Internal Controls And Its Effects On The Oversight Of Management

930 WordsDec 20, 20144 Pages
INTERNAL CONTROLS Several important internal controls were lacking that may have prevented the fraud. Overall, there was a lack of the control environment in that: 1. management lacked a commitment to ethics and integrity 2. the Board of Directors was ineffective in their oversight of management 3. organizational structure was ineffective, and 4. employee were incompetent or fearful about losing their jobs. Management commitment to ethics was clearing lacking due to their fruadulant activity. A recurring theme in the fraud is the improper recognition of revenue. There must be an independent and effective audit committee within the board of directors to assess management’s revenue recognition policies and estimates. Additionally, management’s attitude toward financial reporting was aggressive. This red flag should have alerted the board of directors and the auditors to ascertain whether management was complying with GAAP due to their financial reporting philosophy. Just for Feet did not maintain an effective organizational structure. An example of an internal preventative control that was lacking or circumvented is proper segregation of duties. As an example, Just for Feet Vice President Ruttenberg was able to influence and dictate accounting policies to accounting personnel outside his direct reporting line. The organizational structure of a business should segregate duties related to authorizing transactions, record keeping of transactions, and custody of assets.

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