Fine-tuning Your Internal Controls

If your company’s internal controls are not up to speed, you’re exposing your business to a number of risks. Without adequate internal controls, you may be making decisions based on inaccurate financial information. Moreover, weak internal controls heighten the possibility that your company could fall victim to theft and fraud.

Contractors are particularly vulnerable to accounting errors and outright fraud since they often have operations at several different work sites. Fraud is a particularly serious issue: Businesses lose an estimated 5% of annual revenues to fraud each year, according to the Association of Certified Fraud Examiners. Areas that your company should pay particular attention to include the handling of cash, accounts receivable, and accounts payable.

Handling Cash

You may be leaving your company open to a fraud opportunity if you give sole responsibility for processing cash transactions to a single employee. All cash-related functions should be shared by two or more employees as a safety precaution. Be sure that bank account reconciliations are done monthly, and consider requiring two signatures on checks, especially for large disbursements and payroll.

Personally reviewing your bank statements can alert you to potential problems. Have the statements sent to you directly and promptly review them. Watch out for out-of-the-ordinary items, such as unfamiliar payees.

Reviewing Accounts Receivable

As a practical matter, you should track amounts owed and when accounts are due if your company is to maintain a healthy cash flow. Establish procedures that ensure bills are prepared promptly. Follow up on accounts receivable on a standardized schedule, and record and deposit all cash receipts, segregating collection and bookkeeping responsibilities. You should preauthorize any amounts that are written off as uncollectible.

Tracking Accounts Payable

This is an area of construction where the potential for fraud and accounting errors is high, particularly if your company is working at multiple job sites. You can limit the potential for losses by instituting tight controls on materials and purchasing. Consider requiring management authorization for job site material purchases, and be sure to set limits on the amounts site managers can spend without authorization from an additional, higher level of management.

You should put procedures in place to make sure that delivery receipts are being checked to ensure that all ordered items have been received. And track whether ordered materials and equipment are being used as intended by requiring written verification and receipts for returned items.

Implementing and consistently enforcing effective internal controls can help your company control costs, maintain profit margins, and reduce the potential for fraud and theft. If you would like to know more about improving your internal controls, please consult with us.