Analysis of Hub Group SEC (U.S. Securities and Exchange Commission) Filings

Analysisof Hub Group SEC (U.S. Securities and Exchange Commission) Filings

Analysisof Hub Group SEC (U.S. Securities and Exchange Commission) Filings

Hub Group is atransport and freight firm, which provides logistics, truckbrokerage, and intermodal services across North America. With anannual income of roughly US$3.5 billion and an employee size of 2,600employees, the company has succeeded in creating value, safety,innovation, and providing low-cost services in the areas it serves(NASDAQ, 2016). The report reviews the internal controls of the firm,the aspects of the controls, and the standards met by the controls asset by PCAOB and COSO (Committee of Sponsoring Organizations of theTreadway Commission). Besides, it evaluates the bookkeeping systemsand financial audits to assess whether the firm has implementedeffective management procedures and accurate statements. The mainaspects of the report include a discussion of the accountingintegrity, information systems utilized, audit tests provided, riskmanagement, and the effected ERP systems. Thus, the discussion of HubGroup internal controls and accounting information systems helps toevaluate whether the company has adhered to the benchmarks developedby COSO and PCAOB as provided by SEC.

Internalcontrols

The internalcontrol system: Description, role and significance

A firm’s structure of internal control encompasses processes andstrategies developed to ensure that the company meets its goals andobjectives. Per the definition of COSO integrated framework, aninternal control is a procedure, stimulated by an organization’sboard, personnel, and the management (Martin, Sanders, &amp Scalan,2014 Simons, 2013). Firms intend to attain reliable financialaccounting, comply with the applicable regulations and laws, and haveefficient and effective operations thus, an effective structure mustprovide the administration with reasonable assurance on attainingthese goals. This means that in its broadest meaning, internalcontrol encompasses the processes, concepts, policies, tools, andaspects that control risks in a firm. According to section 404 ofSOX, “a firm’s internal control should encompass a statement thatthe management is responsible for developing and maintaining aninternal structure and processes for auditing,” (Martin et al.,2014). An effective structure should include an evaluation of itseffectiveness for financial auditing. Furthermore, the administrationmust assess the design of internal structures over auditing, as wellas, test the operating effectiveness of the designed controls.

The controls play a fundamental function in a firm’s successespecially in the auditing process. Since they are designed toprovide guarantee to the management that an organization canaccomplish its objectives, the controls if developed effectivelysafeguard assets by providing accurate and significant data to theinvestors. Thus, these structures provide timely, meaningful, andaccurate financial statements and budget evaluations to external andinternal users. Moreover, they are designed as risk managementstructures, which means they help an organization to detect andprevent fraud and risks. Through the internal controls, Hub Group hasmanaged to direct, monitor, protect, and evaluate its resources inits bid to offer freight and logistics services (Hub Group, 2016a).It is significant to note that at the transaction level, the firmmanages to ensure that payments made are for binding renderedservices and all the transactions designed or prepared are rightlybinding. At the organizational level, the firm manages to reportfinancial statements timely, as well as, provide accurate andappropriate feedback on the attainment of strategic goals or thecompliance with regulations and laws.

Report of theindependent accounting firm and its components

The summativecontrol system is composed of numerous individual control processes.COSO describes the system as composed of five components, whichinclude risk evaluation, control activities, monitoring, controlenvironment, and I.C.T (Martin et al., 2014 Simons, 2013). Themonitoring component refers to the procedure utilized to evaluate thequality of the system’s performance or productivity over time whilethe control environment concerns with the policies, actions, andprocesses that reflect the overall attitude of the management,shareholders, and directors. This means that the environment dealswith the integrity and ethical values, human resources practices,audit committee, commitment to competence, philosophy, andorganizational structure. The risk evaluation detects and assessesthe relevant threats while the information and communicationcomponents deal with procedures and structures that support thediscovery, capture, and dissemination of information. On the otherhand, the control activities concern with the policies and proceduresthat assist in ensuring the attainment of the management directives.

