishings and beds in Southampton. It is one of the biggest dealers for memo@memory foam beds and mattresses in the area, and has been trading for the past 3 years since 2007. It has 22 employee, 12 sales staff, 2 cleaners, 2 drivers, 1 accessories salesperson, 1 permanent and 3 part time staff in small accounts department, and also a showroom manager.
4.2. History and Achievements
Cookridge Carpets as the name states, started selling carpets and then grown into beds and soft furnishings. As this result was organised by Peter, who had developed excellent working relationships with carpet manufactures during his time in the industry. During February 2010 by the time the existing local dealer was retiring, Memo Beds invited Cookridge Carpets Ltd to become the main dealership for Southampton. The business has grown in direct sales and that it have recently started selling though internet. This venture seems to have increased business.
4.3. Organisational Structure
The organisation is a retail trader that has relatively flat structure, which comprises of two staff reporting direct to the owners.
Advantages of organisational structure
Each manager is responsible for small number of staff, thus narrow span control.
It less straining because the organisation is structured a sectional expertise.
Organisational structure included as appendix 01 to this report.
4.4. Accounting systemsin process is decentralized system comprising of four stand alone computers. The inventory information is kept on Microsoft office excel spreadsheets. Payroll system is run using sage software. Password installed to protect information is the same used throughout the company.
4.5. External regulations affecting the organisation:
4.5.1. The company Act 2006 - this gives the format on how to prepare financial statements.
4.5.2. The Data Protection Act 1998 - This guide on how to handle confidential information of either an employee or client.
4.5.3. Accounting standards - This describes the policy and approaches to the preparation of accounting statements that the organisation must take.
4.5.4. Health and Safety Legislation - as set out in a variety of legislation Cookridge Carpets will need to abide by health and safety principles and policies.
4.5.5. International Accounting Standards Board (IASB) gives regulations such as International Accounting Standards (IAS) and International Financial Reporting Standards (IFRs).
4.5.6. Late Payment Law - As set out in the late payment of commercial Debt (Internet) Act 1998 the organisation will need to make sure it does not delay to clear its liabilities beyond acceptable periods.
4.6. Key external stakeholders
4.6.1. Customer - The customers who also play a very vital role in the running of Cookridge Carpets are small businesses and individuals. They benefit from this company as they are given six months free interest credit, and they make payments at the end of the period. Price lists are covered in financial information.
4.6.2. Suppliers- Cookridge Carpet's suppliers are manufacture of goods that it sells, and Memo Beds is its main dealer that they also sell through the internet.
4.6.3 Government- Cookridge is to follow laws and principles placed by the government and any disgrace would result in any charges or penalties which will bring the company's name down.
4.6.4. Finance - The Westbridge Finance which helps in the financing of the business as well as paying to cover the grace period of creditors. They benefit from this company as they charge annual interest rate of 8.7%.
4.6.5. Competitors- The competitors of Cookridge are large national retailers, so Cookridge to stand in the market choose to offer credit to its customers.
4.6.6. Debt collection agency- This organization works on behalf of Cookridge after a grace period has passed, to collect its debts from customers. And it also benefit from Cookridge a charge of £80 per case, plus 30% of any monies collected.
4.6.7. Bank-With this stakeholder, for they will inform the organization with any transactions that have taken place in their account due to fraud. And also the business may get the loan from the bank in order to improve its business activities (cash flow). Bank will need financial statements to check if the company is qualifying for a loan and if it can pay back the money they got from them. It also offers an overdraft to the company that it may pay its day to day activities.
5. The accounts department
5.1. Accounts team of Cookridge Carpets is situated on the first flow, above the showroom. Access is easy as the same flow has toilets used by both staff and customers. There is keypad lock to the office that is never used.
5.2. All the staff in the organization can easily enter the office and communicate with the accounting team, for example showroom staff that need to be clarified on their wages, and the owner to sign cheques or discuss the accounts.
5.3. Reasons for accounting department is to compile all activities taking place in production that include sales, purchases ledger and payroll. According to the results shown by weakness there is little management accounting activity or cash flow forecasting. Organisation structure is included in appendix 01.
5.4. The accounts department - key stakeholders
5.4.1. Peter and John Cookridge (Owners)
These brothers invested in this business with various intentions as to make profit and satisfy the community's wants. They also focus on the growth of their business, and they require information that financial accounts.
5.4.2. Sonja Douglas (Wages Clerk)
Is there for the preparation of the wages and salaries of the staff. The clerk is not committed to permanent hours and has an NVQ 2 in payroll.
