J.C. Penney Gift Certificate Concerns
J.C. Penney Company, Inc. has recently introduced a new point of sale (POS) system developed by NCR Corporation into their stores. In the first six months of operation, it has become apparent that there are unanticipated problems with the accounting and control functions pertaining to gift certificates. The new POS system does not provide for adequate tracking or control of the certificates on the sales floor, store level sales audit has inadequate procedures or data capture capabilities in place to track sales accurately and assign responsibility for missing certificates, and corporate accounting has no control over the gift certificate accounting on the store level and are constantly struggling to reconcile gift certificate information.
Problems on the Sales Floor
At the POS terminals on the sales floor, gift certificates are being stored underneath the cash register in a drawer with no security or control. The security and control of gift certificates has been overlooked during the drafting of the procedures for the new POS system. As a result, the security and control on gift certificates on the sales floor that had been in place with the old system has simply stopped. Employees are purely on the “honor” system.
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When sales associates ring up a gift certificate sale they have to key 1) the appropriate twelve-digit SKU from a list of 3 choices, and 2) a dollar value for the gift certificate shown on the face. For example, SKU #1 represented the $25 gift certificate, SKU#2 represented the $50 gift certificate, and SKU #3 represented the $100 gift certificate. After the sales transaction is complete, the sales associate must manually record the dollar value of the gift certificate on their cash audit report. During times of high volume, sometimes this final step is overlooked.
Typically, the cashiers are just keying SKU #1 for any gift certificate sale and keying in the appropriate dollar value from the face of the gift certificate. The SKU’s are not electronically tied to a dollar value. This is a limitation of the previous POS system that was not addressed during the testing stage of the new system. Therefore, the error rate is very high and discrepancies in gift certificate sales are common. At the close of the shift, an electronic cashier report is generated on the register that just shows a total dollar amount tied to a SKU. This electronic cashier report is returned to the cash room along with the receipts and the hand-written cash audit report.
Problems in Store Level Sales Audit
When the cash audit report comes back to the office with the bag of receipts and the electronic cashier report, calculations are performed on the manual cash audit report to identify the amount of gift certificates sold. This is compared to the electronic cashier report. If there are discrepancies, sales audit clerks are required to use the electronic cashier report as the “correct” report for auditing purposes. The dollar amount of the gift certificates sold is recorded on a monthly gift certificate log and a new running monthly balance is calculated. Any new gift certificates received from the corporate office are recorded on another log and the acknowledgement of receipt (from inside the book) is signed by a member of management and returned to corporate accounting. At the end of the month, records of gift certificate receipts (disbursements from corporate), records of gift certificate sales, and other accounting records are forwarded to corporate accounting for verification after an attempt on the store level for reconciliation.
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Problems in Corporate Accounting
Store managers are responsible for calling and authorizing a book of gift certificates to be dispersed for their store. When this occurs, the gift certificates are retrieved from the vault, the book number is logged, and the dollar value of the book is tentatively charged to the store. When the acknowledgement of receipt from the store is received, it is compared against the store’s records, the charge for the gift certificates is confirmed, and then the acknowledgement is filed away. Once a month, corporate accounting receive sales audit information from the stores and attempts to reconcile, but typically have no better luck than the store level audit clerks.
Analysis of Problem
It is very evident that there needs to be a drastic change in the J.C. Penney gift certificate tracking procedure from corporate accounting all the way down to the sales floor. Lax security and control, poor procedures, and inadequate testing of the hardware and software involved has created a very unstable situation with potentially large ramifications. Without quick remedy, potential financial losses could be staggering. In looking at this project, it is important to prioritize the underlying problems that are creating the unstable environment. The areas that need to be addressed are point of sale, sales audit, and corporate accounting respectively.
First, and perhaps the most important, is to look at your sales floor and gain control of your gift certificates. These items are the same as cash and should be treated as such. Gain immediate control of your POS to track sales and establish accountability. Modify your POS, Sales Audit, and Corporate Accounting Procedures to implement tightly coordinated controls over the sale, sales audit, and accounting functions. Second, the inadequacies in the hardware and software need to be addressed. Can minor changes in the configuration of the hardware or minor changes in your software code eliminate potential methods of shrinkage? If not, can there be changes made to the gift certificate design to help eliminate shrinkage? Maybe it would take a combination of both. A definite audit trail of every transaction is a necessity. Give yourself the ability to audit each register transaction by transaction.
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If you use a computer to record your business activity and maintain this data electronically, you are a candidate for an electronic audit. * What are the Benefits of e-Auditing? •It saves time – Electronic audits are completed much faster than traditional, manual audits. Company personnel and tax auditors spend less time working on the audit. •It saves paper – Electronic tax auditing reduces the ...
Once control is achieved on the sales floor, the majority of problems in the back office sales audit area will take care of themselves. It is imperative, however, that a tight control on cash, as well as, gift certificates be maintained. When looking at possible hardware and/or software modifications on the sales floor, be sure to keep in mind that the back office sales audit area might benefit from having the ability to look at information in real time.
After attacking the back office sales audit area and getting them lined out procedurally, things should also begin to shape up in the corporate accounting area. If the procedures pertaining to gift certificates on all three levels have been coordinated, cooperation between the different levels will be easier to foster. The gift certificate area of corporate accounting should only be in the business of procuring and dispersing gift certificates to retail stores, verifying sales audit information pertaining to the certificates, and reporting to upper management and other areas, information concerning gift certificate sales and redemption.
After reasonable control over the immediate financial instability has been achieved, focus on each individual level that has been identified in the order of importance in more detail. Initially, the focus should have been on creating some security and control, clear lines of communication, consistent procedures and definite audit trails. Now the focal point should be on minute parts of each area of distress and priorities should be established to handle those items.
Possible Alternatives
In the point of sale area, the general idea is “the simpler it is, the harder it is to make a mistake”. The entire POS process should be reviewed in its entirety to identify any areas that can be streamlined. After all, the shorter the line is, the happier the customer is. Can any changes be made in hardware or software configurations that would speed up the process? In this case, a change in software code coupled with a change in the design of the gift certificates to incorporate bar codes that tied a SKU number and a dollar value would certainly seem to make a huge difference on the error rate and make sales audit on the store level and the corporate level much easier. The number of keystrokes required per transaction on the sales floor could also be reduced with this change. The use of real-time POS information would also be beneficial to store management as well as management on the corporate level.
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For the store level sales audit clerks, the sales audit process should be reviewed to see if software code changes (already suggested for POS) could be modified even further to automate the sales audit procedure where gift certificate information would simply be verified on the store level and passed on electronically to the corporate office eliminating the manual accounting. Receiving new gift certificates on the store level would be a simple matter of scanning the new book verifying receipt. No more manual logs.
On the corporate accounting level, there would be very little paper generated during the sales audit process. Procurement of gift certificates could be enhanced reducing the on-hand inventory of gift certificates because management would be able to establish trends in gift certificate sales and order accordingly. Security and control would be significantly enhanced, and, theoretically, every gift certificate in circulation could be tracked individually allowing the company to know, at any moment in time, their gift certificate liability.
The important thing to remember when you tackle a problem, regardless of the type, size, company, etc., is to involve the people directly affected by the problem in its resolution. Give them “ownership” of the problem and they will give you all the answers you need to make the most rational and logical decision.
