Kimberly Davis-AC553-Unit 6 Final Course Project

Running Head: Unit 6 Dollar General Project 1

Kimberly Davis

Dr. Tanae

AC553 Development and Evaluation of Internal Controls

Unit 6 Course Project

Dollar General Corporation

June 21, 2015


Introduction

Dollar General Corporation is a retailer that offers a variety of products that people

frequently consume and need to be replenished. The product line is comprised of items such as

cleaning supplies, basic apparel, food, personal care, houseware, health and beauty, and seasonal

items. The company sells quality brand names that include Hanes, Unilever, Coca-Cola, General

Mills, Energizer, Kimberly-Clark, Procter & Gamble, and Kellogg’s (Dollar General 2014

Annual, 2015).

Dollar General has 12,000 locations across 43 American states. The company has more

retail locations than any other retailer in the United States. The substantial visibility makes

Dollar General the largest discount retailer in America. This company has achieved a

sustainable competitive advantage that has allowed them to be successful for many years. Dollar

General employs more than 109,000 employees.

History

Dollar General has been operating successfully since 1955. The company was

incorporated as JL Turner and Son Inc. By 1968, the name was changed to Dollar General

Corporation. By 1998, the company was reincorporated as a Tennessee corporation (Dollar

General 2014 Annual, 2015). The company went private in 2007 by Kohlberg, Kravis, and

Roberts but became public again in 2009 under new management (Insights, 2012). The company

trades on the New York Stock Exchange.

The headquarters is located in Goodlettsville, Tennessee. They have recently opened

their 12,000th store in Juliette, Georgia. It was officially open for business May 20, 2015. The

company has committed to opening 730 stores while remodeling and relocating 875 stores this

year, 2015 (Dollar General Opens, 2015). The business model of the company is as follows:


“providing a broad base of customers with basic every day and household needs supplemented

with a variety of general merchandise items at everyday low prices” (Dollar General Corp,

2015).

Financial Position

Dollar General has achieved solid growth for the last five years in revenue, net income,

and free cash flow (Bias, 2014). The company’s assets include cash, cash equivalents,

merchandise, inventories, prepaid expenses, property, equipment, and goodwill. The total assets

equal $11,224,104 (thousands) as of January 30, 2015 compared to $10,867,524 (thousands)

from January 31, 2014. The comprehensive income is $1,067,928 (thousands). The net sales for

2014 total $18.9B with $1.3B in cash flow (Dollar General 2014 Annual, 2015). Dollar General

has a reasonable amount of long term debt but has been able to reward their shareholders in the

process of their expansion (Bias, 2014).

Code of Ethics

Dollar General updates and enforces a strict code of business conduct and ethics. Each

employee must familiarize themselves with the code. The employees are expected to adhere to

the ethical standards. The Code of Ethics is approved by the Board of Directors. The code

represents a commitment to integrity by management as well as other employees. Each

employee is required to complete a certification and disclosure form to honor the commitment

(Code of Ethics, 2007). The code covers areas such as competing fairly, ensuring accuracy of

records and public disclosures, cooperating with audits and investigations, conflicts of interests,

protecting company assets, and much more (Dollar General Code, 2015).


Controls

Internal controls are procedures or methods that help an organization achieve efficiency

and effectiveness in their business operations. Dollar General devised controls in inventory

management, cash handling, payroll, fixed assets, and financial reporting.

Inventory Management

Dollar General has an automated wireless warehouse system for the distribution center

network. According to the annual report the centers are located in Scottsville, KY, Ardmore,

OK, South Boston, VA, Indianola, MS, Fulton, MO, Alachua, FL, Zanesville, OH, Jonesville,

SC, Marion, IN, Bessemer, AL, Lebec, CA, and Bethel, PA. The company is preparing to open

its 13th distribution center by October 2015 (Dollar General, 2014). The company leases four of

the centers and owns the others. The smallest center is located in Lebec, CA with an average of

600,000 square footage. The square footage for the centers range from 600,000 to the largest of

1,310,000.