5.4.3. Stefan Kalinowski (Accounts clerk)
This deals with accounts receivables (sales ledger) accounts for the organisation, working four days per week. The clerk has accounts "A level" but no formal training and was trained on the job by the previous clerk.
5.4.4. Margaret Peterson (Accounts clerk)
Clerk deals with accounts payables (purchase ledger) worked two full days and a half each week. The clerk gained experience three years back in operating the accounting systems.
5.4.5. Vincent Gontse (senior accounts clerk)
A newly appointed senior accounts clerk is there to supervise the accounting team, systems and producing this report investigation the weakness of accounting systems and making recommendations to improve them.
5.4.6. Show room staff
They are key stakeholders that most of their time they interact with customers of Cookridge. They are paying attention to superior operational environment and pay. This covers their payments being calculated accurate and in time. They also need correct inventory information from the accounts team.
6. Review of the accounting system
6.1. This report examines Cookridge Carpet's accounting system and gives advises on how to make it better.
6.2. With the help of the SWOT analysis, weaknesses have been recognized - see appendix 02. This part also try to fine the system within the situation of the financial reports that should be given to stakeholders and whether it is right to meet their, and organisation's needs.
6.3. Working methods and practices
6.3.1. Cookridge's accounts department system comprises of four stand alone computers connected to the same printer, but not depending on each other. The inventory information and accounting system are kept on Microsoft Office Excel spreadsheets. Sage Payroll Software has been installed to manage payroll system to calculate wages and salaries. A form has been designed in a Microsoft word to be used for invoices.
6.3.2. When the computer system was set up, the same password used throughout the company was installed to protect information stored on it.
6.3.3. Weakness in the working methods and practices within the systems at Cookridge are included in the SWOT analysis in appendix 02 as:
Many of staff are not competent in the area of their work, as they work based on their past work experience. They do not have formal qualifications in accounting. Thus this can bring errors that may bring down the reputation of the company. For example they may end up not calculating the tax accurately.
The backup is not taken at regular intervals, as it was showed after there was an electric cut off and power loss. This put organisation at risk of losing most of its data stored in a system.
In the accounts there are mistakes made mostly when one is absent. This was exposed after one operating the sage payroll system's absence. There was none among those remaining knowing how to operate it. This shows lack of training in accounts departments and due to this they will not be cost effective. Example it may be found that wages and salaries has been calculated inaccurate either under or over- stated.
In the organisation there is no planning that even it is a process to finalize or take decisions on matters concerning payroll. This at first was being run by Southampton Accounting Services. It was found that is expensive as organisation was charged based on time taken to complete task given concerning payroll. Before this was handed to organisation's clerk internally, in the first two months temping agency was being used also was expensive.
Due to systems not connected to share the same information as they are only connected to the same printer, therefore there is no centralised reporting of the accounts. This has caused incomplete financial statements of the organisation.
There are errors that occur in the accounts department more specially by not informing responsible staff for certain tasks carried out on one's behalf during their absence.
6.4. Record keeping systems
6.4.1. Weaknesses were identified as part of the SWOT analysis after review of the record keeping system in appendix 02.
Work that is needed urgently by suppliers or either customers during ones absence is completed manually and no record kept or passed to staff.
Errors may occur as payroll is calculated manually.
Petty cash's float is not kept to its standard and also not recorded correctly which end up cash being taken from the tills.
Improvised payments have been made to suppliers and not recoded the right way.
As uncompleted cheques are sometimes left signed, they may be used and not accounted for, that leads to incomplete records.
Wages are prepared in advance that will result in not accurate records.
Hours worked in the showroom are recorded on rotas which have not been taken properly that leads to incorrect wages paid.
6.5.5. Training
6.5.1. The SWOT analysis in appendix 02 investigates the weakness within the system with regards to training as follows:
Staffs are not competent in accounting. That's leads to lack of knowledge and understanding about general controls and actions in place. If trained and competent they will take their work with high moral.
Current systems such as pivot tables and the sage payroll bring problems that staffs are unable to use due to lack of training.
7. Internal controls and analysis of fraud.
7.1. Internal systems of control
7.1.1. Within Cookridge control are very informal. Dependence is often based on trust.
Proper internal controls will support the accounting system and reduce the chance of fraud taking place.
7.1.2. The SWOT analysis appendix 02 analysis the weakness within the system as:
Petty cash - there is no system that controls in place. As a result of petty cash not balancing.
Collection of wages - there is no confidentiality on who is to collect when comes to staff's wages, and also wages are not signed for.
