Internal Controls Create Internal Benefits

Internal controls
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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:

  1. Assets and resources of the firm will less likely be misappropriated: Ineffective internal controls over segregation of duties or inadequate documentation can contribute to miscommunication, misuse, or theft of company resources. This means that operational efficiency is inherently decreased without effective controls through decreased output at a given level of input. Effective internal control can mitigate risk and maximize output.
  2. Better decisions from management: Implementing effective internal controls means that financial statements and data will be more accurate for external use. The increased value of the financial statements adds internal value as well. More reliable financial statements mean that firm management will have more accurate information to base all of their decisions on. As a result, firm leadership will be able to act more effectively in the interest of the firm.

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

  • Review contracts and periodically compare them to the real payments. Ensure there is a robust system in place for recording payments.
  • Monitor the bidding process between the subcontractor and supplier.
  • Separate subcontractor selection and approval responsibilities.
  • Have an independent employee review accounts payable to vendors or subcontractors for any anomalies.
  • Evaluate the budget variance for all jobs and determine the cause of any variances.
  • Distinguish between accounts payable invoice processing and accounts payable approval to avoid error or theft.

For additional information on Aronson’s Construction and Real Estate Group, contact Greg Leonhartt at 301.231.1816 or gleonhartt@aronsonllc.com.

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