1. Terms of Reference
2.1 This report investigates the accounting system in place within Cookridge Carpets Ltd with regard to making recommendations to improve the system and the controls in place to protect it and make it less exposed to fraud. 2.2 This report will look at the organisation as a whole and also investigates key internal and external stakeholders of the organisation 2.3 This report will also analyse the recommendations made in terms of costs and benefits to Cookridge Carpets Ltd and analyses the potential for fraud in terms in the risk to the organisation. 2.4 The report has also been made to cover the requirements of the Internal Controls and Evaluating Accounting Systems Paper that is part of the AAT Level 4 Diploma in Accounting.
2. Methodology
3.5 To produce this project I used reference books and the internet 3.6 The existing accounting system was reviewed over a period of 4 months to enable a SWOT analysis to be produced. 3.7 A fraud matrix was prepared to investigate the potential fraud within the accounting system and to analyse the controls in place to prevent them.
3. Executive Summary
4.8 This report analyses the internal controls within the accounting systems of Cookridge Carpets Ltd and makes recommendations to improve them. This report has found that a centralised accounting system will have to be installed within the accounts department which will cost approximately £6,090. It is recommended that all accounts staff should be trained to use the new system and there should be suitable cover for when staff are absent. A full cost benefit Analyses (CBA) of all the recommendations is included in section 9 of this report. 4.9 This should improve the organisations finances and cash flow. This will then lead to improved credit control, payments to suppliers, staff wages and morale. 4.10 The report also recommends that all staffs wages should be paid through BACS as this would reduce the need to use cash and cheques around the office.
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4. Introduction
4.1.1.Carpets Ltd is a large business based in Southampton. They were established in 2007 and specialise in beds, furniture and carpets. Set up by two brothers it has been trading for 3 years. The company is owned by two brothers, Peter and John Cookridge. It was set up from the £100,000 loan Peter took out, £80,000 John received for being made redundant, and inheritance received from the brother’s uncle. 4.2.1. It employs 20 members of staff which include 3 part time staff in the accounts department. Cookridge Carpets Ltd is the main dealership for Southampton; they started out selling carpets but later expanded. Peter was behind the expansion as he had developed good relationships with carpet manufacturers during his 20 years in the industry. In February 2010, they were approached by Memo Beds and were asked to become the main dealership for Southampton as the existing dealer was going into retirement. Seeing as the sales they made directly with customers were going excellently the brothers decided to sell carpets and beds over the internet. This proved to be a good idea and has increased sales.
4.3The organisation is a flat structure consisting of the owners Peter and John Cookridge; store manager, senior accounts clerk and supervisors. An organisation chart is included as appendix 1 to this report. 4.4The accounts system is a decentralised system consisting of four stand alone computers. The inventory system which has information of beds, carpets and soft furnishings are kept on Microsoft Excel Spreadsheets. The password ‘Paula C’ is used throughout the whole company. 4.5.1 The key internal stake holders for Cookridge Carpets Ltd are the owners, managers and employees. They are all affected by the performance of Cookridge Carpets Ltd, as the more profit Cookridge Carpets Ltd makes the more interested the owners become, the managers are concerned about their salaries and the employees want to ensure they perform well so that they can continue to earn high wages and make the chance of pay rises more possible. The external stakeholders consist of customers; who want to be purchasing high quality goods at an affordable rate, Suppliers; who want to ensure they Cookridge Carpets Ltd will still be purchasing goods and the local community. 4.5.2 The business employs 20 members of staff:
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* Nine direct sales staff
* Three internet sales staff
* Two cleaners
* Two car delivery drivers
* One accessories salesperson
* Three part-time staff in the small accounts department. 5.1.1 The accounts department consist of two Accounts Clerks (Stefan Kalinowski and Margaret Peterson) and one Wages Clerk (Sonja Douglas).
Of the three members of the accounts department Sonja Douglas is by far the most highly qualified and she also has sufficient experience in working as a payroll clerk. Sonja Douglas currently works 15 hours over two days per week. She is in charge of security for both information and payroll cash. Margaret Peterson has no qualifications but she has several years of experience working within accounting systems. Margaret Peterson works 20 hours over 5 days in a week. Her main responsibilities lie under purchases and she reports to the company secretary of office manager. Finally Stefan Kalinowski, the youngest employee in the accounts department works 37.5 hours over 5 days. He also reports to the company secretary of office manager and his 5.2The accounts department is open from 9.00 am to 5.30pm, Monday to Friday.