Cash - cash used within the organisation is controlled not much. All cash are removed and bagged not counted, also used to pay wages that are calculated manually, without cross checking.
Passwords - the same password is used throughout the organisation.
Authorisation - there is no athorisation as cheque book after being signed with blank sheets, can be used by any staff member during owners absence.
New suppliers/ customers - no control to suppliers and customers are added to system.
7.2. Analysis of fraud
7.2.1. Even though there is no prove of fraud having taken place in Cookridge there are many possible fraud that possibly will arise within the system and appropriate control should be in place to prevent them.
7.2.2. The SWOT analysis in appendix 02 analysis the weakness with the system as:
Cash can be stolen, as is been used to pay wages.
Staff may take advantage of taking cash for their own benefit as sometimes cash is taken from till instead of petty cash box.
Cheques are sometimes kept in an unlocked drawer that could lead to fraud.
Signed blank cheques are left when the owner is absent that may be used by staff. This increase the risk of fraud.
Staff may deceive the organisation by making payments to it, due to no control with new supplies.
With customers, staff may also betray the organisation, as there is no control.
7.2.3. Each of these potential frauds, the current controls in place, and recommendations to improve can be found within a fraud matrix in 03. This matrix also includes the level of risk to the organisation.
8. Recommendations to improve
8.1. There are many recommendations that can be formulated to improve the weaknesses identified above and in Appendix 02.
8.1.1. This same password used throughout the organisation should be changed and all staff's be informed of the need to have effective controls in place. In this case it will reduce the risk of fraud.
8.1.2. Blanks cheques that are signed in advance should be stopped and cheque book should be locked in a safe. The senior account clerk could act as second signatory during owner's absence. This will benefit the organisation as it reduces the risk of fraud.
8.1.3. As centralised accounting system is one where all the data is stored at central location, and can be shared among the accounts staff. It will enable full financial reports to be completed and helps the senior to review books. This will help with better planning of cash flows so that current overdraft would be reduced and aged debtors dealt with properly. Also helps suppliers to be paid on time. It will reduce risk of Cookridge's suppliers not to cut the contract between the two due to unpaid bills.
8.1.4. To improve the morale and bring productivity and efficiency, staff should be trained to use the system in place as to operate it effectively and efficiently.
8.1.5. Decision on whether to or not to grant credit to customers is important commercial decision. This will help organisation to reduce the bad debts and ensuring that credit is provided to those likely to pay their debts.
8.1.6. Backup of information is to be taken at regular intervals to avoid loss of information due to power cut.
8.1.7. Concerning petty cash authorisation should be implemented and records to be kept. This will benefit the organisation by reducing theft or poor recording of cash taken from tills.
8.1.8. The organisation may benefit from employees if given formal training in accounting. This will motivate them and also provide them with much understanding of the need for controls and controls in place.
8.1.9. Central accounts package is to be introduced. This will help complete payroll, sales and purchase ledger and other financial transactions. There should be a networking of computers that are currently used in the organisation. Staff will be motivated to have central accounting records that are effective and provide them with the appropriate information to complete their work.
8.1.10. For till staff to be accountable of their till and also to reduce errors or risk of fraud, control should be in place and tills should be balanced at the end of the day. Staff should be paid extra for those hours.
8.1.11. To improve staff's morale and bring benefits to the ogarnisation. There should be a reviewing of staff hours or days worked and a formal training to cover for each other's absence.
8.1.12. It could be strengthened by completion of procedural manuals to explain how to operate the systems. It will help the organisation to train new staff.
8.1.13. Control should be in place to include new suppliers and customers to accounting system, authorized only by owners or the senior accounts clerk.
8.1.14. To reduce the use of cash and cheques, payments to suppliers and staff should be direct into their accounts using BACS. This will help reduce fraud and theft of cash.
8.1.15. Current system should be installed a new password and also controlled by senior accounts clerk.
9. Cost benefit analysis
9.1. Cost benefit analysis was introduced to recommend and implement a central accounting system, and training staff appropriately on it, has been completed as follows:
9.2. Costs
9.2.1. Centralised accounting package could be introduced such as Accounts Professional. Proper investigation should be taken to determine which best suits the organisation as they are many on the market. An estimate to such package will range from £2000 - £3000. Whichever package is picked should easy to operate, have user and help manual, and drop down boxes to improve efficiency.
9.2.2. Technical equipments should be introduced that will help system within the organisation to share the same information, such equipments as cables or secure wireless network. This may cost £1605.
9.2.3. An additional cost of £1200 will arise after an appropriate support package is introduced.
9.2.4. Other cost is of staff's unhappiness to some changes that takes place in the organisation's current system. This may include the accounts staff as they may not be willing to change their working style by adapting to the new system, this may bring down production of Cookridge.
