Internal Control Weaknesses in Sales Process of Buck Phyz

This report analyzes the internal control weaknesses in the sales process of Buck Phyz, suggesting improvements and discussing the implementation of corporate credit cards. Recommendations include enhancing communication channels, tightening security measures, and issuing corporate credit cards to key personnel.

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Contents
Executive summary....................................................................................................................3
Introduction................................................................................................................................4
Q1. Overview of the sales process.............................................................................................5
Q2. Internal control weaknesses and their impact on Buck Phyz..............................................6
Q3. Corporate credit card.........................................................................................................10
Conclusion................................................................................................................................12
Reference..................................................................................................................................13
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Executive summary:
The following report consists detailed analysis of the internal weaknesses of sales process of
Buck Phyz. Buck Phyz has been facing various structural changes and this report is formed
for investigating the issues in the sales process. The sales process is vital to the organization
as it leads to revenues generation and profits for the organization. Buck Phyz has a hierarchy
which includes CEO, FD and under the FD, there is AR manager, head of sales and financial
accountant. Sales processes mainly include AR, MD specialists, and sales managers. Sales
managers are responsible for making ultimate’s sales and then further reconcile the details of
creditworthiness and payments mechanism with the AR department. Sales managers
formulate legal contracts for clients which are approved by Finance director or head of sales.
The company has faced various internal weaknesses such as improper communication across
different segments, low-security channels/ policies, weak measures for rescuing from credit
losses. This report has made possible suggestions which can be implemented for improving
the weaknesses such as inducing meetings, attachment of client’s personal wealth with the
contracts, clear verification of potential customer before approving for sales. A corporate
credit card is also another important concept discussed over here. Buck Phyz employees face
issue while making business-related expenses such as the purchase of training course. There
are possible solutions such as the issuance of CCC can aid employee to make direct payment
and an effective audit trail can check for possible fraud detection or misleading activities.
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Introduction:
The sales process of Buck Phyz includes sales managers who sales their offers to potential
customers. Sales managers receive commissions on every customer's invoice (not on credit
notes) generated. Sales contracts are formed, cross-verified for creditworthiness, for database
installation by MD managers and AR managers makes day to day reconciliation of payments.
Internal control systems are integral to the organization for finding any form of fraudulent
accounting activities taking place in the organization. For accounting internal control, the
responsibility lies with finance director and Accounts receivable manager, who head a team
of three AR specialized persons. AR manager, in consultation with FD, overview the ledgers
of, credit customers, whose balance are opened and decides upon immediate actions. Bucks
Phyz is facing issues with payments of small expenditures which are essential and hence,
employees have to make payments by themselves. Corporate credit cards can be an effective
solution to the issue.
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Q1. Overview of the sales process:
In Buck Phyz, sales process includes finance director, AR department (MD and AR), and
sales department. Sales are channelized through sales team which includes “Head of sales”
and other five sales managers. The Head of sales reports its team status to finance director of
the company. The five sales manager constitute their offers to their potential customers,
persuade them, consider their request and makes sales. Further, during the contract
negotiation, sales manager sends an email to AR for examining the creditworthiness. It must
be between AAA to C for availing credit otherwise another method of payments is checked
for. They further formulate the legal contract detailing terms and conditions which have to be
signed by either FD or Head of sales. But it is not properly followed due to time constraint.
MD department fills up customer details in ERP system and makes necessary billing system
which are reconciled and contacted by AR managers.
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Q2. Internal control weaknesses and their impact on Buck Phyz
Table 1.1: Depicting the internal control weaknesses in sales process with possible
business impacts and recommendations
S.
No.
Sales process a) Internal control
Weaknesses
b) Business impact c)
Recommendations
1 Sales data: The
master data of
new customers
are manually
entered into the
system by MD
specialists.
 Everyone
with ERP
system
access can
modify the
basic data
information.
 Emails
which are
sent for
making
specific
change are
not
specifically
archived.
 The changes
in the
pricing
template and
pricing
structure can
cause frauds
and revenue
loss to the
company.
 As
suggested,
access to
ERP system
must be in
few hands.
A new
security can
be generated
which must
be with FD,
AR manager
and MD
specialists
only. And,
changes
through
other
departments
must be
through
specific
templates
formulated
(with every
minute
detail)
(Bonnie et.
al., 2012, p.
307-333).
2. Sales billing
systems: The
MD specialists
use billing
system for
making bills.
 There are
varied
irrelevant
fields which
must be
excluded.
 It makes the
process a
time-
consuming
one which
leads to
delay in the
 A new
billing
template
must be
formed in
consultation
with FD, AR
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processing
system.
manager and
head of sales
with
eliminating
irrelevant
fields.
