To:

President, LJB Company

From: Keller Accounting Prepared by: Leon Hiltebeitel

Introduction: As part of the agreement approved by the President of LJB Company, Keller Accounting evaluated existing internal control functionality of LJB Company and prepared a three-part report designed to inform LJB of any new internal controls which may be required with becoming a publically traded company. This report was also to advise the President on what company practices are currently done well, and identify areas of concern and potential threats that exist within these processes. Additionally, Keller was asked to review the proposed purchase of an indelible ink machine by LJB as an advisable purchase. Executive Summary: LJB Companys management requested specific direction regarding the requirements of a privately held company making the transition to a publicly traded entity. As requested, our firm was asked to specifically address internal control requirements as well as requirements of publicly traded US Companies as detailed in the Sarbanes-Oxley Act of 2002. As observed during this review of LJB, the company values its long-term employees and prides itself on its lean organizational structure. While this current sharing of operational duties possesses strengths, it also presents a number of potential serious liabilities. Addressing these threats which currently exist in daily operations of LJB include correcting the lack of segregation of duties, insufficient cash controls, inadequate payroll controls, a lack of information technology controls, and no human resource controls. LJB Management has also expressed in interest in obtained guidance on whether the company should purchase an indelible ink machine for printing checks. Part 1: Internal Control Requirements for a Publicly Traded U.S Company The Sarbanes-Oxley Act of 2002 requires a registered U.S. publicly traded company to have an independent audit committee as a part of its Board of Directors. One member of the board must also have an occupational background as a Certified Public Accountant or Chief Financial Officer. It is also required that a majority of the firms Board of Directors originate from outside of the company. The CPA or CFO is required to certify that the financial statements of the firm are reasonably accurate, meet with requirements of Sarbanes-Oxley, and have a material degree of representational faithfulness. Clearly stated, the financial

statements of any publicly traded U.S firm must fairly present the financial position of the company at the time of filing with the SEC. Sarbanes-Oxley also requires that senior management provide quarterly and annual certifications filings with the SEC attesting to the reliability and accurate oversight of its internal controls concerning its financial reporting. Background checks, a review of employee degrees and certifications, as well numerous HR controls are also requirements of Sarbanes-Oxley currently not implemented at LJB but are detailed below. Part 2: Strengths and Opportunities in the Internal Controls over Financial Reporting LJB Company recently implemented a system of pre-numbered invoices which allows accurate tracking of receivables and payables through its accounting information system, precise accounting of all goods shipped or services performed by the company, and a means to verify physical inventory versus recorded inventory in terms of sales returns and allowances as well as for possible theft. Implementing this process is a recommended practice in providing reasonable assurances with cash controls. LJB Company has a lean organizational structure, making it an attractive offering both for prospective investors and creditors who seek initial public offerings of companies who are not top heavy. Investors and creditors benefit from increased flexibility, efficient utilization of the firms assets and improved revenues and profit due to lower operational costs. It is recommended that LJB Company purchase an indelible ink machine for the purpose of printing checks. Handwritten checks can currently be endorsed by an unauthorized user, whereas preprinted checks are much more difficult to alter and would necessitate proper approval by the firm. Using preprinted checks in indelible ink is also a best practice to minimize opportunities for theft, fraud and collusion. Part 3: Weaknesses and Threats in the Internal Controls over Financial Reporting As mentioned above, the management of LJB Company is vulnerable to fraud with weaknesses and threats presented in which the day to day operations of the firm are conducted. These threats include a lack of segregation of duties, insufficient cash controls, inadequate payroll controls, unsatisfactory information technology controls, and no human resource controls. LJB Company is lacking in the segregation of duties in key accounting functions because the Treasurer and Controller functions are being conducted by the same person. While this may stream line many processes, it also leaves LJB very susceptible to fraud and being out of compliance with current Sarbanes-Oxley requirements. These functions should be conducted independent of each other and assigned to different personnel. Currently, the accountant acts as both Treasurer and Controller, purchasing all of the supplies and paying for those supplies. Procurement functions should be separate from remittance of purchase order payment. The accountant also receives checks and completes the monthly bank reconciliation. Reception of checks should be conducted apart from completing the bank reconciliation. These various accounting functions should be segregated and assigned to different employees.

LJB Company has insufficient cash controls. Every employee has access to petty cash with minimal reporting requirements. Handwritten notes should not be allowed. Access to petty cash should be restricted to authorized personnel only. A best practice for recordkeeping for disbursements from petty cash would require an original receipt and a signature from the person receiving the reimbursement. As mentioned in part 2 of this report, a check printing machine using indelible ink is recommended. Currently checks are handwritten and not preprinted. The process of preprinting checks in indelible ink is designed to prevent alterations to check amounts after an authorized endorsement has been made. LJB Company presently has inadequate payroll controls. The accountant receives all checks, which are stored in his office for pick-up, and then on site in a safe for the weekend. A best practice would be to set up direct deposit for payroll checks. If direct deposit is not available, payroll checks should be mailed to employees homes the day they are issued. LJB Company has inadequate information technology controls. Employees do not have individual passwords for computer access. A best practice would be to assign a unique password to each employee which would automatically require a reset every 45 to 60 days. Passwords should require combining alpha numeric symbols and contain a minimum of eight characters. Internet usage should be restricted to prevent access to certain materials or sites. Access should also be domain restricted with filters to prevent viewing certain websites. Electronic logs should be kept in HR of all computer activity linked to each employee. LJB should also communicate to its employees on its logon page that internet usage is monitored by the company and continued attempts to access certain sites or types of sites not authorized may result in disciplinary action up to and including termination. LJB Company has limited to no human resources controls. Both the President and the Accountant must interview and approve all new hires. A formalized human resources function should be implemented for new hires with consideration given to hiring someone with current HR experience, risk and controls training. This will also aid LJB to more clearly define the assigning of responsibilities between departments and individuals. Background checks should also be implemented as standard procedure for all new hires. Conclusion: Next steps We trust this review of current LJB operations meets your expectations for our agreement and has provided important feedback LJB can benefit from concerning internal controls and compliance. We wish you continued success as you contemplate the transition from a privately held company to a publicly traded U.S. firm and we encourage you to carefully review the Sarbanes-Oxley requirements for compliance in detail. Please contact our firm should you have additional accounting requirements or questions concerning the results of this evaluation.