Construction Business Owner, December 2006 

As a business owner, you are concerned about numerous issues not limited to maximization of profits, employees, succession planning, business risks, customers, partners and that large bid you and your estimator just submitted. On top of this, you want to have a better personal life, and in the back of your mind, retirement thoughts haunt you from time to time.

With all of these concerns, you have the auditors coming in at year-end for the company's annual audit. The last thing you are thinking about now is what your auditors will look for in the future, but you should. The best-in-class contractors expect the audit process and their auditors to perfect their businesses and in the process, assist in addressing all of the other areas of their businesses.

The secret to maximizing the value of the auditors' experiences and the audit process is to use the auditors to assist your business in perfecting business systems. Auditors come back year-after-year to perform your audit. They are exposed to the innards of your business, the talents (or lack thereof) of your people and in general, obtain a clear understanding of your business. Why would a construction business owner hire an outside consultant to come in and analyze the business when he already has access to experts-his audit team?

This is not to assume that all auditors are able to handle this challenge or that audit firms assign the proper individuals with the proper talent to a company's audit. A contractor can have control over this process by interviewing and selecting an audit firm that best fits that contractor's needs. In addition, insist that the audit team has at least one experienced CPA with construction industry background.

Keep in mind, while the auditor can assist in identifying the problems or concerns related to the contractor's business systems, independence must still be maintained. If not, the auditor will no longer be able to do the company's audit. The auditor cannot assist in management of the business or make management decisions. If you as the business owner have the auditor take on management roles, independence will be impaired. This is often a fine line, but generally as long as management approves and follows through on the auditor's recommendations, independence will not be an issue.

Business Systems

What are business systems and why are these so important to the success of any contractor? One can argue that the most valuable asset that a contractor possesses is its business functions. An entity cannot profitably succeed or grow without properly designed and performed business functions. A contractor with revenues of $5 million, but with business functions appropriate for a $50 million organization will be able to grow rapidly and successfully, whereas a contractor doing $50 million in revenue, but with business functions appropriate for a $5 million organization faces a great risk of failure. Positive and constructive modifications to business functions must occur before growth occurs, or at least at the same time, in order to be assured that defined management objectives are achieved.

Business functions can be called by many names-internal controls, internal control, business processes, business culture and/or business systems. These names can often be used interchangeably and describe the same issue. The term "internal controls" usually implies or refers to the collection of the various categories of controls within the entity's total business processes. "Internal control" refers to the sum total of the entity's methods and processes.

Internal control within a business can be defined as the methods and processes which are designed, created, monitored, documented and periodically modified as necessary by the owners, management and employees to provide reasonable assurance that defined objectives are achieved including:

1. The reliability of data, whether operational or financial
2. The efficiency and effectiveness of operations
3. The protection and safeguarding of the entity's assets
4. Compliance with applicable laws and regulations

A control is a procedure or process that provides reasonable assurance that defined objectives are achieved. On the other hand, not all procedures or processes are controls.

Missing or Inadequate Processes or Controls

Beneficial or needed internal processes or controls can also be missing or not yet created or performed by the entity. Every entity, construction related or not, almost immediately sets up processes over cash collections and cash payments. Other needed processes are added as the company grows in size and complexity. During this evolution, controls (i.e., procedures that assure that the objectives of the company are achieved) are added. Not all businesses develop all of the processes or controls that can make the business successful, more profitable, less difficult to manage, deliver a safer work environment, assure employee or management training and transition, address succession planning and more..

Frequently, the types of processes or controls that are missing or partially present in construction-related entities are not limited to:

• Cash management
• Budgeting (either annual budgets or capital budgets)
• Strategic planning, implementation and monitoring
• Quality control
• Safety programs
• Human resource such as employee hiring, retention, satisfaction, training and evaluation
• Succession planning

The reasons that missing processes have not been created and initiated is usually due to the lack of knowledge or understanding on how the process should operate or the benefits that can be derived from the processes or controls. Initiating, creating or adding such missing functions to an organization takes commitment on the part of the organization, the knowledge of how such a process should be structured and integrated into the other systems and the documentation of the process.