It is located on the first floor of the showroom; you can access it by a set of stairs at the rear of the building. Toilets; available for both staff and customers are also located on the first floor so stairs can also be used by members of the public. This makes it very easy to access the Accounts Department and on top of this the keypad lock is never used as the staff prefer to keep the door open. There are no private working areas in the office. There are only two sets of keys for the premises and these are held by both brothers. There is also an alarm code which is set every night. 5.3.1 Due to the lack of qualification and experience in the Accounts Department, there have been some very costly mistakes. In December 2009 Sonja; who handles wages and salaries had booked a holiday and left the weekly pay packets to Stefan to distribute. Matthew Perkins, a showroom salesperson had recently left his wife but none of the staff members were aware of this so when his ex wife came into the office to collect his pay, it was given to her without question. This left Matthew with no money for the week.
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6. Review of the Accounting System
6.1 This report will review wages and salaries within Cookridge Carpets Ltd. A swot analysis has been included as appendix 2 to identify weaknesses. This section looks at the backgrounds of the financial reports and determines whether the accounts system should provide to stakeholders or not and also whether the reports are suitable enough to meet the organisations needs. 6.2 The systems in the accounts department of Cookridge Carpets Ltd consist of 4 standalone computers. The Cookridge brothers have provided a computer for every member of the accounts team. All information on inventories, information of beds, carpets and soft furnishings are kept on Microsoft Excel. The reason for this is because Paula Cookridge has previous experience working with Microsoft Excel and found it would be a good idea to use software she was already familiar with. Payroll is to be run in-house with the Sage Payroll software that has been loaded onto a new computer.
Although the computers are all on a standalone basis they have all been set up with the same password ‘Paula C’. This password is used for everything around the company, first set up by Paula herself the password hasn’t been changed since. 6.3Weaknesses in the working methods and practises within the systems at Cookridge Carpets Ltd are detailed in the SWOT analysis in Appendix 2 as: * The staff working within the accounts department is mostly part time which means that there is hardly a time when all staff is in the room together. This can lead to a lack of communication and mistakes being made when staff perform duties for other staff. * There is no centralised system in place because of the fact that there are a bunch of different systems being used. This is a major weakness as you will have an unclear view on how well your business is doing especially in relation to cash flow. * A lot of the software used requires formulas to be put in manually, e.g. Microsoft Excel which would mean that final statements and reports are error prone. Also as the staff are part time and manual formulas are being put in place, one staff could find that they work out their formulas differently to another staff member which could lead to confusion and incomplete work. * Not all staff have sufficient training so it will be difficult for the company to introduce, new up to date software to speed up process. If staff require training this would have to be paid for.
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* There is also a major lack of planning and the accounts department seems extremely unorganised. * The computers are only allowed to be used by authorised staff and are preloaded with licensed software. No unauthorised disks, memory sticks or hard drives are to be used. Although all these measures are in place there does not seem to be so solid form of backup. This is a very big weakness and risk as the company is at risk of losing key data if systems were to go down. 6.4There are also weaknesses in the record keeping system. These have also been identified in appendix 2 as part of the SWOT analysis. * There have been instances where staff has been paid for overtime when in fact no overtime has been worked. * There was a time when something had to be purchased using petty cash. When asked to use the petty cash tin, the staff member complained and said there was no cash left in the tin. £10 was taken from the till with only a note being left explaining why the till was £10 short.
* Payments to suppliers and income from customers are not being recorded properly which will show incorrect figures in final accounts. * One of the members of the accounts department, Sonja had booked a holiday over Christmas and had completed pay packets beforehand. This could mean that some pay packets were not accurate. * Some cheques have also not been accounted for so they don’t know what the cheques have gone towards. * Because some hours worked are incorrectly recorded some staff are not paid correct amounts 6.5 There were also weaknesses shown in the SWOT analysis within the system regarding training. * Some of the staff in the accounts department at Cookridge Carpets Ltd have not yet been trained in accounting. Due to the lack of knowledge in this department there is a greater risk of mistakes being made, and because it is the accounts department some of these mistakes could end up being quite costly. If the staff were more qualified these mistakes could be rectified and even avoided in the first place. * Some are even not trained enough to use certain software, or even some features in the software. For example a pivot table in Excel spreadsheets can be difficult to use at times, especially without the correct training.
