UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 30, 1999
Danzer Corporation
(Exact name of issuer as specified in its charter)
New York 0-17430 13-3431486
(State or other jurisdiction (Commission File (I.R.S.Employer
of incorporation) Number) Identification No.)
17500 York Road, Hagerstown, MD 21740
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code: (301) 582-2000
(Former name, former address and former fiscal year,
if changed since last report)
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Item 4. Changes in Registrant's Certifying Accountant.
In response to the Commission's inquiry regarding the previously filed
Current Report on Form 8-K filed on or around October 6, 1999, the registrant
submits the following:
Danzer Corporation, a/k/a Global Environmental Corp.
We want to preface our responses to your November 1, 1999 letter by reviewing
changes the Company=s Board of Directors has made since 1997. During the 1997
fiscal year, the Board recognized that the then current management was not
properly performing many of its duties at the Company and specifically was not
providing enough direction in and resources to the accounting department. In the
Fall of 1997, the Board dismissed the Chief Executive and Chief Financial
Officers, hired an interim Chief Executive and permanent CFO, and made a
strategic decision to focus the entire business on the manufacturing of service
truck bodies for utility companies, contractors, and cable service providers.
The Board also named a new Chairman and in March 1998 hired a permanent CEO. All
of these changes were under the direction of the Board to bring financial
stability, profitability and focus to the Company.
When the interim CEO and CFO arrived at the Company in November 1997, the
problems intensified causing the transition process to go less than smoothly.
There was significant turnover in the accounting department and the remaining 3
accounting people all had less than one year of experience. To further
complicate matters, the Company was in the process of adjusting its product mix
in an effort to follow its new strategic direction, which resulted in a loss of
revenue that reduced availability of cash from the Company=s lender. New
management had to immediately get additional cash into the Company to meet
payroll and accounts payable of key vendors. Additionally, the prior CFO, who
had been retained on a per diem basis to assist in the management transition,
was killed in a motorcycle accident before providing sufficient answers to
various operating and accounting questions.
Despite the setbacks, management pushed forward and implemented numerous
operational and accounting controls. The Company hired the present CFO who spent
an enormous amount of time maintaining daily operations and implementing new
procedures in order to allow for the creation of accurate monthly financial
statements. The Company also hired a cost accountant to improve the costing
system in May 1998.
Item 1. Attached is a copy of each of the management letters for 1997 and 1998.
There are no new reportable conditions from the 1997 management letter, so the
answers below relate to both years. In detail the corrective actions to each
reportable item are addressed as follows:
General Ledger and Account Reconciliation
We have identified significant general ledger accounts that are now being
reconciled monthly. The specific accounts are accounts receivable, accounts
payable, purchased parts inventory, accrued payables and trade payables. We have
assigned responsibility for reconciling the detail printout to the general
ledger each month. Any corrective entries are being made monthly to keep the
accounts in balance. The CFO is involved in, reviews, and approves these
corrective entries.
Regulatory Filings
We have hired an additional degreed accountant in May, 98 to strengthen both the
internal and external financial reporting.
Cash
Throughout 1997 and 1998, bank reconciliations have been done in a more timely
fashion. Throughout all of calendar year 1999 bank reconciliations have been
done on a monthly basis.
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All the Company=s cash is being sent to our lender directly out of our lock-box.
We must make written requests of our lender to obtain funding to meet our
disbursements. We manage our cash position daily by use of an online system with
the bank to determine the amount of cash being deposited as well as the amounts
clearing our account. We know daily what our operating cash balance is and how
much cash is received into our lock-box. We now have two officer signatures on
checks over $5,000.
Checks are being issued weekly based upon vendor terms. Those checks are mailed
daily and all checks are mailed within 7 days. We log all checks used and they
are all being issued in sequence.
We closed all extraneous bank accounts in the middle of 1998 and have changed
the general ledger account numbers so only a single bank account per general
ledger account is being posted into the general ledger.
Segregation of Duties
Management is aware of the problems relating to segregation of duties for
payroll and accounts receivable. The first task management had to accomplish was
to develop and implement procedures within these functions. Payroll was
outsourced to a third party. With respect to accounts receivable, personnel were
trained to understand the current computer system. We established customer
credit limits and a credit policy. Once the new policies and procedures become
established and the personnel become familiar with the system, we will then look
into the segregation of duties, which is currently not cost beneficial.
Early in 1998 the general ledger and monthly financial statement preparation was
assigned to another accounting employee.
Another employee other than the payroll person is distributing payroll checks.
Each week another accounting person is checking the hours paid versus the hours
off the time cards.
Accounts Receivable personnel are required to obtain management approval on any
write-off of a customer=s account balance.
Computer System
We now have a backup tape offsite. Our computer system is a PC based network. We
have copies of the operating system, application programs and the database. All
we need to do after a disaster is go to any store that sells computers and
purchase them to get back in operations. We understand the importance of having
a formalized plan but we don=t believe we can justify spending resources to
formalize a recovery plan at this time.
Inventory B Perpetual ReportsB Perpetual Reports
We have changed our accounts payable process to match invoices to receivers. An
employee does a visual inspection of the receipt. The packing list is used to
receive material into perpetual inventory. Accounts Payable personnel then match
the invoice to the receipt paperwork and the receipt transaction is entered into
the computer database.
