An Auditor’s Guide To Top Five Internal Control Challenges Faced by SME

You may think that only big companies find it challenging to combat internal fraud as they have thousands of employees in multiple offices. However, SMEs also struggle when it comes to creating a robust internal control framework to mitigate fraud risks. Even though small businesses can navigate the challenge with the help of internal audit firms in Dubai, the owners should understand the risks they might face.

The biggest challenge for SMEs is that they struggle to implement properly designed controls due to the availability of limited resources. However, the lack of adequate resources shouldn’t deter you from addressing the deficiencies as it can lead to operational and financial risks. Here is a list of five internal control challenges commonly found in SMEs.

1. Separation of duties 

In big organisations, different employees are entrusted with overseeing the performance of critical functions. Such companies can minimise the chances of fraud by adopting the strategy of separation of duties. However, small businesses often have fewer employees and they do not follow the strategy of separation of duties. What we often see in SMEs is that a single employee is responsible for multiple critical functions in the organisation. This strategy increases the risk of fraud.

SMEs should, instead, assign different people key responsibilities such as authorizing transactions, recording transactions, maintaining custody of related assets, reconciling accounts etc. Small businesses should ensure that each employee is in charge of specific job responsibilities, defined in writing. If necessary, you can reassign the specific duties within a process from one individual to another to mitigate fraud risks. You can seek the help of internal audit firms in Dubai to see whether your strategy is robust enough to mitigate the risks.

2. Policies and procedures 

Creating effective policies and procedures still remain an underrated strategy among SMEs. Robust policies and procedures can help SMEs align their business objectives and establish best practice operating procedures. Clearly written policies and procedures are critical for any business and you should not dismiss their importance even if your operating procedures are straightforward. Consulting with internal auditors in Dubai can help you create robust policies and procedures.

We know each business is different, but SMEs can consider the following common processes:

  • Sales and accounts receivable
  • Cash management and banking
  • Purchases and accounts payable
  • Payroll and human resources
  • Financial statement closing and reporting

3. Documentation 

Most SMEs find it challenging to maintain adequate supporting documentation, which may considerably weaken their internal controls. It appears to be challenging because an individual accountant will be in charge of the process in most small organizations. However, you should remember that maintaining adequate documentation is the key to developing an effective internal control framework within your organization, and even as per the respective laws of the licensing authority and VAT laws also emphasizes documentation to keep for a certain period of time.  And even the recent developments and strict adherence by the authorities also make it compulsory to maintain the documentation to explain the transaction.

The lack of proper documentation will make it tough to demonstrate the existence of transactions completed, procedures performed, and controls in place. Effective documentation will also help you to easily research and respond to questions from customers, management and auditors. Companies that understand the importance of maintaining proper evidence can reduce the risks reduce risks to employees and their business. You can assess the effectiveness of documentation with the help of internal audit firms in Dubai.

4. Oversight and review 

Small business owners often fail to devote time to give proper attention to basic internal control monitoring procedures. Their primary focus often falls on the strategic and operational goals of their business. Most entrepreneurs spent their time, money and energy on creating strategies to make profits at the expense of ignoring internal control monitoring.

However, you need to properly oversee the internal control framework to ensure fraud detection and prevention. Business owners must review critical metrics such as sales, expense accounts, cash reports, variance reports, payroll summaries, and other data every month. This kind of review will help you identify problems that may exist in addition to providing valuable information for decision making. Big companies have an in-house internal audit team for this, but you can hire the best internal audit firms in Dubai to properly review your internal control framework.

5. User access rights for information systems 

Usually, SME owners grant their employees more access to the company’s information systems. Granting excessive access may create additional risks that are unknown to management. You should give the employees limited access to the IT systems at first and additional rights may grant if their workload increases. Excess access may give greater chances for fraud by employees.

You should also take care to review user rights annually to align the business purpose for the access granted to each user. It may warrant more time and effort, but this strategy can enhance the system of control. Although SMEs have scarce resources, this strategy can help them detect and prevent fraud. Consult with the internal auditors in Dubai to review the user rights periodically to prevent fraud risks.

Consult with the Best Internal Audit Firms in Dubai 

SMEs will be looking at serious risks of fraud and financial loss if they fail to implement a strong internal control framework. Small businesses can take a leaf from the five challenges mentioned in this article and use them to create a strong internal control framework within their organisation. Small business owners can resolve these challenges by hiring the best internal audit firms in Dubai such as Jitendra Chartered Accountants (JCA).

JCA can help you identify weaknesses in internal controls, operational efficiency, or regulatory compliance. JCA’s  Certified Internal Auditors possess in-depth knowledge of internal controls, processes & systems. We can ensure that your organization is on the right track by improving risk management. Consult with us today to create a better future for your company. Along with this, we offer a wide range of critical compliance services such as Audit, Accounting, VAT services, ESR, UBO, AML-CFT etc. JCA can be your reliable partner to strengthen your business growth.