 And,
changes in
the system
can be done
which guide
with regard
to any
irrelevant
field
(Bonnie et.
al., 2012, p.
307-333).
3. Cash
collection: AR
manager
oversees the
customer
ledgers and
sends a
quarterly list of
open
receivables to
finance director
for further
examination.
 Majorly
small or
other
customers
who aren’t
able to make
their
payments are
referred to
“credit hold”
and further
lead to credit
loss.
 The adverse
impact on
the business
is that most
of the
contracts are
unfulfilled
in between.
It leads to
loss of
revenues
and
unnecessary
cost
expenditure
for the
company
(Darrough,
et. al., 2012,
pp. 1- 20).
 The
personnel
has to put in
more efforts,
time and
cost towards
such
contracts
(Donelson,
et. al., 2016,
pp. 45-69).
 Detailed
case
collection
policies
must be
framed
which
includes
detailed
personal and
wealth
information
about
customers.
And, the
legal
contract
must contain
possible
assets which
can be taken
over in lieu
of payments.
4. Cash receipts  While filing  AR  A
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processing: In
the sales
processing
system, an ERP
system is
placed, which
matches up the
bank payments
with the
invoices
(through
reference
number).
manually the
terms of
invoices
differ from
the invoice
number as
customers
make short
deals with
the sales
staff. These
causes
frustration.
personnel
finds
difficulty in
processing
receipts as it
differs from
the invoice
terms. This
impacts
business as
there can be
a loss of
revenue if
proper
consideratio
n is not kept
(Feng, et.
al., 2014, pp.
529-557).
communicati
on mail from
sales
managers
must be sent
to AR with
regard to
every sales
negotiation
made with
the
customers
(different
from the
invoice
terms).
5. Pricing tool: A
new pricing tool
is implemented
which calculate
cost structure of
offer, workload,
and EBIT
targets.
 Sales staffs
are not able
to comply
with the new
systems. One
of the sales
managers,
Geroge, is
finding issue
with the
system.
There is lack
of training in
the
organization.
 The new
system has
more
effective
tools and
sub-systems
but the
personnel is
not able to
get along
with it.
There is a
potential
loss of cost
and resource
of the new
system
(Feng, et.
al., 2014, pp.
529-557).
 Head of
sales must
not only
provide a
training
course for
employees
but also
conduct a
weekly
meeting of
the sales
team with a
professional
expert of the
system for
familiarising
with every
key concept
of the
system.
6. Check for
credit
issuance:
During any
negotiation
process between
sales manager
and customers,
an email is sent
to an AD for
 The major
issue is that
mostly the
credit is
checked after
the contract
is executed
and invoice
is generated.
This does not
 Business
obviously
has to face
credit losses
and loss of
cash inflows
and wastage
of time, cost
and efforts
over such
 Weekly face
to face
meetings
must be held
which
discusses the
current sales
negotiations
and makes
list for
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evaluating the
creditworthiness
through credit
rating websites.
allow the
organization
to pre-assess
the other
methods
which can be
opted for low
profile
customers.
contracts. upcoming
investigation
s of the
creditworthi
ness of new
customers.
The various internal control weaknesses which are ascertained from the thorough
investigation includes lack of strong action for defaulters, lack of training, non-timely
ascertainment of creditworthiness, improper billing template, improper communication
between sales managers and AR managers and lack of strong security mechanism.
Their business impact includes increase in credit losses, revenues loss due to write-offs (1
million in past 2 years), increase in dissatisfaction among personnel, loss of cost, resources,
and time of personnel due to lack of implementation of effective communication methods,
possibility of fraud transactions which leads to loss of cash/ profits (Caplan, et. al., 2017, pp.
1-20).
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Q3. Corporate credit card
Table 1.2: Depicting the risks and benefits of corporate credit card and the internal
control to be implemented along with recommendations
Risk and benefits of
Corporate credit card
Impact (Internal control to
be placed)
Recommendations
Ha, et. al., (2012, pp. 765)
has suggested that Corporate
credit cards are issued by
companies to its employees
for making business-related
expense as and when these
arise.
When issued, an employee
can make purchases and
lastly file all the receipts to
financial analysts and
company makes the
payments.
 He further added that
undoubtedly, CCC
has a number of
benefits such as it
allows making
necessary online
expenditure
spontaneously
without delays such
as in Buck Pyhz,
employees have to
personae make an
order of training
course and later seek
reimbursement.
 Such issuance of
cards develops sense
belongingness among
employees and they
consider them an
important part of the
organization. This
enhances employee
productivity and
enthusiasm towards
work.