Accounts Payable
All employees have been informed of the importance of recording expenses in the
proper periods. All received items are recorded into accrued payable account at
time of receipt. We accrue major items at end of periods. We have made major
efforts to inform employees of the importance of supporting documents for all
expenses. Each item purchased has an approved requisition signed by a staff
member. All expenses that don=t have purchase orders issued are approved prior
to vouchering.
Inter-company Reconciliation
We have changed our operations accounting to eliminate the need for almost all
intercompany transactions.
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Board of Director Minutes
We have a new Chairman, a new CEO, and a new CFO and they are all committed to
conduct business in a proper and controlled environment. Board meetings are
regularly held and proper minutes are presented and approved at each meeting. No
critical decision is implemented without Board approval.
Inventory
We completely altered the prior physical inventory methodology in June 1998. The
new procedures include the controls necessary to ensure a proper counting and
valuing of the physical inventory.
Adjustments
All adjusting entries are now being properly documented.
Item 2
Year-end adjustments were as follows: an adjustment for $60,000 to reconcile the
physical inventory as counted to the general ledger. In FY 1996 and FY 1997, we
had untrained people and procedures in place to record inventory transactions.
As a result, a new CFO and cost accountant were hired to correct the inventory
accounting and proper inventory controls are now in place.
Another year-end adjustment was made to record accounts payables for purchased
inventory for $229,000. This was the result of accounts payable transactions
being incorrectly charged to the inventory account number. The distribution of
this entry was $160,000 to work-in-process inventory and $69,000 to cost of
goods sold in the 4th quarter.
Another year-end adjustment was to increase the Allowance for Bad Debts. The
Company made an initial adjustment of $158,000 which was increased as a result
of the audit process by another $96,000. Other audit adjustments include:
Adjust for differences in unrecorded liabilities that reduced profit by
$41,000;
Adjust difference between accounts payable confirmations and Company
balances of $87,000;
Adjustment to accounts payable to reflect unrecorded expenses of
$78,000;
Adjust for inventory price test errors of $48,000;
Adjust for errors noted in inventory cost test $92,000;
Adjust for overhead analysis $36,000;
Adjust for pension liabilities $119.000;
Adjust depreciation by $27,000;
Adjust Royalty Accrual by $57,000;
Adjust interest expense by $18,000
As alluded to in the introductory paragraph to this letter, the Company in the
fiscal year ended October 31, 1997 experienced significant problems with respect
to the accounting function. There was significant turnover in the accounting
department, some lack of qualified personnel, a new CFO and some lack of
segregation of duties. These situations existed primarily due to the Company=s
financial and operational problems, which resulted in less emphasis being placed
on financial reporting. As a result, the Company relied upon the audit process
at the end of the year to identify accounting adjustments rather than producing
fully adjusted monthly financial statements on a timely basis. The year end
adjustments, which were recorded in the fourth quarter of the fiscal year ended
October 31, 1997, related in some cases, to prior quarters included in the
fiscal year end October 31, 1997. None of the adjustments relate to a prior
fiscal year. Unfortunately, due to the factors previously identified, including
the death of the individual who was the Company=s CFO for FY 1997, the Company
is unable to identify to which quarters in fiscal year 1997 such adjustments
relate and, therefore, has not restated any fiscal 1997 quarters.
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Item 3
With the change in the Company=s CFO it is difficult to determine the reason why
the gross margins and SG&A expenses increased in the fourth quarter of fiscal
1997. All we can do is provide a reasonably good scenario of what happened. In
the second quarter of fiscal year 1997, a new cost system was installed because
the procedures previously in place to assign costs to work orders were not
functioning effectively. Costs became difficult to match to sales because work
orders were not being closed. As a result, the process used to develop estimates
for quarterly allocation did not result in appropriate quarterly reporting. At
the end of the year work orders were finally closed, estimates made, and cost of
goods sold and SG&A expenses were adjusted in the final quarter.
Item 4
We made adjusting entries in the fourth quarter as a result of the Company
relying upon the audit process at the end of the year to identify accounting
adjustments rather than producing fully adjusted monthly financial statements on
a timely basis. The year end adjustments, which were recorded in the fourth
quarter of the fiscal year ended October 31, 1997, related in some cases, to
prior quarters included in the fiscal year end October 31, 1997. None of the
adjustments relate to a prior fiscal year. In the second quarter of fiscal 1997,
a new cost system was installed because the procedures previously in place to
assign costs to work orders were not functioning effectively. Costs became
difficult to match to sales because work orders were not being closed. As a
result, the process used to develop estimates for quarterly allocation did not
result in appropriate quarterly reporting. At the end of the year work orders
were finally closed, estimates made, and cost of goods sold and SG&A expenses
were adjusted in the final quarter. Unfortunately, due to these factors listed
above, including the death of the individual who was the Company=s CFO for FY
1997, the Company is unable to identify to which quarters in fiscal year 1997
such adjustments relate and, therefore, has not restated any fiscal 1997
quarters.
The Provision for Bad Debts increased primarily because of the adjustments in
our product mix in an effort to follow the Company=s new strategic plan. With
the sale of the Company=s air movement product division, outstanding balances
due from former air movement product customers became more questionable because
of the loss of the ongoing relationship thereby causing adjustments to be made.