9.2.5. Cookridge would have to take staff for training if it introduces the accounts package. This comes with cost on open courses for staff, costing around £400 - £550 per staff. There might also be cost of £2500 to Coookridge special training course to all staff at a go.
9.2.6. There will be costs arising of staff attending the training, as they will not be there to complete their tasks.
9.3. Benefits
9.3.1. System will bring less tangible benefits to organisation, that not easy to value. Where is possible to quantify a benefit this has been done.
9.3.2. Cookridge would benefit from centralised system as all financial position would be included. This will help management to plan and take proper decisions on cash flows if they are effectively managed. And also helps organisation to reduce overdraft. This may include:
Aged debtors analysis
Payroll reports
Profit and loss account
Cash flow forecast
Balance sheet
9.3.3. Staff will be paid the right amount as the payroll will be accurate and up to date, to rules and regulations such as tax rates. It will produce more accuracy and fewer complaints and increase efficiency of staff time. This will help speed up completion of the payroll by about 3.5 hours per month.
9.3.4. Staff's morale will grow due to training, which accountants would have competent on their work load and it will improve the efficiency and effectiveness and also their morale. There will be a high commitment to an organisation as staff should result in lower staff turnover.
9.3.5. Cookridge will be able to meet the terms with regulation such data Act 1998 with protected storage of its data and information.
9.3.6. About £1700 of bad debts would be saved in a year. This comes after an aged debt analysis has been used to ensure that overdue debts are clearly shown, this will help organisation to know which debts will be written off.
9.3.7. Cash flow statements will help management with planning, control and decisions to take on the organisation's cash balance and reduce the overdraft.
9.3.8. Cookridge must take back up at regular intervals to avoid loss of information as electricity sometimes cuts unexpectedly.
COOKRIDGE CARPETS LTD
Appendix 01 - Organisational Structure
Peter and John Cookridge
( Owners)
Jim Andrews
(Showroom Manager)
Vincent Gontse
(Senior Accounts Clerk)
Margaret Peterson (Account Clerk)
Stefan Kalinowski (Account Clerk)
Sonja Douglas (Wages Clerk)
Lynn Pearson (Salesperson)
Matthew Perkins(Salesperson)
Susan Teery (salesperson)
Parton Senna (salesperson)
Carol Watson (salesperson)
General Staff
C00KRIDGE CARPETS LTD
Appendix 02 - SWOT Analysis
Strengths
Cheuqe book is locked into a drawer in the office.
There are policy and procedures followed to claints that have not fulfiled their payments to the organisation.
No unathorised devices are to be used for saving, uploading or downloading work . Eg memory sticks
As the accounts office is open plan, with no private working place, there is free and easy communication that they also able to handle other's tasks when absent.
Both the brothers hold the only full sets of keys of the building to ensure that the property is secure. There is an alarm code which the set every time when they lock up.
Cheques and cash received into the office are recorded into a day book and later used to update ledger accounts.
Weaknesss
As sales staff and general staff are paid with cash every week this can lead other to end upstiling money.
Not keeping records on staff's worked hours end up causing confusion in rotas and staff's payments calculated wrong.
Cheuqes that are already signed are left in the office that may lead to some being stolen.
Cash is taken from the petty cash box and not accounted for.
Wages and salaries should not be assumed, and adjusted later.
There is no control on giving day offs, as everyone can decide not to come for work if they fill not to come.
Sometimes payments to suppliers are made without updating the accounts payables.
There is no confidentiality as payments of staff can be handed to their family members without the staff's permission meaning that there is no control of who should receive pay of staff.
It have been noticed that backup is not taken at regular intervals, as this can leads to the organisation lossing of its data if there is an electric failer.
Access to the accounts office is easy as the keypad lock is never used and the account staff prefer to keep the door propped open and there is no private working areas. As a result anyone including unauthorised people has access to the office.
As cheques and cash received from customers is kept in the office until banking day, it may happen that there is fire breakage that may end up burned.
Sometimes a drawer that is used to lock in cheque book was left unlocked that ended up one of the staff members had access to it.
Most of accounts staff not competent in accounting that end up bring errors.
Opportunities
Cookridge is the main dealer of memory@memory foarm beds and mattresses.
Employ more staff
It has expanded from direct sales into internet sales.
Trainning arrengements _ _ _
As Cookridge competes with large retail stores, it has provided creadit terms to its customers to beat its competators in the market.
