Cookrige_Carpets

COOKRIDGE CARPETS Review of the Work Activities and Effectiveness of the Accounting System at Cookridge Carpets Contents 1. Terms of reference Page 3 2. Methodology Page 3 3. Executive Summary Page 4,5 4. Introduction Page 5,6 5. Analysis of the current system Page 7,8,9 6. Recommendations for improvement Page 10,11,12,13 to the accounting system 7. Appendices 1. Organisation chart for Cookridge Carpets Ltd 2. Organisation chart for accounts department 3. SWOT Analysis 4. Exposure to fraud at Cookridge Carpets Ltd 5. SAGE 50 Accounts Professional 2012 Cost Analysis 1. Terms of References * This report describes the responsibility of the accountancy system, and makes recommendations for changes to the existing practice of the accounts department. * Investigation into the weaknesses and recommendations for improving existing system and general work environment at the Cookridge Carpets. 2. Methodology The following was undertaken before preparing this report on 28/01/2012 * Familiarisation with the organisation and structure. * Familiarisation with the accounting system and practices. Internet websites were studied to look at the prevention of Fraud within the business environment. Visited websites: ftp://ftp.software.ibm.com/common/ssi/sa/wh/n/wsw14053usen/WSW14053USEN.PDF www.pwccn.com/home/eng/forenic fraud.html http://shop.sage.co.uk/accountslanding.aspx'gclid=CIW0-Nva-K0CFVRItAodIHilqw http://www.emagister.co.uk/association_of_accounting_technicians_aat_nvq_level_3_courses-ec170273862.htm 3. Executive Summary The aim of the report is to identify the areas in the existing accounting system where improvement is needed. This report has identified the problem within Cookridge Carpets accounting department. The area under review * Accounts receivable with special importance on the credit and debit card collection and accounts payable use of manual payments * Payroll internal covering the operating of to payroll systems * Staff training * Accounting system in use * Company procedures The following recommendations * The purchase of an accounting package SAGE 50 Account Professional 2012 * Follow exactly Company policy and procedures * Introduction of time sheets * Increased staff training Results indicate that the accounting area is a concern. Recommendations should remove these concerns, and reduce the duplication of work as well as provide increase efficiency in processing of sales and purchases. Better supervision and internal controls would safeguard the company against of potential fraud. 4. Introduction * Cookridge Carpets established in 2007 by two brothers Peter and John Cookrigde. They employs twenty staff across sales delivery, cleaning and accounts. Refer to Appendix 1: Company Organisation Chart * Cookrigde Carpets Ltd is large carpet, soft furnishing and bed dealership in Southampton. * Company is now the main dealer for Memo@Memory Foam beds and mattresses. * Directors have been very successful in Direct Sales and just began selling carpets over internet. The Company is regulated by the Financial Reporting Council which sets out to monitor and enforce accounting and auditing standards, regulates audits, oversees the regulatory activities of the professional accountancy bodies and * Promotes high standards of internal regulations within companies. * Accounting standards have been developed by the Accounting Standards Board to provide the rules of accounting. * This framework for accounting is presented by Statements of Standard Accounting Practice and Financial Reporting Standards. These items above need to be looked at and addressed to ensure the company is complying with the regulations and that policies and procedures are being submitted to members of the staff. * The external stakeholders are the customers who will need to be provided with an easy means of making payments with the availability of credit terms and finance. Suppliers require to be paid on time with credit terms and discounts negotiated. Banks who lend the company money will need access to management accounts which will include sales, inventory cash held, payables and receivable. Tax authorities will require payments of tax due. * Cookridge Carpets business accounting practises and policies include Payroll, Sales Ledger and Purchase Ledger. As part of a Finance team’s monthly process, it has to produce monthly accounts these should include Profit and Loss (Income Statement), Balance Sheet (Statement of Financial Position) and a Cash Flow Statement. * The accounting function operates the Sales Ledger which means that balances can be given to the sales dept. The accounts department can provide reports to management and order inventory via the purchase ledger. The payroll area of the accounts dept pays the staff salaries. * Financial statements are produced for internal use and can provide the management with information on the financial state of the company. They will enable management to analyse past performance and project for future performance. The Financial statement are also an important source for the external stakeholders who will use them to assess the financial position of the company for example banks, suppliers and HM Revenue and customs. * Financial Statements consist of the Profit and Loss account (Income Statement) which shows all gains and losses recognised in the financial period and should be included in a profit and loss account. The Balance Sheet (Statement of Financial Position) shows the assets, liabilities and the owner’s capital of the business at a particular