Furthermore, because the adjustments came about in the fourth quarter of fiscal
1997, that is when they were made and no estimates were appropriate for prior
periods.
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GLOBAL ENVIRONMENTAL CORP. AND SUBSIDIARIES
Item 5
The audit report will be revised to include the signature of Rudolph, Palitz LLC
our accountants for fiscal year end October 31, 1997.
Item 6
The 10-Q statements for the quarters ending January 31, 1998, April 30, 1998 and
July 31, 1998 will be filed by November 22, 1999. The 10-K for the fiscal year
ending October 31, 1998 will be filed by January 15, 2000. The first, second and
third quarter 10-Q statements for fiscal year 1999 will be filed on or before
March 15, 2000.
The new accountants have just started their audit procedures for fiscal year
ending October 31, 1999. We have had an initial meeting to complete a
questionnaire on our policies and procedures. The new accountants have not
identified any material internal control deficiencies. They also observed our
physical inventory and have not informed us of problems.
The Company=s adjustments in the fourth quarter of the fiscal year ended October
31, 1998 made as a result of the audit process were immaterial.
Item 7. Financial Statements and Exhibits.
Exhibit 99. Management Letters of Prior Accountants.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf, thereby
duly authorized.
Date: November 9, 1999
Danzer Corporation
/s/ Terry Moore
------------------------------------
Terry Moore, Vice President and
Chief Financial Officer
GLOBAL ENVIRONMENTAL CORP.
MANAGEMENT LETTER
OCTOBER 31, 1997
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Board of Directors
Global Environmental Corp.
Hagerstown, Maryland
Gentlemen:
As part of our audit of your 1997 consolidated financial statements, we
are pleased to provide you with these comments to help improve your internal
controls and the efficiency and profitability of Global Environmental Corp. and
Subsidiary.
We have divided our comments and suggestions into two categories:
I. Reportable Conditions;
II. Other comments.
Appendix I includes certain additional information regarding these
comments related to the internal controls.
We note that many of the comments represent reportable conditions which
have previously been communicated to the Company and which may have been
attributable to the Company's previous CFO, Mr. Clarke. Certain such conditions
may have been ameliorated since October 31, 1997. However, it is important that
these matters be communicated so that they may be addressed completely and as
soon as possible.
We sincerely appreciate the courtesy and cooperation the Company's
officers and employees extended to us during the audit. We will be pleased to
discuss our recommendations at your convenience and assist in implementing them,
as necessary.
November 1998
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<PAGE>
I. REPORTABLE CONDITIONS
General Ledger and Account Reconciliation
During our audit, we noted numerous general ledger accounts (for
example, cash, fixed assets, accruals, intercompany accounts, etc.) had not been
reviewed or analyzed during the year. This resulted in material errors in the
accounting records, year-end adjustments and numerous delays in completing the
annual audit. Many of these errors were not detected during the year because
accounts were not reconciled and analyzed on a timely basis. The failure to
analyze and reconcile accounts each month causes delay in closing the accounting
records, inaccurate monthly financial statements and possibly, inaccurate
quarterly filings by the Company on Form 10-Q. We recommend that all significant
general ledger accounts be reviewed monthly. Management should develop a
priority list for each month's closing and assign responsibilities to the
appropriate employees. This will strengthen the monthly financial reporting and
provide timely and accurate financial results. In addition, the Company's CFO
should review and approve all account reconciliations on a monthly basis.
Regulatory Filings
The Company's failure to review, analyze and reconcile various general
ledger accounts during the year as described above, resulted in a substantial
delay in the Company's year-end closing and preparation of financial statements.
Consequently, the Company was unable to meet its deadline or extension for
filing its financial statements with the Securities and Exchange Commission. We
strongly recommend that the Company strengthen its monthly financial reporting
in order to ensure that a late filing does not occur in the future. The Company
should consider hiring additional accounting personnel to assist in this
process.
Cash
We noted during our cash procedures that bank reconciliations were not
being prepared on a timely basis and were also being prepared incorrectly. This
situation resulted in year-end adjustments and delays in closing. Accurate and
timely preparation of bank reconciliations are essential so that bank errors and
any potential misuse of funds is discovered and correctly expediently. Accurate
cash balances also aid in cash flow management. We recommend that bank
reconciliations for all bank accounts be prepared monthly, reconciled to the
general ledger and reviewed by Management. In addition, we noted checks with
only one signature whereas the Company policy required two signatures. We
recommend the Company follow its policies and also inform its Bank as to its
policy.
At October 31, 1997, we noted the Company was holding significant
amounts of written checks ("held checks"), some dating back to 1996. Although
some of the year-end held checks were subsequently released, a number of such
checks were still held into 1998. Held checks could result in inaccurate
accounts payable listings, risk of checks being lost, misplaced or accidentally
issued and inaccurate cash balances. We recommend that checks be prepared only
when Management plans on issuing such checks.
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<PAGE>
I. REPORTABLE CONDITIONS
Cash (Continued)
We also noted the following:
checks were written out of sequence;
old, outstanding checks were not always written
off/investigated/voided periodically;
certain monthly bank statements could not be located;
two bank accounts with cash balances were inactive for a lengthy
period of time (although balances were less than $10,000 and no
bank service charges were incurred, such cash could have been
used to pay bills);
more than one bank accounts' activity being recorded in the same
general ledger account (makes reconciliation process difficult);
We strongly recommend that the Company strengthen internal controls
over the cash function.
