Diamond Foods was accused of accounting fraud in the financial years 2010 and 2011. Two of its executives (now former) mislead investors by understating walnut costs to increase reported net profit (Lynch, 2014). They pushed the recording of some payments to future fiscal periods. It agreed to pay $5 million to settle the civil charges (Lynch, 2014).
An effective accounting information system can help reduce financial statement fraud. The company can develop a system tailored to meet to its specific needs rather than going for an off-the-shelf system.
Feasibility study examines the suitability of the system regarding its workability, user requirements, efficiency, among other aspects. It involves economic, technical, operational, and organizational feasibility analysis (Bodnar & Hopwood, 2013). Economic feasibility will determine whether the system's costs outweigh its benefits. The operational feasibility study will help the company evaluate the functional scope of the system (Bodnar & Hopwood, 2013). The system should be able to conduct all accounting processes and integrate the accounting function with other functional units of the company, as well as its ability to solve the company's existing accounting problems.
The feasibility study should take approximately one month. One month will be sufficient to allow the team to evaluate all the important aspects of the system. The requirements include system experts, accountants and representatives from other departments. The team should consist of the representation of the accounting department to ensure that it meets the company's accounting needs.
It involves identifying the requirements of the system to achieve the company's goals. It entails detailing the all the accounting processes and other functions that the system must support (Bodnar & Hopwood, 2013). The team should determine the inefficiencies of the current system that led to financial statement fraud and features required to correct the problems. This phase should take about one month. This is because it needs adequate to evaluate all the requirements. The phase is critical since it will influence the operational capacity of the system. If the requirement specification is inadequate, the system developed or acquired will not be able to improve the accuracy of financial reporting.
It involves building the architecture of the system based on the requirements identified in the previous phase. It specifies the functional requirements and features of the system. The stage should take approximately three months. It is the most critical phase and involves detailed discussions between stakeholders.
Implementation and Testing
Implementation involves the actual development of the system designed in the previous phase. The company should develop the system rather than acquire an off-the-shelf system. The implementation should be approximately one month, after which the system should be tested. If the test results are positive, the system should be rolled out. Testing should be about two months as this would allow the correction of any errors and a detailed assessment of the system.
Pros and Cons of the design
The system will be tailored to meet the needs of the company's operations. It implies that the scope of developer will not limit the company as in off-the-shelf packages. Thus, the system will address the specific issues in the firm's accounting framework. Besides, the company will be able to modify the system to accommodate any changes in its operations, including the ability to scale it up. However, the company will incur a higher cost of developing and maintaining system than it would spend if it acquires a ready-to-use or off-the-shelf system.
Optimal Computer Operating System
The company needs a computer operating system that will integrate all the functions including accounting. The system should limit the modification of accounting records. It should also to produce predesigned financial statements from the records. Once the accounting policies have been recorded into the design and implementation phases, the computer system should not permit any changes without necessary approvals. These features will reduce management override of controls which has been the primary issue leading to financial statement fraud.
Internal Control Considerations, Issues and Risk Mitigation Measures
Internal control considerations include access to the system, accuracy, and completeness of records, among other factors. The system should improve the internal control by preventing unauthorized access to accounting and other information (Hall, 2015). Although the system will integrate all the functional areas of the company, accounting data should be accessible only to the authorized persons. It should also help the firm improve the accuracy and completeness of records.
Issues include unauthorized access, management override, and supervision. Unauthorized access to the system can lead to loss of information as well as interruption of the company's operations. In this era of increased threat by hackers, unauthorized access is a significant risk that the company must deal with. Secondly, the system's effectiveness can be compromised if there is management override. Management override occurs if managers can access the system and modify accounting records to meet its interests. It may lead to fraudulent financial statements as well as errors in financial reports.
The company can mitigate the risk of unauthorized access by employing qualified IT security experts to monitor the vulnerabilities of the system and propose necessary changes. This will reduce the risk of hacking (Hall, 2015). Besides, the system should have passwords given to relevant officials. The passwords should only be accessible to the appropriate persons. The system should also record all logins by each user and the operations conducted. It will make it possible to identify the user responsible for any errors or fraudulent records. Besides, juniors in the accounting department should not be able to change any entries made into the system without authorization from a relevant senior. This will protect the integrity of the system's information. Establishing an independent audit committee as well as the internal audit department can help mitigate management override of internal controls. The internal audit unit should regularly review the system to identify vulnerabilities as well as any cases of management override and propose corrective measures (Solomon, 2007). A robust corporate governance system reduces management override thus preventing fraud in financial reporting (Solomon, 2007).
Optimal Revenue and Expense Cycle
Sales order entry: Receive and record the order from the customer. The customer care representative then checks the availability of inventories and process the order. For orders for credit sales, the order is submitted to the credit office for necessary approval. All the orders must be documented through the system.
Shipping and Invoicing: The processed orders are delivered to the customers after the production of an invoice detailing the goods dispatched, quantities and prices of each good as well as the total amount.
Cash collection: For good sold in cash, the cashier receives the cash and issues a receipt o the customer. A soft copy of the receipt is kept in the system. For credit sales, an entry is made in the accounts receivable. When the customer pays, the cashier processes the payment and issues a receipt to the customer. A copy of the receipt is submitted to the credit officer to update the accounts receivable.
Purchase orders: Produce and document purchase orders whenever the company orders goods from suppliers.
Receipt of goods: Prepare a note for the goods received and compare with purchase order to ensure that the products received are the ones the company ordered.
Disbursement: Process and disburse payment upon receipt of an invoice from the customer.
Future Issues that Could Impact the Design of the SDLC
The introduction of credit cards as a means of payment will affect the design of the system. Credit cards are becoming more population, and it is likely that the company will start accepting such payment methods. Besides, technological improvement may make a system outdated thus forcing the company to replace it. Other issues include expansion of the company through the opening of new branches as well as the acquisition of other firms. This will increase the scope of its operations.
The proposed system will help the company to adapt quickly to the above expected future changes. The design is quite flexible and allows the company to modify it to suit any changes in its operating environment. Thus, it will not be an issue integrating credit card payments into the system. The design is also scalable implying that the company can scale it to support the increased scope of operations that may result from opening new branches as well as acquisitions. The design is also suitable since it can be upgraded to newer versions of technology rather than purchasing a new system altogether. It reduces the risk of obsolescence.
Bodnar, G., & Hopwood, W. (2013). Accounting information systems. Boston: Prentice Hall.
Hall, J. (2015). Accounting Information Systems. Cengage Learning.
Lynch, S. (2014). Diamond Foods to pay $5 million to settle SEC fraud case. Retrieved from https://www.reuters.com/article/us-diamond-sec-accountingfraud-idUSBREA0813020140109
Solomon, J. (2007). Corporate governance and accountability. John Wiley & Sons.
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