moment in time for example at the year end. The Balance Sheet follows the accounting equations: Assets – Liabilities = Capital. The Cash Flow Statements only include items concerning the movement of cash and cash equivalents it excludes depreciation charges and bad debts written off. The Cash Flow Statement allows investors and external entities to understand how a company’s operations are running, where the money is coming from and how it is being spent. * All accounts payable transactions are maintained on a Microsoft excel database by the accounts payable clerk, the majority of company payments are made by the raising of manual cheques. The purchase of all stock items is made on credit terms. * Sales Ledger transactions come via a mix of in store sales and the internet business. All sales transactions are processed onto Microsoft word by the accounts receivable clerk. * The majority of company sales are taken under extended credit terms offered by the company, with six months interest free credit offered to all new clients. * The payroll operates on a weekly or monthly system for paid staff and salaried staff. The payroll is operated on the SAGE accounting package with only the payroll clerk having the necessary access and training. 5. Analysis of the current system The accountancy department at Cookridge Carpets is a small (appendix 2 Accountancy department chart). The team currently comprises of one sales ledger clerk, purchases ledger clerk and one payroll clerk. There are two part time staff and one full time member. There will be also one full time senior accounts clerk supervising the account department. The accounts office is located on the first floor with an easy access to all staff and general public. Office it’s often unattended. The security door to accounts office are wide open (the keypad lock is never used) allowing anyone access to what should be a security protected area. There are four computers each for one member of staff. Computers are not connected to the server but they share this same printer. The payroll system is operating on the SAGE Payroll Software on one computer. Inventory system is kept on Microsoft Office Excel Spreadsheets. Two other computers are installed with Windows Vista and also have Microsoft Office 2007. All of them have this same password which compromise integrity of all financial information held and thread to confidential information to be accessed illegally. Company uses few different accounting systems this could leads to duplication of data and could leave business open to fraudulent activity. Cookridge Carpets accounting practices and policies are supported by the relevant parts of accounting system, general ledger, purchases ledger, sales ledger, payroll, costing and credit control. To show which area of accounts department works well and which needs improvement are shown in (Appendix 3 SWOT Analysis). Sonja Douglas Wages Clerk is responsible to prepare weekly and monthly payroll information, and calculates all monies due. She also makes up pockets for the weekly paid staff and BACS for monthly paid staff together and preparing all associated returns and documentation. She has gained AAT NVQ level 2 in payroll. She works 15 hours over two full days per week. Cookrigde Carpets operates two payroll systems weekly paid in cash and monthly paid by BACS. Weekly system has many weaknesses and has resulted in number of missing, incorrectly distributed, calculated wage packets. Showroom mangers are responsible for giving wage pockets to the staff but in practise other members of staff undertake that task. This is a hazard policy which resulted in financial losses for the business. Missing weekly wage for sale person Parton Senna which could not be found anywhere and also another sales person Matthew Perkins was complaining that his weekly wage was given to his wife while he was of on holiday by the supervisor unaware he left his wife, leaving him with no money for the week. Wages should be always given to the employee by authorised person to reduce risk of fraud. Cookridge Carpets dose not has any time keeping system so it can lead to work hours being incorrectly claimed. Company use only staff rotas instead of authorised time sheets, internal control is very poor. Incorrect wages for staff in April, no over time has been added to cover staff sickness has been overpaid. Stefan Kalinowski is an accounts clerk. He works four day a week. He has no formal accounting training but got experience on his last role. His responsibilities are to prepare sales invoices, monthly management information, manage credit accounts and ensure that all payments are made on time. All sale orders are received by showroom store staff for processing, and after completions are passed to the accounts department next morning Stefan can prepare and record the invoices in Microsoft Word which he uses for invoices. There are few concerns regarding handling cash with risk of fraud: * Sale staff should put cash in one bag at the end of the day leaving £100 cash in each till for the following morning, which in practice dose not happens during the week. No reconciliation of individual tills and no check is increasing risk of fraud. Management should make sure that procedures are being followed. The payment for over £700 been completed, had been made with a stolen card and was fraudulent, by middle age lady impaling that she took her husband card by mistake but she knew the pin number. * There is no record of the deposit of £8000 worth of beds to Memo Beds for