Analysis of Operations

Analysis of Operations

For

LBJ Company

Prepared

10 February 2013

By

Morrow Krum

Partner of

Monroe, Smith & Krum

Operations Consulting

TABLE OF CONTENTS

Cover page.................................................................................................................. page 1

Table of Contents...................................................................................................... page 2

Introduction............................................................................................................... page 3

Analysis of Facts......................................................................................................... page 3

Recommendations.....................................................................................................page 5

Conclusions.................................................................................................................page 7

References...................................................................................................................page 8

INTRODUCTION

1. Purpose of this report:

At the request of Mr. Winston, President of LBJ, Monroe, Smith & Krum were hired to review the complete operations cycle for LBJ and make recommendations for improvements and process adjustment to allow LBJ to move to the next level of corporate operation. This report is not intended to point fingers or bring suspicion on anyone. Its purpose is to assist the company in improving operations and creating a transparent business environment as will be required when the IPO is offered and throughout continuing operations after that point. This analysis will point out what procedures need to be implemented in order for the company to provide the required public disclosures necessary to comply with existing federal regulations, such as "The Sarbanes-Oxley Act of 2002". In the report internal controls will be addressed along with their potential negative impact on the company if not put into place.

The internal controls to be discussed are: (1)

Establishment of responsibilities

Segregation of duties

Documentation procedures

Physical controls

Independent internal verification

Human resource controls

Internal controls which consist of all the related methods and measures undertaken by an organization to ensure that there are safeguards in place to protect its assets and enhance the reliability of its accounting records. Internal controls will help the company increase efficiency in its operations, and ensure compliance with all laws and regulations. (2)

2. Analysis of Facts:

LBJ Corporation is a local distributor, with plans to go public in the near future. The company has to its benefit many long term employees, which is a strong indicator of the value the management team has placed in their employees.

LBJ Company currently has one person who fills the positions of both Treasurer and Comptroller. While some small companies can and sometimes do operate with this type of arrangement, it is preferred that these two positions be separated so as to provide an opportunity to have checks and balances in the revenue and expense area of the company. While it appears that there have not been any improprieties to this point, the separation of these duties will ensure tighter controls in the future. The implementation of the suggested internal controls will also insure that future investors can readily be confident that the company is conducting all business activities in an ethical manner.

A. It has been observed and reported that one person functions as the both the Treasurer and Controller. While it is understandable that from a cost aspect having one person fulfill both functions is maybe desirable, having two people perform these functions will help to ensure that there is a system of checks and balances in place. Going forward activities such as purchasing and issuing payments must be conducted by different people.

B. LBJ Company should consider revamping the way the company deals with petty cash, and how its accounted for. Again it is admirable that company trusts its employees with handling petty cash and providing the necessary receipts. Once the company goes public it will need operating activities that can stand up to the most intense accounting over sight. That being said it is advisable that no one single employee be responsible for the disbursement of and reconciling of the amounts. It can be done by the Treasurer or their assistant. The employees may resist at first but if it is explained correctly it should quickly become an accepted practice.

C. It has been noted that the company has the practice of allowing employee paychecks to sit out in the open for all to view. It is believed that this practice is both bad for morale and can lead to fraud. The fact that employees can see what each other's pay is can lead to morale issues when an employee realizes that they are making less that another employee. The fraud aspect comes in with possibility that someone can steal or alter another's paycheck. It should be a consideration of management to transition the payroll and disbursement of paycheck through a direct deposit system. This will allow the employees privacy in all of their pay transactions, as well as allow the company to save money by automating the payroll department. Should the company not want to perform this function themselves there are many companies that this function can be outsourced to such as PAYCHEX or ADP. (3)

D. The company recently experienced an incident where an employee was caught conducting inappropriate searches on the company's computers.