Segregation of Duties
Effective internal controls should include segregation of duties among
employees so that a system of checks and balances is established. We realize
that is difficult to segregate duties where there is a limited number of
employees. However, Management should be aware that whenever a limited number of
employees control the accounting function, the system is far more susceptible to
errors, either intentional or unintentional, not being discovered, and creates a
security risk for the system.
We recommend the Company segregate duties to strengthen control over
financial reporting. Specifically, the Company's CFO has check signing
authority, is responsible for the general ledger, at times prepares the monthly
bank reconciliations and prepares the monthly and quarterly financial statements
for inclusion in the parent Company's consolidated Forms 10-K and 10-Q. At a
minimum, someone independent of the CFO function should prepare the bank
reconciliations. The CFO should be responsible for reviewing the bank
reconciliations.
Payroll
One individual is responsible for substantially all phases of the
payroll process (accumulating and entering time cards, calling in information to
Payfirst [including pay rate changes and adding new employees], entering
information into the general ledger and distributing paychecks).
We recommend that the Company consider segregating duties to the extent
practical and/or providing the appropriate level of management oversight. At a
minimum, the Company should consider:
having a different employee distribute paychecks
having management directly receive from Payfirst, the payroll
summary and paychecks and review such for appropriateness and
reasonableness
obtaining a "report on review of policies and procedures placed
in operations" from Payfirst describing their internal controls
and any user considerations
having Management compare the payroll summary with the manual
summary of hours prepared by the Payroll Department for selected
individuals
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Payroll (Continued)
having any changes in pay rates or adding of new employees be
made (or approved) by Management.
Accounts Receivable
One person is responsible for substantially all phases of the accounts
receivable process (billings, cash receipts, collections, monthly statement
mailing, write-offs, general ledger postings).
We recommend that the Company consider segregating duties to the extent
practical and/or providing the appropriate level of Management oversight. At a
minimum, the Company should consider:
having someone independent of the accounts receivable process
generate and mail monthly statements
having Management review general ledger account activity (sales,
bad debt expense, returns and allowances, accounts receivable,
allowance for doubtful accounts) on a monthly basis for unusual
journal entries and postings
In addition, our audit procedures resulted in a year-end adjustment to
the "allowance for doubtful accounts" ("allowance") - we recommend that
management review the allowance on a monthly basis for adequacy.
Computer System
As a result of our review of the Company's computer system, we noted
the following:
There is not adequate segregation of duties with respect to the
computer system, especially since the Company has access to
"source code" rather than having "canned" programs;
There is no offsite storage of backup computer tape/disks. The
Company stores backup tapes/disks in its fireproof vault. Offsite
storage provides security and a means of recovering lost data
should an unforeseen event occur;
There is currently no formal, written "Disaster Recovery Plan".
Institution of such a Plan would include access to replacement
equipment to reconstruct lost records/data necessary to continue
the operations of the business with minimal interruption and
delay;
It is important that the Company institute formal policies to safeguard
the data currently on the computer system and to prepare a Disaster Recovery
Plan should an unforeseen event occur.
Inventory - Perpetual Reports
Inventory quantities on the Company's perpetual inventory are entered
from vendor invoices rather than from validated warehouse receiving reports. In
order to ensure that the perpetual inventory records are properly updated for
receipt of actual materials to be used for production, quantities on the
Company's perpetual inventory should only be inputted from validated receiving
reports. Maintenance of accurate inventory records will also minimize the risk
of significant job cost variances.
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<PAGE>
I. REPORTABLE CONDITIONS
Accounts Payable
During our accounts payable testing, we noted payables were not cut-off
properly at year-end; subsequent adjustments were required to provide accurate
financial statements. In addition, the Company does not "voucher" all of its
payables and accrued expenses on a consistent basis. We recommend that
procedures be established to make sure payables are cut-off properly at interim
and year-end. Proper cut-off is necessary to ensure accurate financial
statements are being prepared. In addition, we recommend that management
considered performing vendor reconciliations on a periodic basis for the
Company's significant vendors; this will assist in strengthening the cut-off of
accounts payable.
We also noted supporting documentation for certain payments was
inadequate or could not be located. We recommend that all payments be supported
by formal check requests, approvals by appropriate levels of management and
appropriate invoices, purchase orders and receiving reports.
Intercompany Account Reconciliations
We noted that reconciliations of intercompany account balances are not
being prepared. We recommend that the intercompany accounts be reconciled timely
on a monthly basis. Reconciliations need to be performed to ensure accurate
recording of all intercompany transactions. In addition, timely reconciliations
will ensure an accurate consolidation process.
Board of Directors' Minutes
During the course of our audit, we noted that the Board of Directors'
approval of all equity transactions (including the issuance of stock and
options) was not documented in the Board minutes. In order to ensure that a
proper record of corporate Board decisions is maintained, we recommend that all
critical decisions requiring Board approval (e.g., issuance of stock, issuance
of debt, significant purchase commitments, etc.) be properly documented in the
Board minutes.
Inventory
The Company generally performs a physical count of its entire inventory
once a year. We recommend the Company perform cycle counts throughout the year
to strengthen its inventory controls and to ensure account perpetual inventory
listings throughout the year.
