Review of the Accounts Payable function at Chic Paints Limited
Name: Asfhan Sheikh
AAT Number: 20076817
Centre: Kaplan Financial Manchester
I testify that the following report is my own unaided work and a true reflection of the organisation.
Signed: Asfhan Sheikh Dated: 06/09/2017?
Table of Contents
1 Terms of Reference 3
2 Executive Summary 3
3 Methodology 4
4 Introduction 5
4.1 Business Overview 5
4.2 System Overview 5
4.3 Standards and Regulation 5
4.4 Stakeholders 6
5 Review of the Accounts Payable Function System 7
5.1 Staff 7
5.2 IT 7
5.3 Suppliers 7
6 Ethical Evaluation of the Accounting Systems 8
6.1 Integrity 8
6.2 Objectivity 8
6.3 Professional Competence and Due Care 8
6.4 Confidentiality 8
6.5 Professional Behaviour 8
7 Sustainability Evaluation 9
8 Recommendation 10
9 Cost Benefit Analysis 11
10 Appendix 12
10.1 Organisation Chart for Chic Paints Ltd 12
10.2 SWOT ANALYSIS 12
10.3 Fraud Matrix 12
10.4 Ethical review of the Accounting System 13
10.5 AAT Code Of Ethics 13
10.6 Internet Sources 14
1 Terms of Reference
1.1.1 The report has been written to cover the requirements of the Level 4 ISYS Unit of the AAT accounting qualification
1.1.2 The report looks at the Accounts Payable function at Chic Paints Ltd and suggests recommendations to help improve this accounting function.
1.1.3 The report also reviews Chic Paints Ltd commitment to sustainability and ethical issues that may be present.
2 Executive Summary
After a review of the accounts department at Chic Paints Ltd a number of issues and weaknesses were discovered with the accounts payable function.
The outcome of this report is that the company invests in a new, sophisticated accounting software which is long overdue and integrate the function of the accounts department into one package, for example Oracle iProcurement.
Recommendations and improvements have been provided in this report for Chic Paints Ltd so that the company can understand the importance of having ‘Code of Ethics’ and ‘Sustainability’ and ‘adherence to the regulations.’
By also implementing the recommendations, staff morale will improve as employees will be engaged with the company through continuous professional development programs, team activities,
The company must implement a change to pay all suppliers and wages by BACS to improve integrity and reduce fraud.
This report has been produced at the request of the Directors of Chic Paints Ltd. The Directors have asked the accounts staff to prepare some brief information. It outlines a diary for the 6 months period from March 2013 until August 2013, an overview of each employee within the accounts department and an overview of the accounting system.
An organisation structure of hierarchy has been produced to show the name and position of staff within the accounting department from the Finance Director to the Accounts Payable Clerk (Appendix 10.1).
A SWOT analysis has been produced to identity the strengths, weaknesses, opportunities and threats to Chic Paints Ltd (Appendix 10.2).
A Fraud Matrix has been produced to identity the risks of fraud to Chic Paints Ltd (Appendix 9.3).
An Ethical Review has been investigated to ensure Chic Paints Ltd is meeting the 5 fundamental principles of ethical conduct (Appendix 10.4).
A sustainability report has been produced to understand Chic Paints Ltd sustainability principles to corporate, social and environmental issues (Appendix 10.5).
This report has also been compiled using information on how to improve accounting systems from Kaplan textbooks of External Auditing, Financial Statements and Budgeting. Information available on the internet has been used (Appendix 10.6). ?
4.1 Business Overview
Chic Paints Ltd is a large company that specialise in producing the niche paint materials for boats, cars and industrial machinery. CPL was formerly part of Ashtead PLC and was part of a management buyout six years ago by the five directors.
The chargeable accounting period of the business runs from 1 July 2012 until 31 July 2013.
In the six years turnover of the business has declined from £200 million to £120 million, gross profit margin has risen from 12% to 30%, and net assets increased from £20 million to £25 million. Also the company has reduced its workforce from 500 employees to 350 employees.
4.2 System Overview
The accounts department employs eight people which consists of a Finance Director, Chief Accountant, Purchase Ledger, Accounts Assistant, Receivable and Credit control, Payroll Clerk, Costing Technician and Accounting Systems Technician.
