Internal Control in Small Companies

Using internal controls in small businesses

Internal control, as its name implies, involves everything that controls risks to a business. With enterprise strategic management theory continuing to develop, the actual meaning of internal controls is of increasingly focused. “Internal controls are an important step to help safeguard assets against the unauthorized acquisition, use, or disposition.” Fabiano (2012) explains that “Internal controls can help minimize the risk of employee theft or fraud occurring in your organization.” While according to Thain (1969), who developed criteria for differentiating among small, medium and large firms, because small firms might face much more different kinds of problems than others, they would find that it would be difficult to implement the internal control procedures in their firms. This literature review sets out to explicate the significant impact of internal controls in small businesses in term of improving the efficiency of auditing. It would also take account of the extension of it, using internal controls to reduce employee theft in small businesses.

It is clear in the literature that effective internal controls have contributed to small businesses to shorten the time spent on auditing, which would also provide a savings in audit fees. Different economists propose a similar attitude to the impact of internal controls on auditing. Hicks and Chenok (1957) put forward a theory to suggest auditors use internal control questionnaires to assist them to characterize a properly coordinated system in a small business. This has become the function of the future researches.

In the early 1990s, an evaluation of internal controls based on Hicks and Chenok’ conclusion was used in the Certified Public Accountant (CPA)’s audit approach to reduce the comprehensive testing of balance sheet accounts. A smooth auditing depends on both close connectives among each part and the emphasis of owners in small businesses on separation of duties. To build an effective separation of duties in small businesses, a detective controls in the internal control system is needed. Bryan and Rouse (1988) state that “With internal controls in place and operating effectively, the auditor can reduce the year-end substantive testing and more efficiently allocate audit effort over the 12 months…the audit fee should be lower.” Considering the particularity of small businesses, Engle and Dennis (1989) develop the above view and emphasis that owners and managers should pay more attention on the select of internal control structure since not all the existing system of control could be relied upon. Since that, it would be essential to use internal controls in the auditing in small businesses.

The literature also demonstrates that appropriate internal control procedures are indispensable parts of reducing employee theft in small businesses. Snyder, Broome and Zimmerman (1989) apply the theory of Hicks and Chenok as a basis and use the information of the work of Donald to suggest using appropriate internal control procedures to reduce employee theft. Eight certified public accountants from Big Eight accounting firm and local and regional firms was asked to assist them. They listed forty-two controls based on Donald’s work and identify which are essential for small businesses. Results of the study were listed as some essential controls in terms of cash, payroll, investments, inventories, accounts and notes receivable, accounts payable, sales and property, plant, and equipment. With an atmosphere of honesty and integrity and a standard that all of the stuffs in small businesses could adhere closely, owners and managers could select the most pertaining items from them and use to decrease the amount of employee thefts in their firms.

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