Graham Stewart

Steinman & Lee, an Ontario restaurant chain, recently closed one of its restaurants, The Steinman Café. This was the first indication that the company was in trouble. Graham Stewart, general manager of Southview Mall location recently had a conversation with the bookkeeper Diana Calhoun, regarding to cash discrepancies which could account for the trouble. All evidence seems to indicate the President, Barry W. Steinman, has been misappropriating cash deposits for the take-out and delivery service.

Issues

There are many internal controls that can be implemented to avoid these problems. Primary ones include, assigning responsibility, segregating duties and defining documentation procedures. Assigning responsibility holds people accountable for their work, while segregation of duties allows internal checks of each employees work; this helps avoid errors that cost the company time and money.

Barry Steinman has control over many aspects of the business and there is nobody to check his work or evaluate it. This issue is most apparent in the misappropriation of take-out, catering, and delivery revenues. Key contributing factors of SteinmanÐŽ¦s unilateral control are that he:

• set-up the operating systems for the catering venture

• made all pricing decisions

• established cash handling and reporting procedures

• personally trained the bookkeeper, with cash deposit instructions

• key signatory on all disbursements and cheques

These issues came to light when catering and take out were moved to the profitable Southview Mall location. Stewart was unaware of these factors and recently discovered he may be held accountable for these revenue losses.

Documentation procedures are ineffective at Steinman & Lee; if they were following Generally Accepted Accounting Principles (GAAP) they would produce accurate and reliable financial statements on a timely basis. To be reliable, accounting information must be verifiable; we must be able to prove that it is free of error. There is no evidence that such safe-guards have been implemented at Steinman & Lee.

Lack of accurate documentation is evident in the closing of the Kitchener restaurant; there is no record of this event in any financial statements. Employee severance packages were paid directly and trade payables remained outstanding. Stewart has developed a system to separate the inventory and labour costs for eat-in and take-out revenues and provides that information to Steinman. However there seems to be no official inventory system in place, no costing, and no official financial information for any portion of the business.

Key indicators of Internal Issues

Stewart is an experienced manager, successfully running restaurant for two other companies, before finally investing in Steinman & LeeÐŽ¦s Southview Mall venture. There were several events that could have alerted Stewart to the existing internal control problem:

• Stores closing

• Calls from creditors

• Bank decision to control additional spending on operations

• Overdue vendor accounts

• Unsigned cheques left on Steinman's desk

• Steinman's reduced interest in the day-to-day operations, eventual absence from office

• StewartÐŽ¦s discovery of SteinmanÐŽ¦s house being empty and for sale

Due to these indicators Stewart should not be too surprised by the revelations from Calhoun.

Violations GAAP and Assumptions

GAAP should be used as a general guide for financial reporting purposes. These rules protect a company and its stakeholders from making uninformed decisions. When these principles are violated, it can be detrimental to any business, in Steinman & LeeÐŽ¦s case:

Going Concern

As the company is in financial crisis, restaurants have been closed and all assets should be recorded in financial statements at liquidation value.

Full Disclosure

All information pertinent to understanding the company's financial status must be disclosed. The revenue has not been disclosed since the money they earned are being deposited into Steinman's personal account. Steinman & Lee is a partnership, so SteinmanÐŽ¦s assets (house) being sold should be disclosed. Further violation occurred when the severance pay for the employees was not recorded on the income statement.

Time Period

The unofficial consolidated income statement is based on estimates; the company needs annual report at least.

Business Entity/Economic Unit

Steinman depositing company funds into a personal account violates this rule. Income for all entities must be reported separately, by combining the two, there is no clear definition of entities.

Matching

All revenue has not been disclosed; the expenses such as cost of labour and supplies to produce this revenue were not recorded in the same accounting period.

Consistency

The accountant must apply the same methods and procedures from period to period. There has been no timely reporting, so there is no consistency, which prevents interested parties from comparing financial information from period to period.

Conservatism and realization

Liabilities are not recognized, losses from restaurants are not reported and lack of timely reporting means there is no clear evidence of how the losses are impacting the company.