From thecompany’s DEF 14A, it is apparent that the Audit Committee managesthe control system and assesses financial statements and other dataincluded in the 10-K (Hub Group, 2016b). The committee also selectsthe independent auditors and its subsidiaries and evaluates theyearly accounting plan. Ernest &amp Young LLP is the firm’sindependent auditors and is accountable for performing internalcontrols over financial reporting, issuing opinion on the statementsand internal controls, and performing audits including consolidatedfinancial statements as per the principles of PCAOB. Ernest &ampYoung has reviewed Hub Group’s consolidated balance sheets of theperiods ending 2014 and 2015, as well as, the associatedcomprehensive income and integrated accounts of income, cash flows(for the 3 years in the financial year ending 2015), andstockholders’ equity. From the report, the independent auditorconducted all the assessments in agreement with the benchmarks ofPCAOB. These standards “require a firm to plan and perform auditsto obtain reasonable assurance on whether financial statements arefree from misstatement,” (Hub Group, 2016a). The report of theErnest &amp Young states that the financial statements presented byHub Group presents impartially the firm’s associated financialposition, the integrated outcomes of all processes, and the cashstreams in adherence with U.S. GAAP. The report further states thatthe internal controls of the firm fulfil all the components of aneffective structure as established by COSO. According to the reportof Ernest &amp Young on internal control, Hub Group’s managementis accountable for maintaining an effective structure, and during theperiod under consolidation, the administration effectively maintainedan accurate and commendable control.

Management’sresponsibility relative to internal controls

According to theregulations of SOX, an organization’s management should issue aninternal control report that encompasses a statement on theaccountability of the administration regarding the development andmaintenance of an effective structure. This means that the managementplays a critical function in designing and running an adequate andoperational structure. Moreover, the control environment component ofthe control framework as established by COSO asserts that themanagement must have ethical and integrity values, devoted tocompetence, and provides clear signals to workers on the importanceof the controls. Hub Group’s board has delegated responsibility tothe management for the independent evaluations of the internalcontrols and independent. According to the firm’s 10-K Report onControls and Procedures, the management evaluated the effectivenessof its disclosure procedures and controls as described under the SECact of 1934 (Hub Group, 2016a). In fact, the firm’s report statesthat the management is accountable for designing and upholdingsatisfactory controls over accounting reporting as established underSecurities Exchange Act in Rule 13a-15(f) (Martin et al.,2014). This means that the management undertook an assessment of theusefulness of the developed controls. However, the report assertsthat the management believes that despite its effectiveness, thesystem cannot offer absolute assurance on the attainment of thefirm’s goals and objectives.

Use andimplications of computer assisted auditing techniques on internalcontrols

Hub Group has anintegrated information system, which combines a suite of evaluationtools, comprising forecasting, optimization tools, and errordistribution assessments. The firm’s 10-K report asserts that thefundamental aspect of its business approach is to invest in highlyeffective and disciplined execution capacities (Hub Group, 2016a).These capacities allow the company to proactively solve problems andoffer effective and concise communication. Additionally, the 10-Kreport states that Hub Group will continue to leverage mobilesolutions such as cloud-hosted and SaaS based solutions to capturereal time data. It is imperative to note that audits are intended toassess the efficiency of an organization’s structures by collectingdata on the operation of the units, pinpointing inefficiencies, andidentifying system controls suitable to prevent risks. Since auditingextensively involves information gathering, networks and computertechnologies are best suited to support the processes of accountingin businesses (Simons, 2013 Stoel, Havelka, &amp Merhout, 2012). Toprovide effective and comprehensive information, auditors should usecomputer technology and networks as an assessing tool, reviewautomated data and systems, and comprehend processes. Besides,information technology systems help auditors to administer auditsthrough effective procedures.

COSO, PCAOB, and GAAS bodies provide principles and regulations on ITand emphasize the significance of computer-based techniques andcontrols in accessing and supporting control environments. Other thaneasing controls and enhancing efficiency, I.T. systems ensure thatbusiness operations and processes run smoothly without interference.By utilizing computer technology in the auditing process, assessorsenhance their capacity to evaluate information and systems andadminister their activities extensively and successfully. HendersonIII, Davis, and Lapke (2013) and Stoel et al. (2012)posit that computer software and tools allow auditors to enhance afirm’s decision-making process, increase efficiency of the auditingprocess, offer transparency governance, reduce risks and fraud,reduce routine tasks, and decrease costs. This means that informationsystems allow auditors to increase their efficiency, performance, andproductivity. These tools and software integrate the reviewingprocess, which greatly reduce costs and allow the performance ofmultiple tasks timely. Thus, they not only save time and money forfirms, but they also ensure transparency and diminish risks.

Table 1

Data flowdiagram

Information Systems

(ERP and Hub’s system)

Data flow (D)

Hub Group

Data flow (B)

Data flow (E)

Data

destination

(Applications)

Data store (H)

Controls

(K)

Auditing Process

(F)

Table 2

Accountingcycle Flow chart

Business transaction analysis

Action Plan and presentation of financial reports

Auditing testsand procedures for assessing control risks

Audit tests andprocedures allow auditors to obtain adequate and accurate accountingevidence to determine with logical confidence that financialstatements are devoid of material misstatement. This means that toavoid misstatements, firms should have effective internal controls todetect, prevent or correct error. Furthermore, errors should not bemade and if made, the auditor should manage to identify them byassessing the effectiveness of the internal structures. In thisregards, in critically assessing control risks (risks which occurbecause of a weak internal control structure) and the integrity ofthe internal mechanisms, one can utilize risk assessment procedures,test of controls, or analytical procedures. Risk assessmentprocedures encompass the identification of risks associated withinternal structures and their exposure to hazards. Collectively,these procedures are applied to gather a comprehension of the firmand its environment usually the auditor’s risk evaluation (Stoel etal., 2012). In the case of Hub Group, Ernest &amp Young’sassessment of the firm’s internal controls to obtain anunderstanding of its operations, effectiveness, and weaknessesincorporates the risk assessment procedures.