beds ordered this month show room staff said money was collected but there is no record of this. When Stefan contacted customers to query they said that deposits has been left with sale staff. There is no record of the receipt of 20% deposit by the show room staff. It shows how poor is recording of customers deposits by the sales team. (Appendix 4 Exposure to fraud). Cookridge Carpets offers monthly payment terms to all customers at 6 months interest free credit. After this period an annual interest rate of 28.4% through Westbidge Finance. Company uses credit reference agency for new customers but there is no policy regarding the amount of credit offered to the customer which may result as a thread of bad debts. The company has a policy regarding non payment: * Seven days overdue Stefan will phone a customer * Fourteen days overdue phone call and letter requesting payment * 60 days details passed to debt collection agency, however the Coorige Carpets do not often bothers following through with it because they think it’s expensive. More than 500 customers owed more than £1000 each and all taking advantage of 6 months interest free credit. Over 100 customers had not paid in full in eight months and did not pay an interest, which will result in company paying interest of 8.7% to Westbridge Finance to cover this debt. All this factors contributed to big amount of the company’s overdraft. John had been informed after telephone conversation with the bank manager that the overdraft must be reduced over next four months. Margaret Petreson is the Accounts Payable Clerk and works 20 hours per week. Her responsibilities are to check GRN and purchase invoices, liaise with carpets, beds and soft furnishing suppliers, ensure that all payments are made on time and prepare monthly management information. She has several years of experience but not formal qualification. Most of the company payments are made by issuing company cheques with only Peter and John being able to authorised payments. In practice number of cheques to be signed in advance and left with Margaret for supplier payments. It should be kept in the locked drawer but often cheque book is left in open drawer. Use of cheques for payments it’s costly in terms of time and cost of processing and it could cause potential thread of fraud. In March Margaret been reconciling the orders against inventory levels on spreadsheet, and discovered that £5000 of an expensive carpet was uncounted for. Carpet had been ordered but not sold. After investigation missing carpet couldn’t be found. In April 2010 when Margaret was off Stefan took blank cheque and sent a payment to the irate supplier. He was very busy this week and forgot to inform Margaret of his actions. As each staff member work on their own computer, he did not update the accounts payable system. This could increase the threat of duplicate payments being made and increase the potential for fraud. Present economic climate is increasing number of suppliers requesting 30 day payment terms on the Cookridge Carpets which with poor credit control is leading to liquidity fears for the business. The part time hours and flexible working time of the staff often results in accounts department being unmanned. Staff can only do their own job and can’t cover for various accounting functions which also highlighted in the case study. This poses thread to the smooth running of the accounts department and potential for lost revenue through poor credit control. Company does have policies and procedures but they are not followed most of the time and this has to change in order for the business to function correctly. 6. Recommendations for improvement to the accounting system Segregation of duties A clearer separation of authorisation and responsibilities for example blank cheques should not to be left in the open office, one person should not be responsible to do purchases ledger, authorising invoices and paying suppliers because that is increasing risk of fraud. Solution The Senior Accounts Clerk should ensure segregation of duties. Benefits Reduce potential for fraud. The purchase of the accounting package The main recommendation for Cookridge Carpets is to purchase SAGE 50 Account professional 2012. That is the best option as the business already operates SAGE payroll system. Purchase of SAGE 50 would help with recording of till receipts and cash sales, process of card payment, sales and order processing as well as purchases processing, bank reconciliation and aged debtor analysis. It would need additional staff training. Solution Purchase of SAGE 50 Accounts Professional 2012, training for accounts staff on 3 days training also offered by SAGE. Purchase of SAGE accounting system will bring far more benefits to the company than initial set up costs in terms of time saved, increased customer relations and better financial accountability. It will reduce amount of duplicated work. System will reduce risk of fraud by providing secure payments methods with build in financial controls (see appendix 5 SAGE cost analysis). Benefits Faster more reliable system with clearer reporting structure. Many routine operation will be speeded up saving time and reduce salary costs. Electronic payments to suppliers will also save time and money and invoices will have fewer errors. It helps to take better control over company finance. Produce profit and loss, trial balance sheet reports with just few clicks. Automatically calculate VAT and submit returns online to HMRC. Also bank reconciliation - know what’s in your