Abstract
This paper is written to study the internal control of a small company and analyze its weaknesses and strengths. The Company that we are going to analyze is a Construction company called Al-Karnak contracting company. We choose this company because it does not do huge projects but up to 4 floors which means that it is not a very big company and its operations can be observed and analyzed easily. We choose to ask the employees some questions and we visited the office to observe some of the operations.
Company’s background
The company is Located in Dubai, Abu Hail Area and it opened in 2007. The company started with building that consists of ground floors and 1st floors only which means only villas. Throughout the years the company started building more floors. The company has an accounting office that includes 3 accountants as follows: Accounting Manager, Accountant, and data-entry accountant.
Understanding the Business
The company gets designs from the consultants’ office and then they offer their pricing, if the company offers the best price they take the project and sign a contract directly with the owner and indirectly with the consulting office as a third party. The company has number of suppliers that they deal with to get all the materials needed for building their projects.
Their supplies include:
- wood
- steel
- cement
- drainage pipes
- wires
- nails
- PVC pipes
- carpentry tools
- etc.
Moreover, they also need engineers such as site engineers, project engineers, project managers and watchmen; more importantly the foreman, labor workers, and the safety officer.
The business has a storage that contains the basic things needed to start any project; however, other things are ordered depending on the preferences of the owner, for example some owners like to have the Turkish steel instead of the Qatari one. Moreover, things like cement and iron are things that should be ordered and used immediately because if they are stored they would be ruined.
Internal Control
Observations
We had 2 visits to the office; the first one was to observe the work and to study the environment. However, if we wanted to see the core operations of the company we would have gone to the sites but we were told that it is dangerous and since we are studying internal control we liked to stay in the office and check how things are done. The first thing that we noticed is that the site engineers are always coming with lists of what they need and they give that to the estimation department who reviews the list and gives confirmation. The list is then sent to the purchasing department that also confirms from the project engineer and makes the orders. Moreover, we have also observed that the big decisions were made by the General Manager, Wejdan Obeidat, and he was the one responsible for getting the jobs and projects where he had the connections with people who recommend his company.
Questions and Interviews
The next visit was the one that held the questions and our main focus was the Accounting department. The first interview was the General Manager who was very helpful and tried to explain the business as much as he could. We asked about the nature of the business and what requires cash payments. Moreover, we asked how the cash is made and the answer was that the owners give them payments each time they’re done with a major part of the project or when they want extra stuff that was not listed at the beginning of the project period. Then we moved to the Accounting department where we interviewed the Accounting manager, Mr. Rami Abbas, where we asked him about the processes that the accounting department is responsible for. Mr. Rami Abbas has told us that there are 3 accounting employees in the accounting department where he was the Accounting manager and two other employees were: accountant and data-entry. He told us that they were using a program called almizan.net. They use this program to generate financial reports such as income statement and statement of cash flows. The Interesting part was that these were the only reports that the company generated and there was no mention of balance sheets or statement of retained earnings, when we re-asked the Accounting manager he said that those are generated if the management asks for them only. Moreover, the accountant Ms. Diala, was the one responsible for collecting checks from owners and paying for suppliers; Moreover, the data-entry accountant, Ms. Ghada, is the one who enters the transactions on the system and the Accounting Manager reviews them and makes sure of their work all the time. Moreover, the Accounting manager told us that the company is Audited annually using a freelance accountant.