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7. Potential Fraud
7.1.1.Controls within Cookridge Carpets Ltd are very informal. Being able to rely on someone takes trust. It doesn’t take that much for one to break the trust of someone so more formal measures should be put into place. This will support the accounting system and reduce the possibility of any fraud being occurred. 7.1.2.The SWOT analysis in appendix 2 analyses the weaknesses with the system as: * Cash – Tills are not counted and wages are paid using cash. The wages are also calculated by one of the members in the accounts department and put into pay packets. Hours/Time worked is not being checked to see whether or not the staff are being paid correct. * Cheques – These can be used very easily as they are left already signed in an open drawer. It is very easy for someone to walk in and write them self a check and no one would suspect a thing as it has already been signed. * Passwords – There is only one password being used throughout the whole of the company ‘Paula C’. Anyone can find out this password and access files on the computers.
The passwords have never been changed and staff will be aware of this. * Petty cash – The system with petty cash is odd, there is a tin in place where it is topped up with £100 when required. Recently there was no money in the tin when only £40 out of £100 had been written down as spent. Petty cash should be carefully monitored at all times. * Collection of wages – There is no form of wage collection as pay packets are left in the safe and anyone can take someone else’s packet. Pay packets should be distributed and signed for. It would be easier for it all to be done electronically and this would reduce the risk of someone losing out on their pay. * Checking of reports – There is no system in place where someone can actually look over the reports to see that everything is in order. Due to the lack of experience and qualification in the accounts department I feel it is necessary to have someone check for mistakes and to ensure all accounts are stable and that nothing seems out of the ordinary. 7.2.1.There is no evidence of any fraud taken place at Cookridge Carpets Ltd but there are many possible frauds that can still occur within the system and measures should be taken to avoid these frauds from taking place.
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7.2.2. The SWOT analysis in appendix 2 analyses the weaknesses with the system as: * Because cash is being used in pay packets this could lead to the theft of cash or someone taking more than they should for themselves. * Payroll staff and weekly staff could get together and ensure that they end up being paid more than they should because they are getting paid in cash and changes can easily be made. * Cheques have not been stored securely and have also been signed and left waiting to be filled in for when the owners are absent. This greatly increases the risk of these cheques being used for fraud. * Records of customers and suppliers are not being updated regularly so it would be quite simple to add in a new customer or supplier, one that does not exist and begin making payments to them. * When there is no money in the petty cash tin, the staff tend to casually go to the till and take out however much is required. This would not occur if there was some sort of formal petty cash system. 7.2.3. All of the above frauds, the controls that are currently in place and the recommendations that will be used to improve can be found within a fraud matrix in appendix 3. The matrix will also include the level of risk to the organisation.
8. Recommendations
8.1There are a range of many recommendations that can be used to improve the weaknesses identified above and in appendix 2. 8.1.1.Cookridge Carpets Ltd’s accounting system is decentralised. The computers are all being run on a standalone basis. Cookridge Carpets Ltd should consider purchasing a centralised accounting system. This can be used to complete the sales and purchases ledger and payroll. The computers will have to be networked so that they are all connected in one way and it will enable accounting records to be shared throughout the network. Staff will find it easier to complete jobs if the software and computers can provide them with the relevant and appropriate information. This will also mean fewer errors will be made which will save time and benefit both the organisation and staff. 8.1.2.All staff should be fully trained for the software they will be using as Cookridge Carpets Ltd will not be able to afford to pay out for costly mistakes. When staff know what they are doing they will complete the tasks more efficiently and take less time.
8.1.3.Regular backups of company data should be made to ensure no key information is ever lost if systems were to go down. Backups could also be made on to external hard drives and these hard drives should be taken off site to ensure the information is not lost if something was to happen to the premises. Multiple backups should be made. 8.1.4.If requested, staff should receive formal accounting training. They will then fully understand what role they are taking and what is requested of them. They will also get to know the current rules and regulations and ensure that everything they do is legal and meets current standards. 8.1.5. Staff should be reviewed to find out whether they are completing their hours and if they are coming into work on the days that have been agreed with them. If for some reason some staff cannot make it into work on a particular day; suitable cover should be available to take the place of the missing staff member. The cover should also have a basic understanding of what to do and what is expected of them. 8.1.6.The password that is used for everything should be changed regularly. This will reduce the risk of fraud and keep all staff members on their toes. 8.1.7.After the centralised accounting system has been implemented all members of staff should be paid by BACS. (Banker’s Automated Clearing Systems).