During our audit, we noted that the Company's year-end physical count
of raw materials inventory was poorly planned and ineffectively run. In
addition, quantities counted were entered incorrectly from the count tags into
the accounting/inventory system (which resulted in quantities having to be
completely re-entered). We recommend that more emphasis be placed on physical
inventory planning and preparation, including appropriate management oversight.
In addition, see the "Audit Committee Letter" for comments pertaining to the
Company's work-in-process inventory.
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I. REPORTABLE CONDITIONS
Inventory (Continued)
We noted that the individual responsible for the physical inventory
count at October 31, 1997 was subsequently relieved of his duties. In addition,
we noted that the October 31, 1998 physical inventory count appeared to be much
better planned and executed.
Adjustments
Monthly adjustments are generally filed together in a month-end closing
binder. We noted numerous adjustments recorded without the proper documentation
or support or approval. We recommend all adjustments be properly documented and
supported. In addition, all adjustments should be reviewed by management and
signed-off upon approval.
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<PAGE>
II. Other Comments
Accounting Policies and Procedures Manual
Currently, the Company does not maintain a written accounting policies
and procedures manual.
We recommend preparing a manual that defines accounting policies,
procedures and internal controls. A comprehensive manual is a fundamental
component of an effective control structure, accounting and financial reporting
system. The lack of formal procedures results in increased risks of errors and
loss or misuse of assets, inconsistent treatment of transactions and a lack of
comparability of financial information. A comprehensive manual offers employees
a clear picture of Company controls, accounting procedures and practices,
provides the Company with a source of information that will not be lost if key
personnel leave, and will be helpful in training new employees.
This manual should include:
An organization chart that specifics areas of responsibility and
reporting lines;
Job description;
Levels of authority for approving transactions;
Flowcharts and narratives of the accounting system and
procedures, including the document flow from inception of a
transaction to completion;
Documents and records used in each segment of the accounting
system;
Accounting policies, especially for inventories, deferred
revenues, accruals and other areas requiring judgement;
Chart of accounts, including detailed explanations of accounts
contents;
Productive asset acquisition, retirement and depreciation
guideline (including a dollar limit for capitalization);
Accounts receivable credit and collection policies/procedures
(setting up accounts, credit limits, etc.)
We realized the preparing a comprehensive manual is costly and
time-consuming. Thus, we recommend developing crucial areas first, and as time
permits, other areas should be developed.
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<PAGE>
II. Other Comments
Computer - Y2K Issue
On January 1, 2000, information technology experts believe that many
application systems will fail as a result of erroneous calculations and data
integrity problems. The situation, commonly known as the year 2000 issue, will
occur because many computers cannot process date information beyond December 31,
1999. That is because many application software products (both commercial and
in-house developed legacy systems) were originally designed to accommodate only
a two digit date position to represent the year (for example, 95 for the year
1995).
The Company must devote the necessary resources to evaluate its systems
and make them year 2000 compliant. This will ensure that the systems will be
able to process date information on and after January 1, 2000.
We understand that Management has begun the process of reviewing its
computer operations (hardware, software, applications) to determine the effect
of this issue.
We recommend that you modify all applications, particularly
mission-critical applications, as soon as possible, to allow for complete
testing before January 1, 2000. If the Company is not year 2000 compliant by
January 1, 2000, it may experience costly and significant application program
failures that could prevent it from performing its normal processing activities.
Depending on the extent of system failures, noncompliance may also affect the
audit of the October 31, 1999 financial statements and, in extreme situations,
could have catastrophic financial consequences for the Company. Also, the
Company should consider implementing additional verification procedures to test
the accuracy of information received from its vendors, bankers, customers, and
other third party organizations with whom you exchange date-dependent
information because these organizations also must become year 2000 compliant.
The Company should satisfy itself that vendors, customers and other third party
organizations will not experience problems relating to the Year 2000 Issue that
could affect the Company's sales or purchases.
Joint Venture Activity
We noted that a loan exists between Global and its joint venture
partner Cadema Corporation; however, there is no documentation to support this
transaction. We suggest that a formal agreement and a signed note be prepared to
document all terms and obligations application to Global with respect to this
loan. Although activity related to the joint venture has not been significant,
we recommend that any activity be recorded timely in order to ensure accurate
financial reporting on an ongoing basis.
Purchase Order
A copy of purchase orders is forwarded to the Receiving Department for
matching to the receipt of materials. The purchase order, however, includes the
"cost" of the item. We recommend that the receiving department copy of the
Purchase Order block out the cost of the item.
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<PAGE>
II. Other Comments
Property and Equipment - Physical Inventory
Currently, a physical inventory of property and equipment is not taken
on a periodic basis to identify that items exist and agree with those reported
in the accounting records.
We recommend that a physical inventory be taken on an annual basis and
compared to the detail recorded in the fixed asset records. This procedure will
improve control over these items, identify obsolescence and help assure that
adequate insurance is in place. In addition, tagging the assets with permanent
metal identification plates or other similar means will increase the efficient
of the inventory process as well as aid in recovery in the event of theft or
loss.
What We Did
In our audit of Global Environmental Corp. and Subsidiary's 1997
financial statements, we considered its internal controls. We did this to help
us plan and perform our audit, not to provide assurance on the internal
controls. Our consideration of the internal controls might not disclose all
deficiencies in the internal controls. Accordingly, we do not express an opinion
on the internal controls of Global Environmental Corp. and Subsidiary.