IBM and JDA Merchandising technology is used to efficiently manage inventory. The

comprehensive system allows for planning and allocation of processes. JDA Portfolio has

applications for data mining, store place planning, and merchandise assortment (Leading

Discount. 2002). According to Bragg (2009), “Many inventory items are difficult to identify

once they have been removed from their shipping containers, so it is imperative to properly

identify and tag all received items prior to storage” (p.97). The distribution center process is as

follows:


The receiving process

The shipping process

Orders are downloaded from the host computer daily

Items are picked and batched

Pallets are geographicaly organized

Inventory is verified for the order

Replenishment workorder is generated

Labels are produced for outbound

Mobile computer verifies the location of each item to make sue that it is placed on

conveyor system

Conveyor scans and send to the specified dock door

(Dollar General Case Study, 2002).

Cash Handling

Purchase orders for goods are generated via SEC/VAX server

Barcoded license plates are generated

for each pallet

Each pallet is scanned upon entrance and

tracked throughout

Operator scans the pallets

Inventory is automatically

updated


Dollar General operates in the retail industy and therefore utilizes cash registers in the

establishments. The cashier scans the items and the transaction is tallied. According to Bragg

(2009), “the primary role of the cash register is to record the amount of cash stored in it, either

electronically or on a paper tape, while also providing a moderate level of security over the cash”

(p.186). The cashier gives a receipt to the customer once the transaction is completed. The

receipt verifies the amount charged and collected and any change owed to the customer. Once

the shift has been completed, the manager reconciles the cash to the cash receipt. The managers

use keys to make changes pertaining to refunds, returns, or cancellations. As stated by Bragg

(2009), the requirement for a key or password from a manager or supervisor when refunds are

issued prevents the cash register operator from stealing cash (p.188).

Dollar General employs a cash audit and payment services manager. This employee

reports to the Director of Sales and Cash Audit. The manager processes the auditing of cash and

electronic tender and reconciles non-cash activities. The manager is responsible for posting cash

and checks and electronic funds, and reports missing deposits and cash overage or shortage

(Cash Audit, 2014).

Payroll

Payroll is not outsourced. This is performed in house by a payroll specialist. Dollar

General uses a sophisticated computerized system utilizing ADP software. The specialist does

all pertinent research and reports to the payroll tax manager. The specialist researches deduction

history, employee wages, etc. (Payroll Specialist, 2015). The manager verifies the information

and makes sure the correct data is posted to the payroll register. The manager has to provide the

approval for changes and payroll balances and ensures accuracy.

Fixed Assets


The company assets include facilities, equipment, monies, products, and vehicles (Dollar

General Code, 2015). The property is not permitted to leave company premises or be used for

personal purposes without the manager’s approval.

Dollar General invested in a highly sophisicated system that provides a uniform network

design for all stores. Interface Managed Cloud Services are advanced security in the areas of

Network management (wide area), IP Alarm System monitoring, digital voice, PCI compliance

by way of Cisco IPS/IDS, IP video surveillance, and Rogue Wireless Management (Dollar

General , 2012).

The security system protects all the fixed assets simultaneously. As mentioned by Bragg

(2009), the installation of an alarm system protects valuable fixed assets that cannot be moved

(p. 253).

Financial Reporting

Dollar General is very concerned about being a company with integrity. The Code of

Business Conduct and Ethics declares that the company’s SEC filings and other public

communications must contain full, accurate , fair, timely, and understandable information

without fail, They willingly comply with GAAP (Generally Accepted Accounting Principles).

The company uses auditors that conduct audits in accordance with PCAOB (Public Company

Accounting Oversight Board) standards.

According to Bragg (2009), “it is really impossible to integrate controls into the closing

process that at least make it more likely that financial statements will be generated that are

reasonably close to actual results” (p.275). Dollar General has an audit committee. The

committee must have at least 3 of the existing board members. The requirements for the

committee member include financial management and/or accounting expertise. The member has


to have experience as a CPA, CEO, CFO, controller, or a senior officer that has experience in

overseeing financial reporting responsiblilities (Dollar General Corp, 2012).

