Business companies in the current era of the Internet of Things seem to be very strict. In fact, it is so strict that various unhealthy company operating practices often emerge because management is forced to make profits that are difficult to achieve.
When management cannot achieve the targets set at the General Meeting of Shareholders (GMS), company management can be replaced at any time. Conflicts of interest between management in charge of running the company and shareholders who own the company are often the cause of problems within the company.
For example, management may submit a report that the company’s achievements and performance are very good to shareholders in order to secure its position. Although, for example, the facts on the ground are actually the opposite.
Apart from that, the basic human nature of never feeling satisfied can also be a problem. This can also lead to various frauds in company management, such as embezzlement, mark ups, fraud, and so on.
Therefore, a company must carry out a management audit to detect various errors, fraud or inaccuracies in company management or known as deficiencies. So, in this article we will discuss the meaning of deficiencies, their types, and their relationship to audit findings. Listen to the end, OK?
Understanding Deficiency
Basically, deficiencies are shortcomings, usually found in company management. The company carries out a management audit to correct these deficiencies which will improve management performance.
Therefore, deficiencies can also be considered as one of the points of concern of management audits. A comprehensive management audit will be able to find and correct the causes of deficiencies so that the auditor can achieve audit objectives. As explained by Hery SEMSI. CRP. RSA. CFRM. CIISA in his book Accounting and Auditing Terms. In this book you can find various important terms or concepts regarding the basics of accounting as well as general knowledge in the field of auditing.
Auditors can identify deficiencies by looking at standard performance measurements that show weaknesses in organizational units or individuals. In addition, Cooper and Backer (1993) say that deficiencies can also occur due to an organization’s unpreparedness to face changes that occur in the business environment. For example, human resources are less prepared to face changes in consumer shopping habits from offline to online.
On the other hand, Tagiman (1997) says deficiencies can also be related to assets. This means that the auditor needs to review the various methods or tools used to protect these assets and, if necessary, verify the existence of assets owned by the company.
Apart from that, auditors must also see how company assets are protected from various types of losses such as theft or illegal activities with appropriate and appropriate inspection procedures.
In short, audits are carried out to improve management systems, such as preventing losses, avoiding incorrect payments, improving operational efficiency, or others. In the process, auditors are required to find practices that occur in order to determine which organizational unit or individual is the cause of the deficiency.
Even so, Herbert (1979) reminded that auditors also need to provide recognition for work results that produce good effects if they exist. So the results of the management audit will be objective and clear.
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Types of Deficiencies
Deficiencies in an organization can be divided into two, namely deficiencies in the system and deficiencies in operations. For more details, see the brief explanation below:
1. Deficiencies in the system
As mentioned previously, deficiency is the same as deficiency. This means that deficiencies in the system can be interpreted briefly as deficiencies in a company’s system. Several things in the company system that can experience deficiencies include:
a. Internal control system
In general, internal control can be interpreted as part of each system that is used as a guideline and operational implementation procedure for an organization. Meanwhile, the internal control system is a collection of internal controls that are interconnected, integrated and mutually support each other.
In a corporate environment, internal control is a process established by the board of directors and management as a whole with the aim of providing confidence that the company will achieve its goals.
This goal is divided into three categories, namely the effectiveness and efficiency of company operations; compliance with applicable procedures and regulations; and reliable financial reporting.
So, a company’s internal control is said to be effective if these three categories of company goals can be achieved under the conditions:
- Directors and management gain an understanding of the direction of achieving company goals which includes achieving goals or targets, performance, level of profitability, and also security of company resources (assets).
- The regulations and procedures that have been established by the company are strictly adhered to and complied with as they should.
- The published financial reports are reliable and trustworthy and include interim and segment reports.
This means that if any one condition is not achieved, it can be said that the company’s internal control system is deficient. For example:
- There is inadequate implementation of an internal control design or system
- Documentation belonging to the internal control department is not functioning properly
b. Human resources (HR)
Human resources (HR) are every person’s potential to produce something as a social creature. It can also be defined as a person’s mental and physical abilities which are influenced by heredity and environment. This ability will work because someone is motivated to realize their desires and fulfill their satisfaction.
Human Resources (HR) are also the only resources that have intelligence, feelings, knowledge, skills and creativity. In general, HR functions to increase productivity which can make the organization more competitive so that it can achieve its goals.
No matter how advanced technological developments are today, quality human resources have an important role in achieving company or organizational goals. In fact, even though the company or organization has easy and fast access to changing information or has adequate raw materials, without quality human resources, achieving the goal is impossible.
So, it could be said that companies or organizations are required to have quality human resources as system managers so that the system can run properly. A company or organization is said to have a human resource deficiency if its human resources do not have qualifications and do not have a training development plan to be able to carry out the various tasks assigned.
c. Organizational system
The system is a synergy concept that is expected to produce greater output compared to individual output or the output of each part. Because ideally joint activities carried out by several separate but still interconnected parts can indeed produce a greater effect.
That is why an organization’s system always prioritizes work within teams and requires that work be carried out in an integrative manner. Both work related to people, methods, equipment, or resources used.
Of course, each system has its own goals. There are those who only have one goal, there are also those who are good. Regardless of the number, the goal will be the motivation that drives the system. So, without a goal the system will run aimlessly and uncontrollably.