Weaknesses
Although the use of almizan.net in preparing financial reports may help the contracting company to have a more accurate accounting process, it is a major weakness. The software is not very well known. Hence, it may be prone to inaccuracies. The impact of financial reports inaccuracies is damaging to the company. The manager may end up making bad decisions. A small company like Al-Karnak, which has few staff members in the accounting department may fail to ferret out errors caused by the software. Subsequently, the General Manager may inadvertently make ineffective financial strategies because of the distorted auditing. Miscalculating the income of the company may also unnecessarily raise the tax liability (Leitch 38). Thus, while using financial reporting software is indeed efficient and convenient, there is the need for Wejdan Obeidat to ensure that it is appropriate. The infrequent communication between the accounting department and the purchasing section is also a notable challenge. Maximum efficiency occurs when the proper internal relationship is upheld. The accounting department must record any dealings conducted by the purchasing unit. This strategy, which increases efficiency in the financial analysis, as well as budgeting, in turn helps the administrators in decision-making. Unfortunately, in the case of Al-Karnack contracting company, the purchasing department obtains most of the materials that the engineers need after passing through the estimation department. During this process, the accounting department is given little attention. The disjoint is likely to lead to illegal transactions. Unknown software and a disjoint of department dealing with finances expose the company to illegalities. The small number of accounting employees is also an outstanding fault that makes segregation of duties difficult. Yet, separation of duties (SoD) is meant to discourage deceit and inaccuracy (Barra 12). By allowing the accountant to collect checks and/or pay suppliers, the business exposes itself to untraceable instances of corruption.
Recommendations
Al-Karnak needs to reconsider its criteria for selecting financial reporting software. Financial reporting is essential for budgeting and the day-to-day decision-making in the company. As such, an effective program is paramount (Arwinge 78). The drift towards data collection, as well as automation is ubiquitous in the modern internal control techniques (King 29). Sticking to the trend, the General Manager should utilize the opportunity created by technology to eliminate risks and/or reduce errors of internal control processes. Before settling on the software, the administration should ensure that the tool can help the business to achieve its aims and objectives (Ragan, Savino, and Parashac 58). The objectives of the program vendor should also be consonant to the company such that there is a win-win situation. Moreover, the vendor’s software should offer a comprehensive and custom-built functionality (Kianoff 29). With respect to internal relations, there is the need to create a more frequent interaction between the purchasing and accounting departments. This goal can be achieved by ensuring that before any department conducts a transaction, the accounting department keeps a record. Noble international dealings increase efficiency and accuracy in the business, particularly during the preparation of financial reports. Furthermore, to guarantee proper SoD, the management needs to consider various approaches. Foremost, the manager should identify indispensable duties that are vulnerable to abuse (Barra 10). In this case, the function performed by the accountant will be the most applicable. The duties should then be divided into every stage that makes them susceptible. Subsequently, each stage should be allocated to a different employee (Arwinge 63). To achieve proper SoD, the company needs to have sufficient number of employees (Leitch 49). In this case, Al-Karnak contracting company will need to recruit more staff members, particularly in the accounting department, such that the collection of checks and payment of supplies are performed by different employees.
Conclusion
The company is a small company and they have few employees which makes segregation of duties hard to achieve. However, we have noticed that the General manager put people in control who are close to him and that is because many of the decision makers and managers are either relatives or close friends. This can be a good or a bad thing because if these people are trust-worthy then they will try to do their best to avoid and stop any corruption; however, if these people are not as trust-worthy as they should be, the management would not really know of any corruption that is taking place.
References
Arwinge, Olof. Internal Control: A Study of Concepts and Themes, New York, NY: Springer Science & Business Media, 2012. Print.
Barra, Roberta. “The Impact of Internal Control and Penalties of Fraud.” Journal of Information Systems 24.1(2010): 1-21. Print.
Kianoff, Lisa. “The Changing Face of Financial Reporting for the Middle Market ERP.” CPA Technology Advisor 20.3(2010): 29. Print.
King, Rebecca. “How to get Reporting Functionality from other Software.” Journal of Financial Planning 1.1(2011): 29. Print.
Leitch, Matthew. Intelligent Internal Control and Risk Management: Designing High Performance Risk Control Systems, The United Kingdom: Gower Publishing Ltd., 2012. Print.
Ragan, Joseph, Christian Savino, and Paul Parashac. “Starworld: Preparing Accountants for the future: A case-based approach to teach international financial reporting standards using ERP Software.” American Journal of Business Education 3.11(2010): 53-68. Print.