The purpose of the Purchase Ledger is to reconcile supplier accounts from goods being received to payment been made. The accounts payable staff will enter invoices on the ledger that have been approved. Then the department will produce an aged creditors report and then make BACS payments to repeat suppliers within the payable terms.
The Accounts payable function use Microsoft Office 2010 Excel spreadsheet and a proprietary software. At the end of each month all transactions from excel spreadsheet are updated on the general ledgers of the proprietary software.
The company uses a computerised inventory system to record all buyer purchase orders.
As a manufacturing based company, the company uses a traditional costing and variance analysis system, a stand-alone full absorption costing system running on proprietary cost wise software,
Sage 50 Payroll system, and a Computer Aided Design/Computer Aided Management (CAD/CAM) system to control the manufacturing of niche paint products.
4.3 Standards and Regulation
The Data Protection Act 1998 controls the personal information of Chic Paint’s employee payroll and HR information. This ensures information is kept confidential.
The Money laundering regulations 2007 protects the business from criminal proceeds of money through placement, layering and integration.
Health and Safety regulations protect the employees from risks of accidents, fire. The business is obliged to have risk assessment done and keep an accident handbook in the event of an accident at work, for example employee tripping on the stairs.
Financial statements are prepared in accordance with the International Financial Reporting Standards, UK Generally Accepted Accounting Principal (UKGAAP) and the Companies Act 2006.
The annual Financial statements include Statement of Financial Position, Statement of Profit or Loss, Statement of Changes in Equity and Statement of Cashflow. The statements are produced for the interest of the Directors, Suppliers, Creditors, Government, Shareholders, Bank, Auditors, Staff and Consumers.
The Statement of Profit or Loss provides information on the performance of Chic Paints Ltd as well as gains or losses that are not recognised in the profit or loss. It will record all revenue, losses and expenses over a set period to show Profit ; Loss. It will typically provide information on the profitability and financial performance to investors and creditors.
The Statement of Financial Position also known as balance sheet provides information of Assets, Liabilities and Equity. The purpose of the balance sheet is to show the financial position of the business on any day. The Finance Director and Bank will understand the liquidity of Chic Paints Ltd and help the business understand whether it can meet its obligations from the cash at bank. It will also help Chic Paints provide the balance sheet to the bank for its loan agreement.
The Statement of Cash Flow provides information on the financial adaptability of Chic Paints Ltd to the Chief Accountant, investors, lenders and creditors. It shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks down to operating activities, investing activities and financing activities.
Internal Stakeholders are people that are committed and serve to be part of Chic Paints Ltd, which include directors, employees and shareholders. Shareholders are interested in the business maximising profits to receive high dividends, while as employees are motivated to earn higher wages and have job security.
External stakeholders are groups influenced by and not within Chic Paints Ltd. They are who care about or who are affected by the activities of the company. They are the suppliers, customers, creditors, government (HMRC).
The HMRC regulation ensure that the business produces quarterly VAT returns, National Insurance contributions class 1 and 1A, Annual Financial Statement, and pay its corporation tax liability. For example, the corporation tax liability for 2012/13 is paid quarterly by POA on 14th October 2012, 14th January 2013, 14th April 2013 and the balancing payment on the 14th July 2013.
5 Review of the Accounts Payable Function System
Most of the staff have been employed for more than 2 years, have qualification and are qualified also by experience. However due to the costing Technician being off sick for few weeks, CPL paid £3000 to an external agency employee to do the duties of the costing technician.
The accounts payable clerk is only qualified to AAT Level 2 is not offered any continuous professional development, no further training and no study support to progress in the career.
The warehouse staff have an unprofessional behaviour because they are gaming on the stores computer and they were signing the GRN’S without checking that actual quantities had been delivered. They were unaware of checking GRN’s.
The internal controls are set by the IT policy (see Appendix). There has been a breach of security as the account payable member accidently accessed the general ledger.
The personal computers were purchased 3 years ago. The PC’s are password protected and backed up twice a day by IT. The computers are using the latest version of Excel software 2013 with a Windows 7 operating system. The personal computers have inadequate protection from trojans, viruses and spyware as there is no anti-virus software installed.