Consequently, an organization or company must carry out control in the form of monitoring and supervision to evaluate the effectiveness of the system used. This control must also be carried out regularly from time to time.
If this control is lost, then a company is said to experience a deficiency problem in its organizational system. For example, there is no internal process for reporting deficiencies in the system to management in a timely manner.
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2. Deficiencies in company operations
Operations (operations), together with finance and marketing are the 3 strategic functions of the company. Operations themselves are more closely related to production activities in a company.
So if a company experiences deficiencies in its production activities, it means that the company is dealing with deficiencies in the company’s operations. Some things that may have deficiencies include:
a. Company inventory
Inventory is a list that contains important resources and assets belonging to the company that are used for the general continuity of the company. Starting from company development, resource management, and also the production process.
These notes are important to have because there will be lots of things that will depend on the information in them. Therefore, companies are obliged to ensure that all data in these records is correct and valid in terms of quantity and quality.
Of course, if the data is invalid, many processes will be disrupted and will not run optimally. This is what is meant by a deficiency in the company’s inventory. When inventory records experience deficiencies, the impact will be large and bring losses to the company.
For example, a company will fail to control and protect its inventory from damage, loss, or even abuse of authority.
b. Implementation of company regulations
Every company in the service or goods sector, on a small scale, national or multinational, must have regulations that apply and must be obeyed by all employees. The goal is so that management and operations can run properly.
Usually these company regulations are prepared by the entrepreneur and will be his responsibility. In its preparation, regulations will be made taking into account suggestions and considerations from bad representatives or workers in the company.
That way, the balance between the rights and obligations of workers, the authority and obligations of employers will be more guaranteed. Not only that, regulations can also serve as guidelines for workers and entrepreneurs in carrying out their respective duties so as to create a safe, harmonious and dynamic working relationship.
If all of these goals are achieved, efforts to advance, guarantee and improve the welfare of the company, workers and their families can be achieved. However, to achieve this goal, workers and employers must comply with regulations. If the compliance function with the regulations implemented does not run effectively, then the company is said to experience deficiencies in implementing the regulations.
You can find more complete examples of company operational deficiencies in the book Understanding Internal and Operational Auditing written by Amin Widjaja Tunggal. This book is often a reference for people who want to learn and know more deeply about internal and operational auditing.
Audit Findings and Deficiency
It was discussed at the beginning that deficiencies are usually discovered when companies conduct management audits. In other words, deficiencies are part of the audit findings. Audit findings themselves are matters related to statements of fact, both positive and negative.
From the clarification above, deficiency means being included in the audit findings which are negative in nature and represent an area with a high level of risk. Therefore, auditors usually include recommendations to correct deficiencies in these areas.
In principle, reporting of audit findings, both positive and negative, needs to be presented proportionally. The negative audit findings (deficiency) that are worthy of being reported are as follows:
- Concrete and supported by audit evidence in the form of facts, not opinions.
- Objective and relevant to the problem being faced
- Supports logical, reasonable conclusions, and is able to encourage management to make improvements based on audit results.
- It may not be significant but should show symptoms of problems that will occur in the future.
Gondodiyoto (2004) stated that negative findings are findings based on audit evidence that it is known that there is non-compliance with provisions or regulations, inappropriate expenditure of money, inefficiency, inefficiency and ineffectiveness which could result in harm to the company.
Examples include lost or damaged assets; work procedures/rules/company policies that are not complied with; there is a mistake; or misuse occurs.
Audit findings themselves are the result of a comparison process between expected criteria or practices and actual conditions or facts, including the causes of differences and the consequences that may arise. The final step that the auditor can take regarding this matter is to make recommendations which will later be given to management.
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Conclusion
Deficiency in the context of company management is a deficiency or weakness possessed by management. Usually deficiencies are disclosed as audit findings when a company carries out a management audit process.
These deficiencies need to be identified and also disclosed during the management audit process. The aim is for management to know what deficiencies are occurring in the company and how to correct these deficiencies.
There are many other types of deficiencies, apart from systems and operations. It could be that the company’s deficiencies arise due to the system created by management being weak or the Human Resources (HR) capabilities of management still being less than optimal.
Whatever the cause, the types of deficiencies need to be identified quickly by management. That way, company performance can be improved more quickly and the company is able to adapt to the ever-changing business environment.
It is important to reveal deficiencies in company management at the end of the management audit process. The various deficiencies explained in the audit findings must also be conveyed clearly and objectively. The goal is for management to know that the organization actually has deficiencies or weaknesses.
From the audit findings in the form of deficiencies, it will be possible to find out what the main causes are as well as the impacts and consequences that will occur on the company if the deficiencies are not immediately corrected.
From these impacts and consequences, management will then know how much influence the deficiencies experienced by the company have on the company’s overall performance.
After seeing the impact and consequences of deficiencies on company performance, auditors can make recommendations to correct deficiencies that can be implemented by management within a certain time.
In conclusion, the aim of looking for deficiencies in company management is to help the company utilize its resources efficiently and economically.
It could be that deficiencies that have existed in the company have actually caused the company to utilize resources inefficiently and poorly. In addition, recommendations obtained from the management audit process can help management to overcome existing deficiencies and improve overall company performance.
Hopefully all the discussions about the meaning of deficiencies and also their types can broaden your insight. If you want to look for articles about companies or audits, you can find them at mudacepat.com .