What We Report
We report certain matters involving the internal controls and its
operations that we consider to be reportable conditions under standards
established by the American Institute of Certified Public Accountants.
Reportable conditions involve matters coming to our attention relating to
significant deficiencies in the design or operation of the internal controls
that, in our judgement, could adversely affect the Company's ability to record,
process, summarize and report financial data consistent with the assertions of
management in the financial statements.
Inherent Limitations in Internal Controls
The Management of Global Environment Corp. and Subsidiary is
responsible for establishing and maintaining internal controls. In fulfilling
this responsibility, estimates and judgement are required to assess the benefits
and related costs of control procedures. The objective of internal controls are
to provide reasonable, but not absolute, assurance that assets are safeguarded
against loss from unauthorized use or disposition, and that transactions are
executed in accordance with Management's authorization and recorded properly to
permit preparation of financial statements in accordance with generally accepted
accounting principles. Because of inherent limitations in internal controls,
errors or irregularities might occur and not be detected. Also, projection of
any evaluation of the internal controls to future periods is subject to the risk
that procedures might become inadequate because of changes in conditions or that
the degree of compliance with the procedures might deteriorate.
Distribution of This Report
This report is intended solely for the Board of Directors and
Management of Global Environmental Corp. and Subsidiary.
Foreign Corrupt Practices Act
Our comments about the Company's internal controls are not an opinion
about compliance with the Foreign Corrupt Practices Act (the "Act"). The Act
does not contain specific compliance criteria. The legal standards for
determining compliance might involve different criteria and considerations from
those we applied in our audit.
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<PAGE>
GLOBAL ENVIRONMENTAL CORP.
MANAGEMENT LETTER
OCTOBER 31, 1998
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<PAGE>
Board of Directors
Global Environmental Corp.
Hagerstown, Maryland
Gentlemen:
As part of our audit of your 1998 consolidated financial statements, we
are pleased to provide you with these comments to help improve your internal
controls and the efficiency and profitability of Global Environmental Corp. and
Subsidiary.
We have divided our comments and suggestions into two categories:
III. Reportable Conditions;
IV. Other comments.
Appendix I includes certain additional information regarding these
comments related to the internal controls.
We note that many of the comments represent reportable conditions which
have previously been communicated to the Company. However, it is important that
these matters be communicated so that they may be addressed completely and as
soon as possible.
We sincerely appreciate the courtesy and cooperation the Company's
officers and employees extended to us during the audit. We will be pleased to
discuss our recommendations at your convenience and assist in implementing them,
as necessary.
October 1999
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<PAGE>
II. REPORTABLE CONDITIONS
General Ledger and Account Reconciliation
During our audit, we noted numerous general ledger accounts (for
example, cash, fixed assets, accruals, intercompany accounts, etc.) had not been
reviewed or analyzed during the year. This resulted in year-end adjustments and
numerous delays in completing the annual audit. Many of these errors were not
detected during the year because accounts were not reconciled and analyzed on a
timely basis. The failure to analyze and reconcile accounts each month causes
delay in closing the accounting records, inaccurate monthly financial statements
and failure to make timely quarterly filings by the Company on Forms 10-Q and
10-K.
We recommend that all significant general ledger accounts be reviewed
monthly. Management should develop a priority list for each month's closing and
assign responsibilities to the appropriate employees. This will strengthen the
monthly financial reporting and provide timely and accurate financial results.
In addition, the Company's CFO should review and approve all account
reconciliations on a monthly basis.
Regulatory Filings
The Company's failure to review, analyze and reconcile various general
ledger accounts during the year as described above, resulted in a substantial
delay in the Company's year-end closing and preparation of year-end financial
statements. Consequently, the Company was unable to meet its deadline or
extension for filing its financial statements with the Securities and Exchange
Commission ("SEC"). In addition, the Company did not make filings of quarterly
Form 10-Q throughout 1998 as required by the SEC.
During 1998, the Company hired an additional person to assist in the
accounting process.
Cash
We noted during our cash procedures that bank reconciliations were not
being prepared on a timely basis and were also being prepared incorrectly. This
situation resulted in year-end adjustments and delays in closing.
Accurate and timely preparation of bank reconciliations are essential
so that bank errors and any potential misuse of funds is discovered and
corrected expediently. Accurate cash balances also aid in cash flow management.
We recommend that bank reconciliations for all bank accounts be prepared
monthly, reconciled to the general ledger and reviewed by Management.
In addition, we noted checks with only one signature whereas the
Company policy required two signatures. We recommend the Company follow its
policies and also inform its Bank as to its policy.
We strongly recommend that the Company strengthen internal controls
over the cash function through monthly preparation and review of bank
reconciliations.
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<PAGE>
II. REPORTABLE CONDITIONS
Segregation of Duties
Effective internal controls should include segregation of duties among
employees so that a system of checks and balances is established. We realize
that it is difficult to segregate duties where there is a limited number of
employees. However, Management should be aware that whenever a limited number of
employees control the accounting function, the system is far more susceptible to
errors, either intentional or unintentional, not being discovered, and creates a
security risk for the system.
