Besides the lack of segregation of duties, what did Benihana's management identify as deficiencies that, in aggregate, constitute a material weakness?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
- Lack of segregation of duties as it relates to the review of journal entries
- The following deficiencies in the aggregate constitute a material weakness:
- The Company's redesign of certain controls throughout 2021 did not contemplate all the relevant design elements of control activities necessary to address the risks of material misstatement, as well as the completeness and accuracy over the information used in those controls. Additionally, certain controls were not executed as designed or were performed without sufficiently documented supporting evidence. The business processes impacted primarily consisted of payroll, accounts payable and property and equipment. Additionally, in certain cases controls were redesigned and implemented without a sufficient period of time remaining to evidence operating effectiveness
- The Company did not design and maintain formal and effective controls over user access to certain information systems to ensure adequate restriction of users and privileged access to venue level transaction processing applications and IT systems maintained by third parties. As a result, it is possible that the Company's business process controls that depend on the accuracy and completeness of data or financial reports generated by these information technology systems could be adversely affected due to the lack of operating effectiveness of information technology controls
- In certain instances, the Company determined there was inappropriate application of technical accounting pronouncements for certain transactions and disclosures
Source: Item 22 — CONTRACTS (FDD pages 73–74)
What This Means (2024 FDD)
According to Benihana's 2024 Franchise Disclosure Document, management identified several deficiencies that, in aggregate, constituted a material weakness in internal control over financial reporting as of December 31, 2021. Besides the lack of segregation of duties related to the review of journal entries, these included issues with the design and execution of certain controls, as well as deficiencies in user access controls to information systems. These weaknesses were considered when determining the audit tests for the company's consolidated financial statements.
Specifically, Benihana's redesign of certain controls throughout 2021 did not fully consider all relevant design elements necessary to address the risks of material misstatement, including the completeness and accuracy of information used in those controls. Additionally, some controls were not executed as designed or lacked sufficient documented support. The business processes primarily affected by these issues were payroll, accounts payable, and property and equipment. In some instances, controls were redesigned and implemented without enough time to demonstrate their effectiveness.
Another significant deficiency was the lack of formal and effective controls over user access to certain information systems. This deficiency could lead to inadequate restriction of users and privileged access to venue-level transaction processing applications and IT systems maintained by third parties. As a result, Benihana's business process controls that rely on the accuracy and completeness of data or financial reports generated by these IT systems could be adversely affected due to the ineffectiveness of IT controls. Finally, there were instances where Benihana determined there was inappropriate application of technical accounting pronouncements for certain transactions and disclosures.
While these material weaknesses did not result in a material misstatement of the annual or interim consolidated financial statements, they did create the potential for material accounting errors. Benihana is working to remediate these weaknesses by modifying the journal entry review process and accelerating the timeline for testing and documenting the design and operating effectiveness of control activities. Prospective franchisees should be aware of these identified weaknesses and the potential impact on financial reporting and internal controls.