The independent auditors should utilize what-if analysis,checklists, hazard and operability study, and faulttree analysis. These processes involve brainstorming onactivities that could wrong within the systems, using a list of knownhazards and threats to detect, which are inherent in the structure.They also encompass conducting a thorough evaluation on the existingor potential threats and risks, and identifying things or actionsthat could potentially cause a hazardous event (Martin et al., 2014).On the other hand, the tests of controls concern with the use of theauditor’s comprehension of the controls to evaluate the controlrisks for each activity related to audit goal. This means that Ernest&amp Young should use its experience in analyzing statements, aswell as, its knowledge of Hub Group’s internal mechanisms andcontrols to appraise the risks. The auditor can utilizere-performance by initiating new transactions to see which controlsthe clients use or note the effectiveness of the systems. Moreover,they can observe business processes in action especially the controlaspects or inspect business documents for stamps, authorizationsignatures, and appraise checkmarks (Hall, 2015). Analyticalprocedures focus on comparing and contrasting recorded amounts toexpectations that the auditor has developed. An assessor must comparethe amounts during planning and auditing to indicate potentialmisstatements and provide proof regarding the existence of suchmisstatements.

Accountinginformation system

Primaryinformation flows within business environment and traditionalaccounting records

The AccountingInformation Systems (AIS) provide effective data or information as abusiness resource to the users. Today, AIS have become fundamentalstructures especially in ensuring that the activities of a businesssuch as distribution, sales, cash receipts and billing run smoothly.In a firm, information flows horizontally and vertically withhorizontal flow supporting operational level activities with greatlydetailed data about the numerous transactions impacting on the firm.The horizontal flow of information encompasses activities such asshipment of products, sale, transfer of resources, and utilization ofmaterials and labor. Hall (2015) assert that the vertical flow ofinformation disseminates data downwards from the executive to junioradministrators and operations staff. The information flow is in theform of budgets, quotas, and instructions and ensures the effectiveoperations of all activities. Moreover, summarized flow ofinformation pertaining to operations flow upward from subordinates tothe management.

Traditionalaccounting involves the utilization of paper-based to registertransactions. Information is manually recorded in binders and columnpapers such as journals, ledgers, documents, and registers. On theother hand, computer-based systems entail the electronic registry ofdata in software and other computer-linked structures (Hall, 2015).Traditional accounting records offer an audit trail for locatingtransactions from source documents, which capture and validatetransaction information needed for processing to financialstatements. This means that the conventional records allow theauditor to determine the accuracy, validity, and completeness of allinformation included in the financial statements. For example, if theexternal auditor wishes to verify the accurateness of Hub Group’saccount receivables published in annual reports, they can locate theaccounts receivable figure in the balance sheet to the generalledger. Thus, traditional records allow a firm to establish theaccuracy of what is recorded in computer-based systems.

Differencesbetween batch and real-time processing and their impact ontransaction processing

In real-timeprocessing, firms process transactions immediately they arise withoutany deferment to amass transactions while in batch processing, theylet the transactions accumulate over time and process them as a bunchor a single unit. In batch systems, information is gathered, entered,and administered, and then the firm releases the batch results, whichmeans the system requires different programs for output an input. Atime lag always occur in batch systems between the point of abusiness activity happening and the point of processing the activitysince the system accumulate transactions into clusters forprocessing. For example, the payroll processing where a time lagexists between the application of labor and the preparations ofpaychecks. This means that unlike real-time, batch structure requiresfewer resources due to its easier programming and maintenance (Hall,2015). On the other hand, real-time structures require numerousresources especially in designing interfaces and developing theprocessing capacity. The two processing systems have ensured thatfirms manage their transactions effectively. Organizations have beenable to support their operations and activities. Furthermore, bothbatch and real-time systems involve the recording of data indatabases thus, businesses have managed to integrate managementinformation systems in their operations. Hall (2015) contends thatbatch structures have become essential in ensuring efficiency whenprocessing transactions since they disregard unnecessary activities.Additionally, the processing systems have enabled firms to managetheir resources and identify the best way to support efficiency oreffectiveness. It is also imperative to note that the elimination ofnon-activities increases productivity by ensuring competitiveness andcontinuous processing. Unlike traditional approaches, which aretiresome, costly to maintain, require numerous resources, and areprone to fraud, REA is creates computer objects that represent realeconomic objects. Thus, it is well-organized, effective, easier tomaintain, and extensive.

