¶ … Accounting System Implemented at Chic Paints Limited Report submitted in order to fulfil the requirements of AAT Accounting Qualification

Internal Controls and Fraud

Accounting System Review

Weaknesses in the Existing System and Recommendations

Cost and Benefit Analysis

Mapping of report to outcomes and criteria

The purpose of this report is to present the findings of the evaluation of existing accounting system implemented at Chic Paints Limited. Chic Paints Limited hired me as an Accounting Technician of the Company to review the accounting systems of the company and report on the operating effectiveness of the internal controls, and this report explains it.

The report also discusses the results of the evaluation of existing accounting systems implemented at Chic Paints Limited on the basis of the AAT code of Ethics and Sustainability requirements. The report also identifies and presents the weaknesses in the existing accounting system along with the effects of the identified weaknesses.

1.3 Recommendations for improvement in the current system is another significant part of the report which also identifies methods for eradication of identified weaknesses. Thus, the objectives of this reports are:

Explanation and review of the existing accounting system at Chic Paints Limited;

Identification of weaknesses in the system and effect of those on the organisation; and Recommending methods and steps for improvement in the existing system.

2. Executive Summary

By conducting a proper analysis and evaluation of the entire accounting function, policies and procedures of Chic Paints Limited, following system weaknesses came to light:

Absence of controls over payments to creditors and identification of unrecorded invoices,

Absence of controls over credit controlling and recovery,

Absence of a strongly and properly integrated ERP system,

Absence of central network and automated computer system,

Absence of integrity and honesty in the employees,

Absence of proper reconciliation processes,

Lack of training and development of employees,

Major control weakness in the payroll disbursement system, and Lack of staff.

3. Introduction

3.1 Chic Paint Limited, a company formed as a result of the management buyout in the year 2007, when Ashstead Plc. placed its wholly owned subsidiary for sale. The directors of the Chic Paints Limited, who had an extenxive experience of managing the company, bought it. The directors, who are also the owners of the company, overlook all the operations of the company.

3.2 From separation from Ashstead Plc. To date, that is in the year 2013, there has been a single change in the composition of Board of Directors. The change was that Dave Whistler replaced Jane Yip, as Finance Director of the company, in around March 2013. Moreover, two directors have shown the intention to sell their holdings in the company and retire, Ruth Jones and Ahmed Khan. The other directors have identified prospective investors having specialized skills to manage the areas under those directors regime.

3.3 The existing composition of Board of Directors of Chic Paint Limited along with their percentage shareholding and area of operation / specialization in the company is:

Name of Director

Percentage Shareholding

Area of Operation

Greg Pearce

25

Managing Director

Dave Whistler

25

Finance Director

Ruth Jones

20

Sales Director

Ahmed Khan

15

Production Director

Susan Mather

15

HRM Director

3.4 The major objective of the company as reflected through its mission statement is the production and supply of quality paints as per the international safety and quality standards. The company also aims at using the best available technology for the manufacture of paints and other allied products. Moreover, the company also aims at maintaining all the ethical standards and comply with business ethics in dealing with all the stakeholders. The company also aims at ensuring sustainable business operations that contribute to a safe environment and developed society.

3.5 The major stakeholders of the company are the directors of the company, its customers, suppliers, law making bodies and agencies, bankers, employees, society and government. Chic Paints Limited is required to prepare proper management accounts for the benefit of the owners of the company that is the existing Board of Directors. Board of Directors needs this information to make further decisions about the operations of the company and improve its financial position. Moreover, law making agencies and government require the annual financial statements of the company to impose taxes and other levies. The prospective investors of the company also require its financial statements showing profits and current financial position of the company. The financial position of the company is also of import to the suppliers, supplying goods on credit. Suppliers...

Customers need the financial position of the company to ensure that the company is a going concern and will continue its operations for future supply of paints to them. (Mtetwa, 2013)
3.6 Employees also need to ascertain their job security, and for that purpose they need the financial statements of the company. Moreover, working in a company with strong financial position is a matter of pride for employees and they like to show it off to their acquaintances. (Mtetwa, 2013) Further, the company is also liable to the environment and society on the whole. Thus, Chic Paints Limited should comply with environmental and other social laws and the company should also contribute to the society in the form of donations as a percentage of profits.

3.7 Chic Paints Limited is required to follow a number of laws and regulations. The following laws and legal requirements are applicable on the company:

State laws;

Corporate laws and code of corporate governance;

Taxation requirements;

Requirements of the SEC;

Environmental laws and regulations;

The requirements of International Auditing and Assurance Setting Board (IAASB);

Code of Ethics and Sustainability requirements imposed by AAT; and International Financial Reporting Framework requirements.

3.8 All these legal and regulatory requirements bind the company and any change in one or more requirements will require the company to change its accounting systems. These changes will also require the company to change the relevant statements and reports to comply with the legal and other requirements. Moreover, Chic Paints Limited is also bound by the nature of business and corporate culture in formulating its accounting systems and procedures. The company uses simple reporting system as it is more cost effective and easily understood company wide

3.9 The accounting function of the company, explained in detail in the next part of the report, serves as a support function. Accounting function of the company is mainly responsible for arranging the funds for the company to be utilised properly in various capital and revenue expenditure. The reports and statements produced by the accounting function play a vital role in setting various corporate level strategies. The accounting function of the company determines and sets the bargaining power of the company. This function is responsible for identifying the best possible price of the products manufactured by the company and acceptable prices for the raw material required for manufacturing of those products.

3.10 Accounting function at Chic Paints Limited also monitors the credit and receivable. The accounting officers and clerks are also responsible for compliance with budgetary requirements. The accounting function of the company is also responsible for the approval of capital expenditure. Hence, it can be said that revenue and expenses of the entire company is governed by the accounting department. Furthermore, accounting department also ensure that all other department comply with legal requirements since they are responsible for legal and regulatory compliances.

3.11 The users of the financial information will be highly affected by any change in the reporting and recording requirements. The users will be affected more by changes in the system if such changes require non-disclosure of information important for such users. Each of the users of financial statements of Chic Paints Limited requires a set of information and any deduction or loss of information will be a point of concern for each user. Moreover, it is highly likely that the changes in requirements enhance the information provided to the users.

4. Internal Controls and Fraud

4.1 Lack of effective internal controls will lead to the chances of frauds and misappropriation in the company. Since, Chic Paints Limited is a small company having around 350 employees and fully owned by the Board of Directors, the management of the company is fully responsible to implement a culture of strong internal controls. (Perry, 2011)

4.2 The company will surely face the chances of fraud and misrepresentation if the employees or management of the company surpass the ethical and professional requirements and internal control mechanism of the company. Management's unethical ways and greed also let to fraud in any organisation. Furthermore, in certain areas of operation there exists an inherent risk of fraud and thus the Board of Directors and management should monitor those areas on a regular basis. The areas that are most inherent to fraud risk are management override of control and cash. At Chic Paints Limited, areas such as accounting function or purchases division are solely in the control of chief accountant and purchase manager / deputy manager respectively, lack of monitoring from directors gives a chance of deliberate misappropriation to the management and hence, will result in fraud. (Fraudiscovery.com, 2013)

4.3 In order to detect fraud cases at Chic Paints Limited, the Board of Directors and management of the company should be vigilant and alert. Any transaction or attempt by any employee, director or management…