Though, the company might
The impact of Corporate
Credit cards would be over
AR department. They would
further need to reconcile the
payments made by issuers
and reconcile the figures.
There also might be an
increase in cash outflows due
to instant credit payments
made by employees (Ha, et.
al., 2012, pp. 765). Possible
internal controls are as
follows:
 The company must
place a credit card
limit. This limit must
be decided
considering the
expenses that arise
with the employees.
Since Buck Phyz
doesn’t have big
traveling expense, the
limit can be
minimized. The limit
will automatically
reduce the chance of
fraud risk or
monetary risk.
 The AR department
must implement a
monthly audit trail of
the credit cards. The
auditing would cross-
examine the credit
card payments details
with the expense
report as submitted by
the employee
 Buck Pyhz can issue
corporate credit cards
(company payment
card) for its
employees and can
ask also ask for
expense report and in
addition, ask for
reimbursement to the
company for any
unapproved
transactions.
 Looking at the
organisation
structures of the
company, the
corporate credit card
must be issued to
Finance director, AR
manager and head of
sales manager. All
these are key
personnel of the
organisation who
have large authority
and accountability in
the organization.
 These persons can
further provide the
card to their juniors
for approved
transactions.
 This would also act as
an internal control
and doesn’t allow any
unapproved
transactions and
fraudulent activity
(Bellotti & Crook,
2012, pp. 174).
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also have to face certain risks
such as follows:
(Bellotti & Crook,
2012, pp. 172).
 AR department must
also check for
individual credit
score before applying
for corporate credit.
An individual credit
score depends on
timely payments of
his/ her dues (Bellotti
& Crook, 2012, pp.
172).
 An automatic email
generation must be
implemented which
apart from other
member s must also
be sent to FD (every
time a purchase is
made).
 Company must have
the authorization for
blockage of card as
and when required
(Bellotti & Crook,
2012, pp. 172).
Unauthorised purchase:
Once, the card is issued; an
employee can even make a
purchase which is not
supposed to be done from
that card ((Bellotti & Crook,
2012, pp. 172).
Risk of sharing with
outsiders: An employee can
also share details of the card
with outsiders and makes
other payments. This can
cause loss of cash flows to
the organization (Bellotti &
Crook, 2012, pp. 172).
Personal use: With the card
authority, it is most
probable that the holder
makes it useful for making
its personal payments
(Bellotti & Crook, 2012, pp.
171).
Risk of theft or loss: Like all
the credit cards, there is the
possible threat of theft or
loss.
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Conclusion:
With this report, it can be concluded that Buck Phyz is currently facing a number of internal
control weaknesses in its sales process. The company has also been facing difficulties such as
credit loss, loss of revenues, improper investigation of customer’s creditworthiness and lack
of tight security to providing access of ERP system to a large number of personnel. With this
overview, it is suggested the organisation need to improve its communication channels (for
effective customer verification, detailed modification of term and reduction in credit hold/
credit loss), lesser access of ERP system for true customer database etc. lastly, company must
also corporate credit cards to its key persons for non-delay for payments and no personal
expenses to be made by employees for business-related expenses.
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Reference:
 Bellotti, T., & Crook, J. (2012). Loss given default models incorporating
macroeconomic variables for credit cards. International Journal of Forecasting, 28(1),
171-182.
 Bonnie K. Klamm, Kevin W. Kobelsky, and Marcia Weidenmier Watson (2012)
Determinants of the Persistence of Internal Control Weaknesses. Accounting
Horizons: June 2012, Vol. 26, No. 2, pp. 307-333.
 Caplan, D., Dutta, S. K., & Liu, A. Z. (2017). Are Material Weaknesses in Internal
Controls Associated with Poor M&A Decisions? Evidence from Goodwill
Impairment. Auditing: A Journal of Practice and Theory, pp. 1-20.
 Darrough, M., Huang, R., Zur, E., (2012). Internal control weaknesses in the market
for corporate control, Disclosure vs. Propensity. Branch college, city university of
New york, pp. 1-20.
 Donelson, D. C., Ege, M. S., & McInnis, J. M. (2016). Internal control weaknesses
and financial reporting fraud. Auditing: A Journal of Practice & Theory, 36(3), pp.
45-69.
 Feng, M., Li, C., McVay, S. E., & Skaife, H. (2014). Does ineffective internal control
over financial reporting affect a firm's operations? Evidence from firms' inventory
management. The Accounting Review, 90(2), pp. 529-557.
 Ha, S. H., & Krishnan, R. (2012). Predicting repayment of the credit card debt.
Computers & Operations Research, 39(4), 765-773.
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