This will ensure all wages will be paid straight into bank accounts to reduce the use of cash and cheques. A major benefit of implementing BACS will be that cash will no longer be calculated incorrectly, there will be no way to steal cash and the chance of fraud will be greatly reduced. 8.1.8.Petty cash is not being recorded correctly so there should be a system in place where everyone knows how much petty cash there is currently available and what to do when you are in need of petty cash. The chance of theft will become very slim and there should be no reason to take out money from the tills. 8.1.9.Tills should be accounted for at the end of day and recorded. This will ensure you have an accurate representation of how many sales you’ve made and how well your doing as a business. This should be done by staff when they are finished and they should be paid for this. This will ensure you reduce the risk of errors and fraud. 8.1.10.Suppliers and customers should only be added to the database under the authority of the owners and or the senior accounts clerk. 8.1.11.Blank cheques should no longer be signed before hand and should be locked away securely.
If the owners are absent then someone with authority should be allowed to sign cheques. This will ensure that there is always someone on hand to cover for the owners and also reduce risks of fraud. 8.1.12.Customers who demand for items on credit should have their background and credit history checked to ensure they will be able to keep up on payments. This will be good for Cookridge Carpets Ltd because they’ll be able to have a good idea on who will be able to pay back their debts and who won’t be. 8.1.13.Another benefit of incorporating a centralised accounts system is that financial reports will be able to be completed to the full enabling the owners and senior accounts clerk to look at and evaluate the organisations current financial position. This will ensure the cash flow is run more smoothly, creditors will be paid and debtors will be chased up. It will help reduce the current over draft and debts that need to be paid will also eventually clear up. This will help Cookridge Carpets Ltd to get into the suppliers good books as a reliable customer who can be trusted to pay back swiftly. 8.1.14.There should be someone with authority apart from the owners of Cookridge Carpets Ltd who should be able to set the new password and be able to operate and manage the system with ease.
9. Cost benefit analysis
9.1. A cost benefit analysis which includes the recommendations to add a centralised accounting system and to train staff so that they are aware of the changes that have been made has been completed as follows: 9.2. Costs
9.2.1.A system that would be suitable for a small to medium organisation such as Cookridge Carpets Ltd would be a package such as Accounts Professional. There are many centralised packages on the market such as Sage 50 Accounts Professional. However a full investigation should be carried out to find what software suits your organisation best. A package with a multi user licence will cost approximately £3000 including VAT. A package should be chosen that is easy to use and has a simple and easy to read manual to ensure staff training goes as smoothly as possible. 9.2.2.A support package would also benefit the company and this would cost £330 including VAT. 9.2.3.Because new software will be purchased the staff would have to be appropriately trained. If the sage software was to be purchased training for each staff member would be done in 3 stages costing a total of £310. 9.2.4. With all this new software and regulations appropriate equipment will have to be used to ensure all computers are networked correctly or on a secure network. Preferably wireless. Wireless connection would be easier to set up and cause less disruption but there is the possibility of losing out on connection at times. This would cost in the region of £1000 – £2000.
9.2.5.There is also a possibility of work being disrupted while installation occurs and although staff will be able to continue with their manual systems, extra hours will still be required to make up for disruptions. This will require around 30 additional hours costing £450. 9.2.6. Another cost that should be considered is the fact that some employees might be comfortable in doing what they usually do without disruptions and all these changes being made. Some may also feel that because of the new system being put into place they can’t carry out their daily routine the way they usually do. 9.2.7.Lastly there’s the cost of producing manuals to ensure staff know what they are doing and understand how the system works. A rota for cover for when staff are absent will also have to be completed and this can be performed by the senior accounts clerk. It would take approximately 20 hours of their time.
9.3.Benefits
9.3.1.The benefits the system will bring will be harder to value. In other words they are less tangible. 9.3.2.The first benefit to the Cookridge brothers will be the complete centralised reports that show the full financial position of the organisation. This will also enable the owners and accountants to ensure the cash flows are effectively being managed. Some of the things that would be included in the produced reports are: * Income statement
* Statement of financial position
* Cash flow forecast
* Payroll reports
9.3.3.Another benefit will be the accuracy of the payroll when produced and the fact that it is up to date on payroll rules and regulations such as tax rates. This can increase accuracy and efficiency of staff time. 9.3.4.The fact that there will be a backup in place would ensure there would be a smaller risk of losing or corrupting data if systems were to breakdown. If one computer were to fail then the support agreement will be able to make sure the computer is up and running again as soon as possible. 9.3.5.A benefit to do with staff will be a higher and improved morale. The accounts team would benefit from some accounts training including formal accounts training if requested. This would help efficiency and effectiveness. They would also have a greater understanding which may also help them enjoy what they do. A higher moral and motivated staff will hopefully lead to the staff being more committed to Cookridge Carpets Ltd. 9.3.6. A final benefit would be that the Cookridge brothers will then be able to comply with regulations such as the Data Protection Act 1998 with secure storage of its information.
