Question

1. From the SEC website or other sources, locate Daily Journal’s 2013 form 10-k and review EY’s report on daily journal’s internal control over financial reporting. What were some of the weaknesses noted in this report?

Answer 1

EY's report indicated the following material weakness in the Daily Journal's internal control over financial reporting:-

Non-routine Transactions and Processes

The Company has not adequately identified and documented sufficient internal controls to support an effective assessment of the system of internal control relating to financial reporting risk assessment and control activities over certain non-routine classes of transactions and processes, each representing a material weakness in internal control over financial reporting including (1) the two business combinations in fiscal 2013 and the related allocation of purchase price to goodwill and identifiable intangibles and related accounting, multiple element software revenue recognition, contract cost accumulation for contracts accounted for under the completed contract method and management’s review of the detail supporting the related revenue and deferred revenue accounts; (2) the evaluation of the quarterly and annual current and deferred tax provision and related accounts; (3) other than temporary impairment related to available for sale securities and (4) the compilation process related to the quarterly and annual financial statements and related disclosures. Certain of the above-mentioned control deficiencies resulted in audit adjustments the Company recorded in the fourth quarter as well as additional disclosures in the consolidated financial statements.

Segregation of Duties and Financial Reporting Information

The Company has not adequately identified and documented sufficient internal controls to support an effective assessment of the system of internal control relating to the risk of fraud and management override of internal controls. The controller, assistant to the controller and department heads have administrative access to their own IT systems. Additionally, due to the small size of the accounting department of six persons, the controller and assistant to the controller post and review journal entries and generate the system-based financial reports used in key management review controls.

The Company’s monitoring activities include monthly review and comparative analysis of financial, production and public information to prior periods by the Company’s department heads, president and board of directors. These management review controls rely heavily on system generated reports and spreadsheet analyses and the Company has not identified and documented sufficient controls relating to the completeness, accuracy and ongoing integrity of this information. The Company’s monitoring and internal control assessment activities also include quarterly control assessments for each of its departments. These monitoring activities are not performed by independent staff and therefore lack sufficient objectivity presenting a reasonable possibility that the Company’s monitoring controls described above will fail to prevent or detect and correct on a timely basis a material misstatement of the Company’s consolidated financial statements.

These are some weaknesses which were noted in the report by EY.