The fiscal year for Dollar General ends the Friday that is closes to January 31. The

company has a finance department, internal audit department, Director of Financial Reporting,

CFO, Controller, and also employs independent auditors to examine all financial statements

(Code of Ethics, 2007). The audit committee works closely with the Board of Directors. These

are the functions of the audit committee as stated in their annual report.

Pre-approves the independent auditor’s audit engagement fees and terms and all

permitted non-audit services and fees

Reviews an annual report describing the independent auditor’s internal quality control

procedures and any material issues raised by its most recent review of internal quality

controls

Annually evaluates the independent auditor’s qualifications ,performance and

independence, annually evaluates the lead audit partner, and periodically considers

whether there should be a regular rotation of such firm

Discusses the audit scope and any audit problems or difficulties

Sets policies regarding the hiring of current and former employees of the independent

auditor

Discusses the annual audited and quarterly unaudited financial statements with

management and the independent auditor

Discusses types of information to be disclosed in earnings press releases and provided to

analysts and rating agencies


Discusses policies governing the process by which risk assessment and risk management

are to be undertaken

Reviews disclosures made by the CEO and CFO regarding any significant deficiencies or

material weaknesses in our internal control over financial reporting

Reviews internal audit activities, projects and budget

Establishes procedures for receipt, retention and treatment of complaints we receive

regarding accounting or internal controls

Discusses with our general counsel legal matters having an impact on financial

statements

Performs an annual self-evaluation

Furnishes the committee report required in our proxy statement

Evaluates and makes recommendations concerning shareholder proposals relating to

matters within the committee’s expertise

Periodically reviews and reassesses the committee’s charter

(Dollar General 2014 Annual Report 2015 Proxy Statement, 2015)

Strengths and Weaknesses

Dollar General updates and enforces a code of ethics and requires all employees to adhere

by commiting to signing the agreement. There is a consistent same store sales growth. The

company has achieved high visibility in the U.S. Customer traffic has increased. The company

has obtained the confidence of Wall Street. The company is popular with the wealthiest

investors (Lavish Investor, 2013). The company has managed to lower operating expenses.

Dollar General has managed to invest in a standardized system to provide security for critical


data and other fixed assets. One great strength is the ability for Dollar General to earn double

digit operating margins because of the lean structure of expenses (Insight, 2012)

Dollar General has committed to this amazing growth strategy that may be at risk. The

level of debt that has been incurred may cause difficulty for the company to raise additional

capital to fund operations and continue in the pursuit of their strategy. They may have to use a

huge portion of operating cash flow to make principal payments (Dollar General 2014 Annual,

2015). The issue of shrinkage is a weak spot because there is no definite way to prevent it. This

can also have a negative affect on the finances. Theft, loss, and damage are the enemy of all

retailers. The sales volume is also an issue when compared to the high volume of Wal-Mart.

They will have to remain consistent in opening stores for the increase of foot traffic.

Assessment and Recommendations

Dollar General has thoroughly reviewed processes in their business operations. They

have implemented well managed controls. They have also thoroughly considered their options

and strategically mapped out their needs in order to develop the controls that match their

strategic direction. They have become the largest retailer in the United States because of their

unusual growth strategy of planting more locations. They have experienced increased

productivity because of the wise choices in internal control investments.

The inventory management has controls for receiving the goods as well as for tracking

and leaving the distribution center. They have a remote system that allows them to know exactly

where the good is throughout the warehouse and once it is ready for shipping. They create

license plates to mark that the goods have been received. The cash handling has necessary

control points. The manager must approve refunds, cancellations, and returns by using the

manager’s key. The key is accompanied by a password or particular code to input into the


register. The manager reconciles the register cash at the end of the shift and this allows the

register operator the opportunity not to commit fraud or steal from the company.

The payroll is performed in house. The specialist must remain current on all regulations

and laws and make sure to fulfill all compliance responsibilities. The payroll manager must

approve the final register to make sure all things are accurate. The alarm system protects the

facilities and all of the inventory and store registers. The standardized system also protects the

confidential data for customer and employee information.

