Lesson 12 Internal Control and Business Ethnics

1. Lesson 12Internal Control and Business Ethnics Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University Slides Content 1-3 Learning objectives 4-12 Internal controls-link 13-17 Petty cash-link 18-21 Banking activities-link 22-38 Bank reconciliations-link 39-40 Appendix 9A 41-46 End of chapter and link slides Slides Content 1-3 Learning objectives 4-12 Internal controls-link 13-17 Petty cash-link 18-21 Banking activities-link 22-38 Bank reconciliations-link 39-40 Appendix 9A 41-46 End of chapter and link slides

2. 2 Outline The Fundamental Principles of Internal Control Internal Control to Cash Explain and Record Petty Cash Fund Transactions. Prepare a Bank Reconciliation Exploring the Concept of Accounting Ethics Accounting Ethics and Social Responsibilities Accounting Ethics and Decision Making

3. 3 Opening Story The Failure of Firms and Internal Control Enron Worldcom CAO

4. 4 Opening Story China Aviation Oil (Singapore) Corp., an overseas arm of China's main jet-fuel supplier, revealed the end of 2004 that it has racked up about $550 million in trading-related losses.

5. 5 Today’s organizations are concerned about: Risk Management Governance Control Assurance (and Consulting)

6. 6 Internal Control Internal Check Internal Control Internal Control Structure Internal Control-----Integrated Framework ERM

7. 7 Internal Control What is internal control? It is the organizational plan and all the related measures that an entity adopts to… safeguard assets, encourage adherence to company policies, promote operational efficiency, and... ensure accurate and reliable accounting records.

8. 8 Establishing an Effective System of Internal Control Characteristics of an effective internal control system include: Competent, reliable, and ethical personnel Assignment of responsibilities Proper authorization Separation of duties

9. 9 Separation of Duties

10. 10 Internal Controls for e-Commerce

11. 11 Internal Controls for e-Commerce What is an encryption? It is the primary method of achieving confidentiality in e-commerce. Plain-text messages are rearranged by some mathematical process. The encrypted message cannot be read by anyone who does not know the process.

12. 12 Internal Controls for e-Commerce

13. 13 The Internal Control Integrated Framework

14. 14 ERM Defined: “… a process, effected by an entity's board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risks to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.” Source: COSO Enterprise Risk Management – Integrated Framework. 2004. COSO.

15. 15 Why ERM Is Important Underlying principles: Every entity, whether for-profit or not, exists to realize value for its stakeholders. Value is created, preserved, or eroded by management decisions in all activities, from setting strategy to operating the enterprise day-to-day.

16. 16 Why ERM Is Important ERM supports value creation by enabling management to: Deal effectively with potential future events that create uncertainty. Respond in a manner that reduces the likelihood of downside outcomes and increases the upside.

17. 17 Enterprise Risk Management——Integrated Framework This COSO ERM framework defines essential components, suggests a common language, and provides clear direction and guidance for enterprise risk management.

18. 18 The ERM Framework Entity objectives can be viewed in the context of four categories: Strategic Operations Reporting Compliance

19. 19 The ERM Framework ERM considers activities at all levels of the organization: Enterprise-level Division or subsidiary Business unit processes

20. 20 The ERM Framework Enterprise risk managementrequires an entity to take a portfolio view of risk.

21. 21 The ERM Framework Management considers how individual risks interrelate. Management develops a portfolio view from two perspectives: Business unit level Entity level

22. 22 The ERM Framework The eight components of the framework are interrelated …

23. 23 Fundamental Principles of Internal Accounting Control

24. 24 Fundamental Principles of Accounting Internal Control

25. 25 Limitations of Internal Accounting Control

26. 26 Limitations of Internal Control

27. 27 Cash Is an important asset for every company. Control of cash on hand and access to it is critical. Cash includes: Currency Coins Deposits in bank accounts Other items acceptable for deposit

28. 28 The Bank Account as aControl Device Documents used to control a bank account include: signature card deposit ticket check bank statement bank reconciliation

29. 29 Liquidity Refers to how easily an asset can be converted into another asset or used in paying for services or obligations. Examples: Cash- highly liquid A specialized piece of equipment -not very liquid.

30. 30 The Bank Reconciliation What are two records of a business’s cash? Cash account in the business’s own general ledger. The bank statement which tells the actual amount of cash the business has in the bank.

31. 31 The Bank Reconciliation Items recorded by a company not on the bank statement: deposit in transit outstanding checks

32. 32 The Bank Reconciliation Items on a bank statement and not recorded by the business: bank collections bank fees interest earned on account NSF checks

33. 33 The Paths That Two Checks Take (Good Check)

34. 34 The Paths That Two Checks Take (NFS Check)

35. 35 The Bank Reconciliation Example

36. 36 The Bank Reconciliation Example

37. 37 Sahita’s books indicates a cash balance of $66,647. A deposit of $11,250 was mailed to the bank on June 30. Checks issued in June for $8,000 have not yet been paid by the bank.

38. 38 The Bank Reconciliation Example

39. 39 The Bank Reconciliation Example

40. 40 The Bank Reconciliation Example

41. 41 Record Reconciling Items

42. 42

43. 43 Record Reconciling Items June 30, 200x Bank Service Fees 12 Cash 12 Bank service charges

44. 44 Internal Controls for Cash Guidelines: Separate handling of cash from recordkeeping of cash. Deposit cash receipts daily. Make cash disbursements by cheque.