Threads
Some goods are bought on credit and never paid (bad debts)
It appeares that backup is taken after a certain period of time. This is a threat because , data may be lost when there is power cut.
Risk of fraud_ _ _
Regulartory environment - this are changes that may suddenly take place e,g inflation , VAT rates.
COOKRIDGE CARPETS LTD
Appendix 03 - Fraud Matrix
Potential Fraud
Current Control
Risk to the Organisation
Recommendation
Sometimes money is taken from the tills instard of petty cash system which may lead to staff using money for there personal purpose.
Note is provided after money is being taken for purchase of iterms.
3 - Medium
There should be someone appointed to handle matters concerning petty cash, and petty cash box is to be reconciled with petty cash vouchers.
Staff may end up stilling cheques as they are signed and left blank in the office for cover ups for the signatorie's absence.
None
5 - High
When that person knows that will be not arround, must inform other signatory to take charge for that particular day.
As sales and general staff are paid using cash, this could lead to cash being stolen.
Cash is locked in the safe.
4 - High
Cash can be deposited to business bank account this as to reduce risk of theft. And also the use of BACS will help reduce risks.
Cheques are not secure, so may end up stolen and used fradulently.
Stored in a drawer that sometimes is not locked.
5 - High
Cheques must be placed in a safe only.
The keypad lock is never used in the accounts office and this can lead to fraud as is easy to access the office.
None
3 - Medium
Organisation should enforce less movements in the accounts office and the door should be locked if there is none of the accountants.
As cash is used to pay weekly wages, this could lead to payroll staff bribery with staff adding more cash to the pay package that earned.
None - no double check of wages
4 - High
Organisation should inforce cross check of wages calculated.
Key to risk
1 = Low, 3= Medium, 5 = High
COOKRIDGE CARPETS LTD
Appendix 05 - Mapping Sheet
Principles of Internal Control
Learning outcome
Assessment criteria
Paragraph Numbers
Demonstrate an understanding of the role of accounting within the organisation.
Describe the purpose, structure and organisation of the accounting function and its relationships with other functions within the organisation.
4.3
4.4
4.6
5.1
5.2
5.3
5.4
Appendix 01
Explain the various business purposes for which the following financial information is required
income statement (profit and loss account)
forecast of cash flow (cash flow statement)
Statement of financial position (balance sheet).
9.3.2
9.3.6
9.3.7
1.3. Give an overview of the organisation's business and its critical external relationships with stakeholders.
4.1
4.2
4.6
5.4
1.4. Explain how the accounting systems are affected by the organisational structure, systems, procedures, and business transactions.
4.4
8.1.9
1.5.Explain the effect on users of changes to accounting systems caused by
external regulations
Organisational policies and procedures.
5.4
6.5
9.3.3
9.3.5
2. Understand the importance and use of internal control systems.
2.1. Identify the external regulations that affect accounting practice.
4.5
9.3.3
9.3.5
2.2. Describe the causes of, and common types of, fraud and the impact of this on the organisation.
7.2
Appendix 03
2.3. Explain methods that can be used to detect fraud within an accounting system.
7.1
7.2
Appendix 03
2.4. Explain the types of controls that can be put in place to ensure compliance with statutory or organisational requirements.
8.1.3
8.1.5
8.1.9
8.1.12
8.1.13
Appendix 03
3. Be able to identify and use the appropriate accounting system to meet specific organisational requirements.
3.1.Identify weaknesses in accounting systems
potential for errors
Exposure to possible fraud.
6.3
6.4
6.5
7.1
7.2
3.2. Explain how an accounting system can support internal control.
8.1.7
8.1.8
8.1.9
8.1.10
8.1.14
3.3.Identify ways of supporting individuals who operate accounting systems using
training
manuals
written information
Help menus.
6.5
8.1.2
8.1.3
8.1.4
8.1.7
8.1.12
8.1.8
9.2.5
3.4. Explain the value and benefit to a specific organisation of different types of accounting systems and software packages.
8.1
8.1.7
8.1.11
9.2.1
Evaluating Accounting Systems
Learning outcome
Assessment criteria
Paragraph Numbers
1. Evaluate the accounting system and identify areas for improvement.
1.1. Identify an organization's accounting system requirements.
4.4
8.1.4
1.2. Review record keeping systems to confirm whether they meet the organisation's requirements for financial information.
6.4
1.3. Identify weaknesses in and the potential for improvements to, the accounting system and consider their impact on the operation of the organisation.
6.3
6.4
6.5
8.1
1.4. Identify potential areas of fraud arising from lack of control within the accounting system and grade the risk.