Dollar General has all of the stores on one network and all things point back to the main

computer at the headquarters. The company has organized the corporation with many control

points to make sure that no one person has too much power and authority. They have made it

possible for everyone to be accountable to each other. The Code of Ethics is an excellent point

of reference for the managemnt as well as employees.

Dollar General has performed very well and continues to make sound decisions for the

future and present conditions of the operating activities. They were unable to acquire the Fanily

Dollar chain which would have significantly increased their competitive advantage, but the

strategy to open and remodel stores every year has allowed them to still compete aggressively.

As Dollar General moves forward, the company should remain focused and consider applying

the following:

1.) They should remain vigilant and continue to expand by opening and remodeling

locations. This will drive profitability. They may also consider acquiring another chain

to help with the expansion since Family Dollar was not a success.

2.) The company must maximize the store space and figure out more ways to improve

pricing, markdown optimization, and initiatives (Dollar General Corp, 2014).


3.) There needs to be an introduction of new products. This will keep the customers

interested and making return visits.

4.) Inventory is vital to company success. They have to continue to monitor inventory and

figure out ways to close the gaps that lead to shrinkage and also minimize damages.

5.) They will need to work on improving cost structure.

6.) They will need to continure brainstorming for perfecting efficiencies throughout the

entire company. As they continue to increase in numbers, they will need to have good

management controls and processes that will be easily integrated.


References:

Bias, W (2014) Here’s how dollar general is doing so far this year. Seeking Alpha. Retrieved

from http://seekingalpha.com

Bragg, S (2009) Accounting control best practices. 2nd Edition: John Wiley & Sons

Cash Audit & Payment Services Manager (2014) DG Careers. Retrieved from

jobs.dollargeneral.com

Code of Ethics Memo (2007) Dollar General. Retrieved from

https://www.dgpartners.com/codeofethics.doc

Dollar General 2014 Annual report 2015 Proxy Statement (2015) Dollar General. Retrieved from

investor.shareholder.com

Dollar General Case Study (2002) Retrieved from

www.intermec.com/learninf/comtent_library/case.../cs149.aspx

Dollar General’s Code of Business Conduct and Ethics (2015) Dollar General. Retrieved from

m1.ethisphere.org/code-of-conduct/dollar-general-code.pdf

Dollar General Corporation Adopts Interface Systems Managed Cloud Serices to Replace

Traditional Service Providers (2012) Interface. Retrieved from

www.interfacesystems.com/pdfs/success-story-DollarGeneral-final.pdf

Dollar General Corporation Audit Committee Charter (2012) Dollar General. Retrived from

investor.shareholder.com

Dollar General Corporation Form 10-K (2015) Dollar General. Retrieved from

filesshareholder.com

Dollar General Opens 12000th store (2015) Dollar General. Retrieved from

www.dollargeneral.com

http://www.dollargeneral.com/

http://www.interfacesystems.com/pdfs/success-story-DollarGeneral-final.pdf

http://www.intermec.com/learninf/comtent_library/case.../cs149.aspx

https://www.dgpartners.com/codeofethics.doc

http://seekingalpha.com/


Dollar General to Build New Distribution Center in San Antonio, Texas (2014) Dollar General.

Retrieved from newscenter.dollargeneral.com

Insights (2012) Retailing Today. Retrieved from retailingtoday.com

Lavish Investor (2013) What experts are saying about dollar general in 2014. Seeking Alpha.

Retrieved from http://seekingalpha.com

Leading Discount Retailer to Increase ROI and Achieve Aggressive Growth with JDA (2002)

JDA. Retrieved from www.jda.com

Payroll Specialist (2015) DG Careers. Retrieved from jobs.dollargeneral.com

http://www.jda.com/

http://seekingalpha.com/

Kimberly Davis-AC553-Unit 6 Final Course Project

Documents

Transcript of Kimberly Davis-AC553-Unit 6 Final Course Project