What material weaknesses in internal control over financial reporting were identified in Benihana's management assessment?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
ished in the COSO framework.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Based on our assessment, management has concluded that as of December 31, 2021, our internal control over financial reporting was ineffective due to the material weaknesses in the control activities component of the COSO framework described below:
- Management identified there is a lack of segregation of duties as it relates to the review of journal entries.
- In addition, management identified the following deficiencies which, 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 material weaknesses in internal control over financial reporting as of December 31, 2021. These weaknesses relate to the control activities component of the COSO framework. The first identified weakness is a lack of segregation of duties in the review of journal entries.
In addition to the lack of segregation of duties, management identified other deficiencies that, when combined, also constitute a material weakness. These include the company's redesign of certain controls throughout 2021, which did not fully consider all relevant design elements necessary to address the risks of material misstatement. This also includes the completeness and accuracy of information used in those controls. It was also noted that certain controls were not executed as designed or lacked sufficient documented supporting evidence. The business processes primarily affected by these weaknesses were payroll, accounts payable, and property and equipment. Furthermore, some controls were redesigned and implemented without enough time to demonstrate their operating effectiveness.
Additional material weaknesses include the company's failure to design and maintain formal and effective controls over user access to certain information systems. This failure could compromise the accuracy and completeness of data and financial reports generated by these systems. Finally, the company identified instances of 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.
Prospective Benihana franchisees should be aware that while these weaknesses were identified in 2021, the company has been taking steps to remediate them, including modifying the journal entry review process and accelerating the timeline for testing and documenting the effectiveness of control activities. It's important for potential investors to understand the company's efforts to address these weaknesses and the potential impact on financial reporting.