Internal Controls for Contractors

Posted on 08.14.13

internal controls contrsAuthor: Brett Sinsabaugh, CPA, Business Assurance & Advisory Services Senior Associate

Internal controls provide a way for companies to achieve operational and financial goals. Every company should instill a network of internal controls to ensure their business is operating at its optimal level.

The Committee of Sponsoring Organization of the Treadway Commissions (the COSO Commission) defines internal controls as a process—effected by an entity’s board of directors, management and other personnel—designed to provide reasonable assurance regarding the achievement of objectives in the following categories: a) reliability of financial reporting, (b) effectiveness and efficiency of operations, and (c) compliance with applicable laws and regulations.

Internal Control Components

Major components of internal control and the fundamentals of the internal control framework are as follows:

  • Control environment
  • Risk assessment
  • Control activities
  • Information and communication
  • Monitoring

Internal Controls for Contractors

Many internal controls related to primary accounting and financial reporting cycles, such as cash receipts, receivables, sales, payables and cash disbursements, inventories, and personnel and payroll are common among industries; however there are several controls that contractors should consider implementing to strengthen reliance on operations and financial reporting.   See below for internal controls beneficial to contractors.

  • Approved contract forms and change orders
  • Segregation of duties among invoice approval and billing
  • Proper supporting documentation for detailed billing
  • Written policy for procurement and bid processes including a detailed review by management
  • Request proof of insurance for all subcontractors
  • Protect and secure company assets, such as materials and equipment
  • Unannounced job site inspections for operational, procedural, safety, and administrative compliance
  • Written safety and health policy to minimize hazards on the job site
  • Documentation of hours performed by subcontractors

Weaknesses of Internal Control

Although internal controls may add considerable strength and reliability to your company's operations and financial reporting, there are limitations. No internal control is perfect, as controls are susceptible to failure. Some common limitations of internal control are as follow:

  • Human judgment and error
  • Cost constraints
  • Management over-ride
  • Collusion

Successful internal controls are largely driven by a company's employees, especially management and those charged with oversight.

As of May 14, 2013, COSO issued its updated Internal Control-Integrated Framework and related illustrative documents. Per COSO News Release, the original framework may be used extending through the transition period (May 14, 2013 to December 15, 2014).  For more information regarding the updated COSO framework please see COSO's website at www.coso org.

For more information regarding strengthening your company's internal controls, please contact your Keiter engagement team or information@keitercpa.com I  804.747.0000.