Construction Accounting Article -
Spruce Up Your Internal Controls and Bring Some Shine to Your Bottom Line

Target Audience: General Contractors, Construction Industry Professionals, Forensic Accounting Firm Interest, Internal Controllers

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In many construction companies, internal controls are put in place and left to operate on their own. Owners and managers figure that they’ve dealt with the issue and can move on to the next priority — namely bidding and building.

But one essential (and often overlooked) internal control is the continual review and revision of internal controls. Keeping these policies and procedures up to date not only can help prevent fraud, but also can bring some shine to your bottom line.

Recognie the Importance
Following the Enron debacle, and with the advent of the Sarbanes-Oxley Act, auditors are spending more time testing and inquiring about internal controls. Meanwhile, upper management is being handed more responsibility regarding these policies and procedures — particularly at public companies but at privately owned ones as well.

Internal controls used to be left to the accounting staff. But if there’s one clear lesson from the corporate financial scandals, it’s that owners and management must actively involve themselves in the implementation and execution of these critical processes, see a forensic accounting firm for help.

Protect Your Projects
While the most commonly thought of, and perhaps most important, internal controls relate to the handling of cash, these policies and procedures shouldn’t apply only to writing checks, collecting payments and doing bank reconciliations. For contractors in particular, internal controls need to address the management and execution of your projects.

Many project managers are responsible for approving and coding job cost 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.

Performance also can dictate the need to revisit your controls in this area. For example, if you’ve noticed a reduction in the profitability of a project manager’s recently completed jobs, it may be beneficial to revise the oversight of that manager’s future projects.

Think Technologically
Internal controls are also needed for the ever-changing technology issues that most companies face — construction businesses included. In light of the new systems that have become prevalent for contractors (such as wireless communications), you may need additional policies and procedures to ensure your company’s privacy and protect the integrity of your data.

These controls could include activity logs, mandatory periodic password changes, and physical controls over computers and handheld devices in company trucks or on job sites.

For cash controls, it’s important to keep up with today’s changing banking technology. The “positive pay” process allows you to approve the checks presented on your account each day or provide the bank with a list of the checks written and the intended payees to prevent unauthorized payments.

With electronic payments becoming increasingly common, consider controls to ensure that only authorized payments are made. For instance, you may want to use separate bank accounts for your electronic transactions, such as having all payroll transactions handled via one account.

Anticipate the Unexpected
Another thing to keep in mind is that your internal controls are probably good at handling the routine transactions, but it’s the unusual ones that often trigger problems.

Therefore, be sure to include mechanisms for handling nonstandard transactions in your internal controls, such as obtaining proper authorizations and correctly posting them. Indeed, your auditor may ask you about nonstandard journal entries to make sure unusual transactions were properly authorized and recorded.

You may also need to occasionally change controls related to job costing and vendor and subcontractor invoices. Every so often, conduct an intermediate review process before job invoices are posted to ensure that the costs are being coded to the proper phase of the correct project.

Get Results
By regularly adjusting and streamlining your construction company’s internal controls, you’ll be able to work more efficiently and incur less risk of fraud or costly mistakes. In turn, you’ll likely see positive results on your bottom line.

Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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