We recommend the Company segregate duties to strengthen control over
financial reporting. Specifically, the Company's CFO has check signing
authority, is responsible for the general ledger, at times prepares the monthly
bank reconciliations and prepares the monthly and quarterly financial statements
for inclusion in the parent Company's consolidated Forms 10-K and 10-Q. At a
minimum, someone independent of the CFO function should prepare the bank
reconciliations. The CFO should be responsible for reviewing the bank
reconciliations.
Payroll
One individual is responsible for substantially all phases of the
payroll process (accumulating and entering time cards, calling in information to
Payfirst [including pay rate changes and adding new employees], entering
information into the general ledger and distributing paychecks).
We recommend that the Company consider segregating duties to the extent
practical and/or providing the appropriate level of management oversight. At a
minimum, the Company should consider:
having a different employee distribute paychecks;
having management directly receive from Payfirst, the payroll
summary and paychecks and review such for appropriateness and
reasonableness;
obtaining a "report on review of policies and procedures placed
in operations" from Payfirst describing their internal controls
and any user considerations;
having Management compare the payroll summary with the manual
summary of hours prepared by the Payroll Department for selected
individuals;
having any changes in pay rates or adding of new employees be
made (or approved) by Management.
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<PAGE>
I. REPORTABLE CONDITIONS
Accounts Receivable
One person is responsible for substantially all phases of the accounts
receivable process (billings, cash receipts, collections, monthly statement
rendering and mailing, write-offs, general ledger postings).
We recommend that the Company consider segregating duties to the extent
practical and/or providing the appropriate level of Management oversight. At a
minimum, the Company should consider:
having someone independent of the accounts receivable process
generate and mail monthly statements;
having Management review general ledger account activity (sales,
bad debt expense, returns and allowances, accounts receivable,
allowance for doubtful accounts) on a monthly basis for unusual
journal entries and postings;
the appropriate level of management approving all write-offs.
Computer System
As a result of our review of the Company's computer system, we noted
the following:
There is no offsite storage of backup computer tape/disks. The
Company stores backup tapes/disks in its fireproof vault. Offsite
storage provides security and a means of recovering lost data
should an unforeseen event occur;
There is currently no formal, written "Disaster Recovery Plan".
Institution of such a Plan would include access to replacement
equipment to reconstruct lost records/data necessary to continue
the operations of the business with minimal interruption and
delay;
It is important that the Company institute formal policies to safeguard
the data currently on the computer system and to prepare a Disaster Recovery
Plan should an unforeseen event occur.
Adjustments
Monthly adjustments are generally filed together in a month-end closing
binder. We noted adjustments recorded without the proper documentation or
support or approval. We recommend all adjustments be properly documented and
supported. In addition, all adjustments should be reviewed by management and any
adjustments over a prescribed amount be reviewed and approved by management.
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<PAGE>
II. REPORTABLE CONDITIONS
Intercompany Account Reconciliations
We noted that reconciliations of intercompany account balances are not
being prepared. We recommend that the intercompany accounts be reconciled timely
on a periodic basis. Reconciliations need to be performed to ensure accurate
recording of all intercompany transactions. In addition, timely reconciliations
will ensure an accurate consolidation process.
Inventory Accounting
Inventory is one of the Company's most significant assets and has a
significant effect on gross profit margins as well as on quarterly and annual
financial reporting. During our 1998 audit we noted the following:
general ledger accounts did not agree with the inventory cost detail;
raw materials used in production were not consistently requisitioned to
jobs;
materials taken from stock (raw materials and component parts) sometimes
were not requisitioned to jobs until the job was closed;
the Company's job cost system is inconsistent in compiling job costs due
to variances in the "cost structure reports" and the job cost reports by
work order;
the current inventory cost system can not track multiple vendors used for
purchases of the same inventory item.
In order to ensure that inventory quantity levels in the perpetual
detail are accurate for production, planning and valuation, controls must ensure
that the activity is properly posted. In addition, to ensure cost and profit
analysis are accurate, these same controls are essential to ensure that all
costs are proper based on the actual activity in inventory and production.
During 1998, the Company hired a cost accountant to improve the cost accounting
process.
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<PAGE>
II. Other Comments
Accounting Policies and Procedures Manual
Currently, the Company does not maintain a written accounting policies
and procedures manual.
We recommend preparing a manual that defines accounting policies,
procedures and internal controls. A comprehensive manual is a fundamental
component of an effective control structure, accounting and financial reporting
system. The lack of formal procedures results in increased risks of errors and
loss or misuse of assets, inconsistent treatment of transactions and a lack of
comparability of financial information. A comprehensive manual offers employees
a clear picture of Company controls, accounting procedures and practices,
provides the Company with a source of information that will not be lost if key
personnel leave, and will be helpful in training new employees. This manual
should include:
An organization chart that specifies areas of responsibility and
reporting lines;
Job description;
Levels of authority for approving transactions;
Flowcharts and narratives of the accounting system and
procedures, including the document flow from inception of a
transaction to completion;
Documents and records used in each segment of the accounting
system;
Accounting policies, especially for inventories, deferred
revenues, accruals and other areas requiring judgement;
Chart of accounts, including detailed explanations of accounts
contents;
Productive asset acquisition, retirement and depreciation
guideline (including a dollar limit for capitalization);
Accounts receivable credit and collection policies/procedures
(setting up accounts, credit limits, etc.)
We realize the preparation of a comprehensive manual is costly and
time-consuming. Thus, we recommend developing crucial areas first, and as time
permits, other areas should be developed.