bank at any given time. SAGE 50 professional accounts will help control over all products, prices and stock levels. For Peter and John SAGE 50 Mobile will allow them to check and manage finances on the move while they away from the office. The only disadvantage is the initial cost of purchase SAGE and staff training but the benefits of it will be far greater then costs. Computers access There are no computer access rights in operation and all computers have this same password. Solution Current users will need to confirm which area of computer packages they required to access to. Senior Accounts Clerk will then need to reduce the access based on the information provided. Computer access should be right for the role. Time to set up password protection is minimal. Benefit is greater security and reduced risk of fraud. Security The accounts staff should make sure that main door and drawers are kept looked when they are not in the office so unauthorised access is minimal. In the interest of data protection and customer data held at the office this should be done. Policy and procedures Cookridge Carpets dose have some policies and procedures but they are not always followed by staff and management. New policies and procedures need to be introduces and staff made aware of them. Management should control that policies and procedures are followed to reduce risk of fraud and lost revenue. Staff should sing that they read and understand policies and procedures and have manual in need the staff to refer to. Cash receipts should be recorded by member of staff and then signed by an authorised manager before being taken to the accounts office. Reconciliation of the tills should be done at the end of each day and ensure that they balance. Company policy for non payments should be adjusted depending on the business cash flow. Staff work hours Company should put time sheets in place for all staff to avoid the risk of inaccurate recording of hours worked and authorised by manager in charge before being sent to the payroll section for payment. Company should review employees working hours in accounts department and make sure that there is always member of staff in the office. Staff training Member of staff in accounts department are able only to carry out their own individual work in their own areas. Multi tasking can be very good motivator for employees and great benefit for the company so that they can support another person work in time of absence (holidays or sickness). Development program should be prepared in order to improve technical skills of the staff. Plans should be discussed with staff and if agreed, documented and formalised within the training program. All training and development should be recorded as continuous professional development hours within their own personal files. Once the raining is put in place it should be evaluated to ensure the success in achieving the learning objectives of each member of accounts team. All staff should receive training for SAGE 50 Accounts Professional 2012. Stefan asked John about receiving some accounts training and John was very happy and would be willing to pay for it. Stefan could start AAT NVQ level 3 at Southampton City College for £620+ Vat course duration 9 months. This would give Stefan a better understanding of accounting and benefit the company. The purpose of internal controls is to provide assurance to managers that the risk of serious errors in the financial records is minimised, assets of the business are safeguarded, liabilities are identified and properly recorded and to make sure that financial records are kept up to date and as accurately as possible. Such controls should include system of authorization and approval, separation of duties, physical control over assets and internal auditing. Internal control systems at Cookridge Carpets are not effective and need to be addressed. Supervision Systems of internal control should include supervision so that day to day procedures are being followed. Cookridge Carpets is a small business but is growing, so does the risk of larger frauds being committed. When it is not possible to apply enough control, the directors should at least be aware of the risks, and make decisions accordingly. Having more than one person involved in an accountancy process or a series of transactions greatly reduces the chance of fraud or theft being committed. Managers need to carry out more checks on transactions to ensure that the risk of fraud is reduced. Although there are initial investments required for the upgrade of the computer systems and segregation of duties may lead to staff having to learn more roles and duties which they may feel uncomfortable with, the overall benefits will outweigh the costs in the longer term. As the company grows the efficiency and speed of the updated computer accounts package will improve accuracy of stock and payments, save time on the accounts and therefore staff costing. The segregation of duties will cut down on any fraudulent transactions. Cookridge Carpets Ltd has a great potential in the market place which could develop into a larger and more profitable business as a result of their diversification into the soft furnishings, beds and carpets. In order to support the business over the longer term, the implementation of the recommendations will allow the business to prosper and grow within a structured environment and improve profitability over the long term, with a faster more reliable and efficient accounts function, and a more professional, accurate image. APPENDICES