Benefits ofadopting REA approach

The REA approachis an alternative model of accounting, which is built on a firm’sresources, events, and agents and their relationship. The modelallows the designation and specification of AIS to meet the needs ofan organization. Since, the approach involves the significant aspectsof a firm: resources or assets of an organization, agents ordepartments or individuals who partake in business activities, andevents or activities that impact on resources, it ensures efficiency.The model attains efficacy by eliminating unnecessary auditingobjects. The approach does not include credits and debits ordouble-entry recording and ledger accounts since it manages togenerate the accounts in real-time.

Functionalityand elements of ERP system

An ERP is acomprehensive computer application, which helps an organizationmanage its significant aspects of business in an integrated manner.The system has a seamless and smooth information flow, standardizeduse, and is highly efficient. An ERP structure enables a firm to takecare of all its information needs and requirements in a singlesystem. The structure allows a firm to support its businessactivities such as distribution, sales, payroll, and purchases.Moreover, the system provides comprehensive transaction processingcapacity to the firm, which allows the management to make decisionseasily and effectively. Through its on-line analytical processing(OLAP) support, the system contributes to modeling, decision support,reporting, information collection and retrieval, and modification ofprocesses (Stoel et al., 2012). Because of its extensive use andefficient, the structure helps in supporting the operations of afirm. However, despite its comprehensive and operative use, thesystem involves numerous risks particularly in its implementation. Inusing an ERP, a firm must change its entire structure, which requiressignificant training of personnel. This means that the firm willengage in change management, which may lead to resistance to changeor failure to choose the right system. An ERP system must grow withthe operations of a firm thus, issues related to structurescalability usually arise while organizations incur huge costs indeveloping and running the system.

Conclusion

Controls are animportant aspect in Hub Group, as they allow the firm to detect andprevent risks, as well as, attain its objectives. The accountingprocess within the organization has integrated I.T. and greatlydepended on Ernest &amp Young for auditing and evaluation of risksand accuracy of the financial statements provided. It is significantto point out that the computer related structures are key to therealization of the firm’s goals owing to the operations of thefirm. The adoption of computer systems and mobile solutions and thecompliance regulations established to adhere to COSO, GAAP, PCAOB,and SEC requirements have helped the company to effectively managerisks and enhance the existing internal structures. This shows thatfirms require effective auditing process and comprehensive I.T.structures that support the accounting procedure, internal controls,and management’s operations.

References

HendersonIII, D. L., Davis, J. M., &amp Lapke, M. S. (2013). The Effect ofInternal Auditors` Information Technology Knowledge on IntegratedInternal Audits.&nbspInternationalBusiness Research,&nbsp6(4),147.

Hall, J. A. (2015).&nbspAccounting information systems.Cengage Learning.

Hub Group. (2016a). Hub Group-10k. Retrieved September 10,2016, fromhttps://www.sec.gov/Archives/edgar/data/940942/000156459016013549/hubg-10k_20151231.htm

Hub Group. (2016b). Hub Group-schedule 14A.Retrieved September 10, 2016, fromhttps://www.sec.gov/Archives/edgar/data/940942/000162612916000433/hubg-def14a_050616.htm

Martin, K., Sanders, E., &amp Scalan, G. (2014). The potentialimpact of COSO internal control integrated framework revision oninternal audit structured SOX work programs.&nbspResearch inAccounting Regulation,&nbsp26(1), 110-117.

NASDAQ. (2016). HUBG Company financials. Retrieved 9September 2016 from http://www.nasdaq.com/symbol/hubg/financials

Simons, R. (2013).&nbspLevers of control: how managers useinnovative control systems to drive strategic renewal. HarvardBusiness Press.

Stoel, D., Havelka, D., &amp Merhout, J. W. (2012). An analysis ofattributes that impact information technology audit quality: A studyof IT and financial audit practitioners.&nbspInternationalJournal of Accounting Information Systems,13(1), 60-79.

Appendices

Table 1

Data flowdiagram

Information Systems

(ERP and Hub’s system)

Data flow (D)

Hub Group

Data flow (B)

Data flow (E)

Data

destination

(Applications)

Data store (H)

Auditing Process

(F)

Controls

(K)

Table 2

Business transaction analysis

Accounting cycle Flow chart

Action Plan and presentation of financial reports