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<PAGE>
III. Other Comments
Computer - Y2K Issue
On January 1, 2000, information technology experts believe that many
application systems will fail as a result of erroneous calculations and data
integrity problems. The situation, commonly known as the year 2000 issue, will
occur because many computers cannot process date information beyond December 31,
1999. That is because many application software products (both commercial and
in-house developed legacy systems) were originally designed to accommodate only
a two digit date position to represent the year (for example, 95 for the year
1995).
The Company must devote the necessary resources to evaluate its systems
and make them year 2000 compliant. This will ensure that the systems will be
able to process date information on and after January 1, 2000.
We understand that Management has begun the process of reviewing its
computer operations (hardware, software, applications) to determine the effect
of this issue.
We recommend that you modify all applications, particularly
mission-critical applications, as soon as possible, to allow for complete
testing before January 1, 2000. If the Company is not year 2000 compliant by
January 1, 2000, it may experience costly and significant application program
failures that could prevent it from performing its normal processing activities.
Depending on the extent of system failures, noncompliance may also affect the
audit of the October 31, 1999 financial statements and, in extreme situations,
could have catastrophic financial consequences for the Company.
Also, the Company should consider implementing additional verification
procedures to test the accuracy of information received from its vendors,
bankers, customers, and other third party organizations with whom it exchanges
date-dependent information because these organizations also must become year
2000 compliant. The Company should satisfy itself that vendors, customers and
other third party organizations will not experience problems relating to the
Year 2000 Issue that could affect the Company's sales or purchases.
Joint Venture Activity
We noted that a loan exists between Global and its joint venture
partner Cadema Corporation; however, there is no formal signed note for this
transaction. We suggest that a formal agreement and a signed note be prepared to
document all terms and obligations applicable to Global with respect to this
loan. Although activity related to the joint venture has not been significant,
we recommend that any activity be recorded timely in order to ensure accurate
financial reporting on an ongoing basis.
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<PAGE>
III. Other Comments
Property and Equipment - Physical Inventory
Currently, a physical inventory of property and equipment is not taken
on a periodic basis to identify that items exist and agree with those reported
in the accounting records.
We recommend that a physical inventory be taken on an annual basis and
compared to the detail recorded in the fixed asset records. This procedure will
improve control over these items, identify obsolescence and help assure that
adequate insurance is in place. In addition, tagging the assets with permanent
metal identification plates or other similar means will increase the efficient
of the inventory process as well as aid in recovery in the event of theft or
loss.
Common Stock Transactions
During our confirmation of the Company's stock transfer agent, we noted
small differences between the stock transfer agent's records and the Company's
historical records in the number of shares issued and outstanding and held in
treasury. Although these differences were not material, we recommend the Company
monitor stock transfer activity for reasonableness on a quarterly basis.
Accounts Payable
During our accounts payable testing, we noted that the Company did not
prepare vendor reconciliations during 1998. We recommend that management
considered performing vendor reconciliations on a periodic basis for the
Company's significant vendors; this will assist in strengthening the cut-off of
accounts payable. During 1999, the Company started preparing vendor
reconciliations.
Inventory
The Company generally performs a physical count of its entire inventory
once a year. We recommend the Company perform cycle counts throughout the year
to strengthen its inventory controls and to ensure accurate perpetual inventory
listings throughout the year.
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<PAGE>
What We Did
In our audit of Global Environmental Corp. and Subsidiary's 1998
financial statements, we considered its internal controls. We did this to help
us plan and perform our audit, not to provide assurance on the internal
controls. Our consideration of the internal controls might not disclose all
deficiencies in the internal controls. Accordingly, we do not express an opinion
on the internal controls of Global Environmental Corp. and Subsidiary.
What We Report
We report certain matters involving the internal controls and its
operations that we consider to be reportable conditions under standards
established by the American Institute of Certified Public Accountants.
Reportable conditions involve matters coming to our attention relating to
significant deficiencies in the design or operation of the internal controls
that, in our judgement, could adversely affect the Company's ability to record,
process, summarize and report financial data consistent with the assertions of
management in the financial statements.
Inherent Limitations in Internal Controls
The Management of Global Environment Corp. and Subsidiary is
responsible for establishing and maintaining internal controls. In fulfilling
this responsibility, estimates and judgement are required to assess the benefits
and related costs of control procedures. The objective of internal controls are
to provide reasonable, but not absolute, assurance that assets are safeguarded
against loss from unauthorized use or disposition, and that transactions are
executed in accordance with Management's authorization and recorded properly to
permit preparation of financial statements in accordance with generally accepted
accounting principles. Because of inherent limitations in internal controls,
errors or irregularities might occur and not be detected. Also, projection of
any evaluation of the internal controls to future periods is subject to the risk
that procedures might become inadequate because of changes in conditions or that
the degree of compliance with the procedures might deteriorate.
Distribution of This Report
This report is intended solely for the Board of Directors and
Management of Global Environmental Corp. and Subsidiary.
Foreign Corrupt Practices Act
Our comments about the Company's internal controls are not an opinion
about compliance with the Foreign Corrupt Practices Act (the "Act"). The Act
does not contain specific compliance criteria. The legal standards for
determining compliance might involve different criteria and considerations from
those we applied in our audit.
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