45. 45 Cash ReceiptsOver the Counter

46. 46 Cash ReceiptsOver the Counter

47. 47 Cash Receipts by Mail All incoming mail should be opened by a mailroom employee. This person should compare the check received with the remittance advice. Cash receipts should be given to the cashier. The mailroom employee forwards the remittance advice to accounting. Many companies use a lock-box system. Customers send their checks directly to an address that is a bank account. Company personnel do not handle the cash.

48. 48 Cash Short and Over

49. 49 Petty Cash System of Control Good internal control procedures require cash disbursements be made by cheque. The exception: Small payments requiredin most companies for items such as postage, courier fees, repairs and supplies.

50. 50 Control of Cash Disbursements All expenditures should be made by cheque. The only exception is for small payments from petty cash. Separate authorization, cheque signing and recordkeeping duties. Apply a voucher system.

51. 51 Control OverApproval of Payments The accounting department... combines all of these documents, checks them for accuracy, and... forwards this disbursement packet to designated officers for approval and payment.

52. 52 Controlling Petty Cash Payments On June 15, Sahita Inc. manager decided to establish a $250 petty cash fund. What is the entry?

53. 53 Controlling Petty Cash Payments Jose is the petty cash custodian responsible for the fund. On June 20, he purchased supplies in the amount of $70. For each disbursement, he prepares a petty cash ticket. At all times the amount of cash in the petty cash fund plus the petty cash tickets must equal $250.

54. 54 Controlling Petty Cash Payments Jose also spent $20 for delivery charges and $60 for coffee and other miscellaneous expenses. What is the journal entry to record the replenishment of the fund?

55. 55 Controlling Petty Cash Payments

56. 56 Ethical Values Do Matter! In making judgment, the Early Kings were perfect, because they made more principles the starting point of all their undertaking and the root of everything that was beneficial. This principle, however, is something that persons of mediocre intellect never grasp. Not grasping it, they lack awareness, and lacking awareness, they pursue profit. But while they pursue profit, it is absolutely impossible for them to be certain of attaining it. --Lv Bu-wei 246BC, The Annals of Lv Bu-wei, Lu Shi Chun Qiu

57. 57 Ethical Values Ethical values have been changed immensely in the last century. Ethical and moral values provide a foundation to society on how to function, live, and work within the society. Ethical values provide the foundation on which a civilized society exists. Without the foundation, civilization collapses.

58. 58 Enron Cartoon

59. 59 Economic Boom and Ethics The boom of the 1990's -- changing the business environment, reshaping corporate leadership. Financial scandals and out-of-hand executive compensation -- a lapse of ethics and unprecedented greed, a disdain for the rule of law. The most pressing leadership issue for today ---ensure that corporate officers behave in an ethical manner.

60. 60 Ethical Issues in Accounting CEO ---- daily share price v.s. long-term corporate value Current compensation practices—overstate earnings to boost pay short-term behavior excessive risk-taking aggressive accounting methods Legislation ---- tackle the accountingirregularities issues caused byunethical executives. (G.Bush signed into law “Sarbanes-Oxley Act of 2002”)

61. 61 Purposes of Ethics Direct business men and women to abide by a code of conduct that facilitates, if not encourages, public confidence in their products and services. In the accounting field, professional organizations such as the AICPA, IMA, maintain and enforce a code of professional conduct for public accountants They recognize the accounting profession's responsibility to provide ethical guidelines to its members.

62. 62 Can One Person Make A Difference in Business Ethics? I am only one. But still I am one. I cannot do everything, But still I can do something; And because I cannot do everything I will not refuse to do the something that I can do. ---Edward Everett Hale

63. 63 Who Takes the Lead? At this moment, America’s highest economic need is higher ethical standards --- standards enforced by strict laws and upheld by responsible business leaders. George W. Bush, Corporate Responsibility speech July 9,2002

64. 64

65. 65 Ethics and Social Responsibility

66. 66 Social Responsibility Donations to not-for-profit organizations Programs to reduce pollution and better use natural resources Programs to improve worker and consumer safety Paid time off for workers

67. 67 Guidelines for Ethical Decision Making

68. 68 Professional Code of Ethics Accountants are held to very high standards of conduct. There is no compromising. Would you hire an accountant who is “almost always” honest? Internal controls rely upon basic honesty and integrity.

69. 69 Summary The Fundamental Principles of Internal Control Internal Check; Internal Control; Internal Control Structure; Internal Control Integrated Framework; ERM. The Internal Accounting Control The Purposes and Principles of Internal Control. Internal Control to Cash Record Petty Cash Fund Transactions. Prepare a Bank Reconciliation. Ethical values have been changed immensely in the last century Ethics are closely related to social responsibility Ethics influence people’s decision making

70. 70 Case for Discussion This connection will direct you to the complete case “HOW DO YOU MEASURE SUCCESS?” (Click on the title of case)

71. 71 Case for Discussion This connection will direct you to the complete case “Ethics and Enron?” http://www.businessethics.ca/enron/

72. 72 Case for Discussion CCC company is a young business that has grown rapidly.The company’s bookkeeper,who was hired two years ago,left town suddenly after suddenly after the company ‘s manager discovered that a great deal of money had disappeared over the past 18 months.An audit disclosed that the bookkeeper had written and signed several cheques made payable to the bookkeeper’s sister,and then recorded the cheques as salaries expense.The sister,who cashed the cheques but had never worked for the company,left town with the bookkeeper.As a result,the company incurred an uninsured loss of $ 600,000.

73. 73 Evaluate CCC company’s internal accounting control appear to have been ignored in this situation. Case for Discussion

74. The End of Lesson 12