The proprietary software and excel is not tailored for the needs of the Accounts payable function.
The company has vetted its suppliers and deals with 30 approved suppliers for who provide Chic Paints Ltd with medium term stability on pricing and quality.
The accounts payable produces the aged creditors report and makes payment to the supplier according to the terms of payment and engagement by CPL conditions. However, the company has cash flow problems due to a poor working capital cycle. Therefore the ad hoc payment processed by cheque are delayed and suppliers are misinformed that the payment is in the post. The business needs to improve its integrity with the suppliers.
6 Ethical Evaluation of the Accounting Systems
This report has reviewed the 5 core principles of AAT’S code of ethics which include Integrity, Objectivity, professional competence and due care, confidentiality and Professional Behaviour. The report has identified the potential breaches of the accounting systems and made recommendations to reduce the risks of breaches in the future.
Supplier payments are being delayed when the business has cash flow problems. Delayed payments appear to make the company’s bank balance better and makes the company liquid and attractive to potential investors. This is a breach of integrity.
The Mission statement of the business lacks integrity because the business is not considering the new biodegradable paint pots.
Delaying payments to suppliers and falsifying the management accounts to make the company’s overdraft at the quarter end look better is breaching the code of objectivity. This is because the business is providing bias information to the bank for the loan agreement and making conflicts of interest with delaying payments to suppliers.
6.3 Professional Competence and Due Care
Within the Accounts Payable function there is a loss of morale, loss of adherence and interest in business. This has led to breach of security where the Accounts Payable member has accessed the General Ledger because no user security settings have been put by the Chief Accountant.
Furthermore, the Accounts Payable member is only qualified to AAT Level 2, has not been offered continuous professional development (CPD), no further training and no support to progress in career. This is a breach of Professional Competence and Due Care.
Within the Payroll function employees were collecting colleague payslips. The payroll clerk was breaching the confidentiality as well as the company policy. This can lead to personal data being stolen or abused and fines from the Information Commissioner’s office of up £500,000 for the breach of the Data Protection Act 1998.
Personal unencrypted memory sticks are used by the Store Manager on work computers. Memory sticks are the main routes of data loss. They are potable, convenient and easy to be stolen or lost. The unencrypted memory sticks should not be used to hold confidential information as it will breach DPA and the company IT policy.
6.5 Professional Behaviour
Supplier payments have been delayed several times and Chic Paints Ltd likes to pay the less vital suppliers by cheque because it is easy to make excuses for cheque payments. Suppliers often told that the cheque is in the post. This breaches professional behaviour because suppliers are being cheated and this can cause loss of confidence with supplier relationship. Company can incur late penalty charges for late payments. Suppliers may consider taking their business elsewhere. All information to suppliers should be communicated in a factual and professional manner and where payments are being delayed, the company should consider to negotiate extended payable day terms.
7 Sustainability Evaluation
7.1.1 The mission statement of Chic Paints Ltd states that ‘they will operate their business in a sustainable manner; reducing their impact on the environment wherever possible; and using recyclable materials as a matter of course in all our products wherever feasible.’
7.1.2 Printing invoices, statements and remittances increases the impact on the environment. To reduce the impact on environment, email invoices can be dropped on a new cloud accounting software which will help reduce printing.
7.1.3 The mission statement should be supported by the policies and procedures of the organisations and be provided to the employees to ensure there is adherence to the mission. For example, the company should designate confidential bin to dispose recyclable paper and plastic bin for recyclable plastic bottles.
7.1.4 The main supplier of paint pots approached CPL with a new ‘ultra-green’ biodegradable paint pot. The new biodegradable pots degrade 95% biologically after the paint has been used. Although the Purchasing Manager and Production Director have been impressed by the new biodegradable paint pots’ technical performance, they cost 20% more than conventional pots.
7.1.5 The business has deferred the decision of using the biodegradable pots due to the tough economic conditions unless the competitors launch the product. The business has an environmental accountability and reconsider about marketing the new environmentally friendly and biodegradable paint pots. There is certainly an opportunity to impress the environmentally friendly consumers.
