Internal controls are extremely important because they provide a level of assurance that the financial statements have not been misstated to outside users. Many people believe that the implementation of internal controls is only beneficial to those outside the firm. However, if implemented correctly, internal controls can provide the internal benefit of increased operational efficiency to small firms.
Internal controls can be defined as the atmosphere, policies, and procedures a firm requires or creates in order to mitigate the risks of fraud or error. The implementation of these policies and ethical cultures can increase operational efficiency in two main areas:
Effective internal controls can be difficult to implement, but they can have many worthy benefits for an organization regardless of size. There is a common misconception that internal controls are generally intended for large firms and have no benefit for mid to small-sized firms. Contrary to this popular belief, the benefits of effective internal controls are actually magnified in smaller firms. A 2014 study from Singapore Management University found that “the negative effect of material weaknesses on firm operational efficiency is more pronounced for firms with smaller market capitalization.” Using the Data Envelopment Analysis (DEA) methodology of measuring efficiency, firms with market caps ranging from $75-$250 million saw proportionally higher benefits from effective internal controls.
Below is a list of specific ideas on how your organization can implement internal controls in regards to one of the most important aspects of any construction company, subcontractor and supplier controls.
Subcontractor or Supplier Controls