Walker Books, Inc.—Payroll and Fixed Asset Systems

(Prepared by Alex Moser, Lehigh University)

Walker Books, Inc., is currently one of the largest book distributors in the United States.

Established in 1981 in Palo Alto, California, Walker Books was originally a side project of founder and current president Curtis Walker, who at the time was employed by a local law firm. Because reading was much more than just a hobby of his, he decided to use some of his savings to buy out an abandoned restaurant and convert it into a neighborhood bookstore, mainly selling used books that were donated by friends and family. When the doors first opened, Walker’s wife, Lauren, was the only employee during the week; Curtis was the only employee on the weekends. At the end of the first fiscal year, Walker Books had grossed $20,000 in sales.

As the years passed, Curtis Walker quit the law firm and began concentrating fully on his bookstore. More employees were hired, more books were traded in, and more sales were attained each year that passed. However, during the mid-1990s, Walker was faced with two problems: many large, upscale bookstores were being built in the area, and the use of the Internet for finding and ordering books was becoming cheaper and more popular for current customers. In 1995, Walker’s sales finally started to decline. Deciding to take a risk because of the newfound competition, he closed his doors to the neighborhood, invested more money to expand the current property, and transformed his company from simply selling used books to being a distributor of new books. Publishers send books to his warehouse, in which he stores them and resells them to large bookstore chains upon request.

Walker Books, Inc. has rapidly become one of the largest book distributors in the country. Though they are still at their original location in Palo Alto, California, they distribute books to each of the 50 states, and because of that, the company now sees sales of about

$105,000,000 per year. When Mr. Walker is asked about his fondest memory, he always responds that he will never forget how the little bookstore, with two employees, has expanded to now have more than 145 employees.

As mentioned, all of Walker’s customers are large-chain bookstores who themselves see many millions of dollars in revenue per year. However, some of these bookstores have had bad relationships with Walker Books in the past year. There have been many disputes between them, such as books that were ordered from Walker but were never sent, poor inventory management by Walker, and the inability of Walker to provide legitimate documentation of transactions. According to projections of this year’s financials, the sour relationships that Walker Books and many of its customers have are going to take a toll on year-end revenue. Curtis Walker has stated time after time that because of his law background, he “clearly knows the difference between right and wrong, including those of internal controls.”

You have been hired as an independent expert to inspect the internal controls currently in place at Walker Books, Inc.

Fixed Asset and Payroll Procedures In the various Walker Books business departments, employees clock in and out using their timesheets, which they are responsible for keeping at their desks or on their persons until Thursdays, when the manager or supervisor of their department approves them. The manager or supervisor then forwards these timesheets to Debby, the payroll clerk, who prepares checks for each employee’s approved timesheet. She then posts to employee records and the payroll register using a laptop computer, which she is allowed to take home for work. A copy of the check is made and filed in the payroll department. The check is then mailed to the employee. Two summaries of the payroll register are printed, one of which is sent to the AP department, the other of which is sent to the general ledger department.

Any fixed assets each individual division needs are reported to the manager of that division, who decides if it’s necessary. The manager submits a form stating the funds required for the fixed asset acquisition, which he or she must personally sign, showing approval to the purchasing department. The top manager of the fixed asset department, who is knowledgeable regarding fixed asset transactions, reviews any fixed asset request requiring more than $10,000. The purchasing department clerk receives requests for funds and prepares a PO. Two copies of the PO are then made.

One is sent to the supplier, and one is filed in the purchasing department. Finally, the purchasing department sends a fixed asset change report to the fixed asset department.

The AP clerk receives the payroll summary and the fixed asset PO. She writes a check to the imprest account for the exact summation of the payroll and writes a check to the supplier for the amount of the purchase. Finally, when fixed assets are received, the packing slip, invoice, and completed blind copy are forwarded from the receiving department to the AP department, where the clerk reconciles them and posts to a journal voucher, which is subsequently sent to the general ledger department.

The general ledger clerk posts journal vouchers and payroll summaries to the general ledger using a microcomputer terminal.

Required:

a. Create a data flow diagram of the current system.

b. Create a document flowchart of the existing system.

c. Analyze the internal control weaknesses in the system. Model your response according to the six categories of physical control activities specified in SAS 78.

d. Prepare a system flowchart of a redesigned computer-based system that resolves the control weaknesses you identified.