Establishing Strong Physical and Financial Controls for Construction Companies
As a contractor, you probably face diverse and significant day-to-day challenges in operating your business. These challenges likely come in many forms including operational, contractual, administrative, environmental, regulatory and many more. A firm understanding of your construction company’s control environment can benefit your business by maintaining a sound operational structure so you can focus on its many other challenges.
How Segregation of Duties Strengthens a Contractor’s Control Environment
A contractor’s control environment includes the governance and management functions and the attitudes, awareness, and actions of those charged with governance and management concerning the contractor’s internal control. It essentially sets the tone for an entity. The control environment is the foundation for all other components of internal control. A healthy control environment encompasses many different facets. One important area is the assignment of authority and responsibility, which includes how financial based hierarchy relationships are assigned and operate.
For contractors, an effective foundation of segregation of duties is a key element to establishing strong physical and financial controls. Segregation of duties is the practice of assigning employees responsibilities of authorizing transactions, recording transactions, and maintaining custody of assets. It is intended to strengthen a contractor’s control environment, by reducing opportunities that allow any employee to both perpetrate and conceal errors or fraud. At the basic level of implementing an adequate segregation of duties, no one person should have access to both physical assets and the related accounting records, or to all phases of a transaction.
The size of the contractor plays an important role in understanding segregation of duties. Contractors that have small accounting and finance departments could have limitations on the extent of separation of duties. Therefore, it is important for these contractors to have effective financial support for authorizing transactions, recording transactions, and maintaining custody of assets in the form of executive management or governing board oversight.
A good first step to understanding your construction company’s current control environment is to perform a self-assessment of current policies, procedures, and controls to help determine if efficiencies or improvements should be implemented.
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.