December 31, 2013
Tune-up Your Internal Controls for a Better Bottom Line
A contractor would never buy a piece of equipment, then, not perform a “tune-up” or necessary maintenance for the equipment to perform at maximum efficiency. However, in many construction companies, internal controls are put in place and left to operate on their own. Owners and managers figure that they dealt with the issue of internal controls at one time or another and now can move onto the next priority- namely bidding and building! As a result, one essential internal control is the continual review and revision of internal controls. Keeping a construction company’s policies and procedures up to date not only can help prevent fraud, but also can bring some real dollars to your company’s bottom line.
Recognize the Importance – Internal controls used to be left to the accounting staff. But there is one clear lesson from the construction companies that have had a fraud happen to them – the owners and management must actively involve themselves in the implementation and execution of these critical processes. No longer can the CEO, Executive Vice President or any other high level company executive not be involved.
Protect Your Projects – While the most commonly thought of internal controls relate to the handling of cash receipts and cash disbursements, policies and procedures should not be limited to making deposits, writing checks and doing bank reconcilations. Contractors need to address the management and execution of projects. For example, many project managers are responsible for approving and cost coding invoices. Thus, a periodic budget-to actual review that goes deeper than the schedule of values on your billings could be a valuable internal control. Job performance can also dictate the need to revisit your controls in this area. For example, the final costs on one project manager’s projects always comes in less than expected at the end than the project manager has reported during the course of the project. A further review of this project manager’s projects may indicate a breakdown in controls in preparing accurate estimates to complete, change orders that ultimately were not approved (or forgotten), favorable change orders to subcontractors, or worse—some type of fraud is occurring. Almost every contractor would say “Fraud – could never happen to me”. But just read the daily newspapers, and there are usually multiple articles on the long term bookkeeper or project manager that is being prosecuted for theft of services, monies, equipment or materials.
Think Technologically – Internal controls are also needed for the ever-changing technology issues that most companies face. In light of new ways that contractors are communicating and transmitting data with such devices as wireless, PDA’s, iphones and through the internet, additional policies and procedures are needed to ensure your company’s privacy and protect the integrity of data. These controls could include programs that “lock data” on company’s laptops/ PDA’s / phones if the device is lost or stolen, frequent changing of passwords to access data and connections, restricted internet use to approved business sites only and of course, a comprehensive company policy on the use of technology.
Another area is with electronic banking. While most banks today require a company to use “positive pay” process to ensure that only authorized checks are cashed, there are many other areas where internal controls are needed to be enhanced. For example, banking passwords should be secured and not taped on a yellow note on someone’s desk, wire transfers out of bank accounts should be authorized to the bank by more than one employee and documented in writing, and bank reconciliations should be prepared by someone other than who is responsible for cash receipts / disbursements or the general ledger. There are many other controls which are necessary for a proper segregation of duties.
Anticipate the Unexpected – Another thing to keep in mind is that your internal controls are probably good at handling the routine transactions, but it is the unusual ones that often trigger problems. These may include implementing such controls as top level management approval of new vendors and subcontractors (to ensure they are legitimate companies), proper documentation, review and approval of journal entries, and review of cost coding of invoices to ensure they get to the right job and line item in the cost report.
Get Results – By regularly challenging and streamlining your construction company’s internal controls, as the owner or top management, you will be able to rest assured that your employees are working more efficiently, there will be less risk of fraud and less costly mistakes that go undetected. In turn, you will see positive results on your bottom line.