Appendix 1 Organisation chart for Cookridge Carpets Ltd Appendix 2 Organisation chart for the Accounts Department Appendix 3 SWOT Analysis Strengths Cookridge Carpets has a small accounting department which is easy to control and manage. Sales Ledger Uses a credit reference agency to ensure potential new customers have no history of poor credit. There company has a policy regarding non payments and process in place for debt recovery. Purchase Ledger All inventory purchases are maintained on Excel spreadsheets to show suppliers, cost prices, selling prices, profit margins and re-order levels and quantities. The company purchases all inventory on credit terms. Cash and banking Cash and cheques received from customers into a day book to record the receipt, and update the ledger accounts. Wages and salaries Wages Clark is running the payroll system. Salaried staff is paid monthly by BACS. Weaknesses Managing workloads within small team can be sometimes difficult and not always managed correctly. Checklists should be provided to prioritise tasks. Efficiency of accounting functions may be not high enough if there is no use of full potential of software and systems. Training could be provided to improve skills and efficiency of staff. Sales Ledger Once credit score is checked ,new customer is granted an unlimited line of credit. Company do not follow procedures with debt collection agency as owner’s thinks it is an expensive option. Purchase Ledger Peter is involved in the purchasing of goods and has favourite group of supplier, mainly because they willing to sponsor his motorbike building and racing, which could potentially be a fraud risk and possibly paying inflated prices for the goods without room for negotiation of terms. Quite often the cheques are signed blank. Cash and banking Only for cheques there are authorised signatures required. All cash and cheques from the tills are removed and bagged as takings from the tills, and stored in accounts office safe. Tills are not reconciled which could result in the theft of cash. Only one person is responsible for entering cash and cheques in the books and do banking which could be risk of fraud. Wages and salaries All staff expect those in the accounts department, are paid weekly in cash. Any member of the sale staff who is not busy gives out pay packets. There is also no timesheets for staff to sign on the start and end of their shift. Opportunities Cookridge Carpets are expanding especially the internet sales which could be great success for the company. It could help if they improve computer accountancy system. Sale Ledger Company should look at the losses regarding non paying customers and go ahead with debt collection. Stefan should do accounting training. Purchase Ledger Potentially getting new suppliers could get company better deal and reduce risk of fraud. Also would be useful to try renegotiating credit terms with suppliers. Wages and salaries Only BACS should be used for paying wages for staff. Clocking cards should be used to ensure that correct amounts are being paid. Threats Sales Ledger Potential cash flow problems due to money owed by credit customers. There is also big bank overdraft. Purchase Ledger Because suppliers are on friendly bases with the owner they may not be giving the best offer for Cookridge Carpets. This should be checked by senior staff management on the regular bases. Cash and banking One person is putting cash and cheques and then banks them make great opportunity for cash being stolen as no one else is checking the amounts entered. There is also no record of amount of money kept in the safe. No one is reconciling petty cash. Whoever takes money from petty cash is only told to put a note of how much was taken and what for which in practice often does not happens. Wages and salaries Anyone from sale staff can collect money from accounts department which is risk of theft. Appendix 4 Exposure to fraud at Cookridge Carpets Fraud is the use of deception with the intention of obtaining or causing loss to someone else or an organisation. Fraud normally is a combination of theft, falsification or collusion (set up between employee and someone from the outside the organisation). Detecting fraud can be achieved by observing staff by managers or owners and good management. There are many areas of potential fraud to be committed within Cookridge Carpets systems and the risk assessment should be completed and include setting up risk management group to identify objectives, identify areas of fraud, grade the scale of risk in each case, develop strategy to manage the risk, setting up system to detect and deal with fraud and get up and running as well as monitor the system. Appendix 5 SAGE 50 Accounts Professional 2012 Cost Analysis SAGE 50 Accounts Professional 2012 | £1135.00 | +VAT @ 20% £227.00 | £1362.00 | Total Purchase Cost | | | £1362.00 | Staff Training from SAGE - 5 days | £865.00 Per Person x3 £2595 | + VAT @ 20% £519 | £3114.00 | STAFF HOURS LOST FOR TRAINING | | | | Sonja Douglas | £16000 / 52 = £307.69307.69 / 37.5 = £8.218.21 * 15 hrs = £123.15123.15 / 2 days =61.57 per day * 5days = £ | £307.85 | £307.85 | Margaret Peterson | £16000 / 52 = £307.69307.69 / 37.5 = £8.218.21 * 20 hrs = £164.20164.20 / 2.5 days =65.68 per day * 5 days = £328.40 | £328.40 | £328.40 | Stefan Kalinowski | £16000 / 52 = £307.69307.69 / 37.5 = £8.218.21 * 37.5 hrs = 307.87307.87 / 4 days =76.96 per day * 5 days = £384.80 | £384.80 | £384.80 | The total cost for THE SAGE package and staff training | | | £5497.05 |