7.1.6 The decision of not investing in the biodegradable paint pots does not support the ‘Mission Statement’ of the business, therefore tarnishing the reputation of the Chic Paints Ltd, which will lead to a loss of public trust and loss of consumers who will seek sustainable products elsewhere.
7.1.7 In April 2013 Chic Paints Ltd directors agreed to sponsor a full team kit for the local football club, which is Ashton Wanderers. However, in August 2013 the directors decided to drop the sponsorship because the football club had performed poorly and club were expected to be relegated to a lower division. Dropping the football sponsorship does not support Corporate Social Responsibility, damages the local community relationships and gives it a negative public image.
7.1.8 The accounts payable department should be encouraged to send all payments by BACS to reduce the carbon footprint on paper cheques, paper envelope and reduce the cost of stationary. All remittances of payment can be sent electronically by email.
7.1.9 The accounts department uses shared printers which help reduce energy wastage.
The business needs to implement policies and procedures within each accounting function to help reduce errors.
Changes needed to organisational structure
Improvements to Accounting System
9 Cost Benefit Analysis
10.1 Organisation Chart for Chic Paints Ltd
10.2 SWOT Analysis
STRENGTHS • BACS payment require authorisation
• Main suppliers have been vetted
WEAKNESSES • Manual spreadsheet system
• Wages still paid by cash
• No security settings on the General Ledger
• Some staff don’t have formal qualifications.
• Lack of cover in the absence of a member of staff
• Lack of integrity with suppliers as persuasion needed to have the cheques countersigned
OPPORTUNITIES • Most of the suppliers are
THREATS • Use of an external debt collection agency to chase payments overdue by more than 3 months late is likely to alienate the customer and take the business elsewhere to a competitor.
• No anti-virus software to protect the PC’s
10.3 Fraud Matrix
Area of Risk Current Controls in Place Likelihood Impact Net Likely Impact Action
Within the credit control function, all customers need to be vetted through an external credit reference agency
Low High Reduce the risks on providing credit to the customers due to business with cash flow problems going into administration High Provide training to staff and implement strict credit control functions including credit limits and receivable days to minimise risks.
No authorisation required for cash withdrawals Low High Clerk could overstate amounts required to General Ledger Clerk and keep difference for themselves. For example, cost for £50 a week overstated and show annual loss High A limit of authorisation should be set for Chief Accountant to authorise and above that limit the Finance Director should be involved in authorisation.
No segregation of duties within the payroll function None High Payroll clerk could create a ghost employee and pay BACS salary into a personal account. High Segregate duties- one clerk delegated task to process timesheets, another clerk designated task to process BACS payment and only the manager should have security settings to create new employees on Sage Payroll.
No integration between the Accounting System and Sage Payroll Journals posted on the main system and transferred to the payroll runs. Medium This can lead to deliberate errors in the journal entries Medium Chief accountant should do monthly reconciliations to provide evidence that physical wages paid are equal to journals of the wages nominal code
10.4 Ethical review of the Accounting System
10.5 AAT Code Of Ethics
Integrity The principle of integrity imposes an obligation on all members to be straightforward and honest in professional and business relationships. Integrity also implies fair dealing and truthfulness.
Objectivity The principle of objectivity imposes an obligation on all members not to compromise their professional or business judgement because of bias, conflict of interest or the undue influence of others.
Professional Competence and Due Care The principle of professional competence and due care imposes the following obligations on:
• to maintain professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service and
• to act diligently in accordance with applicable technical and professional standards when providing professional services.
Confidentiality The principle of confidentiality imposes an obligation on members to refrain from:
• disclosing outside the firm or employing organisation confidential information acquired as a result of professional and business relationships without proper and specific authority or unless there is a legal or professional right or duty to disclose and
• using confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties.
Professional Behaviour The principle of professional behaviour imposes an obligation on members to comply with relevant laws and regulations and avoid any action that may bring disrepute to the profession. This includes actions which a reasonable and informed third party, having knowledge of all relevant information, would conclude negatively affect the good reputation of the profession.
10.6 Internet Sources
10.6.1 Data Protection, the DPA and the EU GDPR
10.6.2 ICO office