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Internal Control and Internal Audit in SMEs: Cornerstones of Institutionalization

The implementation of internal control and internal audit mechanisms, together with risk management in SMEs, is effective in improving their management skills and corporate competencies.

It is important for SMEs to take steps towards institutionalization by applying modern management techniques to stand strong in the face of developing and changing competitive factors. In this context, small and medium-sized enterprises should adopt management approaches that are transparent, accountable, and compliant with laws and regulations. 

Establishing the habit of operating internal control and internal audit mechanisms in SMEs and making these functions a continuous part of the process forms the basis of modern management culture.

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Institutionalization in SMEs

SMEs constitute one of the most important pillars of Turkey’s economic development. As in the rest of the world, SMEs account for more than 99% of all enterprises in Turkey. According to the revised SME definition, the number of micro, small, and medium-sized enterprises in Turkey is approximately 3,500,000.

The dizzying pace of change in trade and technology is forcing almost all SMEs to become global players. Staying local is becoming increasingly difficult. Maintaining profitability and complying with regulations while keeping up with the competition is driving SMEs towards a different form of management: the corporate SME.

Medium-sized businesses, small businesses, and even micro businesses now must have certain standards in their management strategies to survive. To achieve this, there are two main functions that await them on the path to institutionalization: risk management and internal control and internal audit.

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There is a close and strong relationship between internal control and internal audit. The independent function of internal control is internal audit. Internal control ensures that the necessary systems are established and implemented to mitigate risks. Internal audit, on the other hand, provides information, evaluates, and makes recommendations to management regarding internal controls.

It would not be wrong to say that SMEs do not yet have sufficient knowledge and experience in independent auditing. In an increasingly competitive environment, the risks faced by SMEs during their operations are diversifying and increasing. As a result of technological developments, it is becoming increasingly difficult to manage an increasing number of risks of varying natures. Small and medium-sized companies that fail to manage these risks effectively face significant losses and reputational damage.

In addition to being exposed to market and operational risks, SMEs also need to establish liquidity management and legal compliance mechanisms in a highly competitive environment.

In order to institutionalize, control, risk management, and internal audit mechanisms need to be established and operated effectively within the enterprise.

Internal Audit in SMEs

Internal audit is one of the most effective mechanisms of institutionalization.

The main purpose of an internal audit is to add value. The benefits of internal audit, an activity that provides added value to SMEs with its globally accepted ethical rules, standards, and methodology, are as follows:

  • Contributes to the development of internal control, risk management, and governance systems
  • Ensures the improvement of processes and the effective and efficient use of resources
  • Reduces the losses that risks can cause
  • Helps prevent errors, fraud, and misconduct, reduces losses, prevents penalties, protects reputation
  • Contributes to healthy decision-making and achievement of goals
  • Adds value
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There are different types of internal audits in SMEs: These are legal compliance, system, performance, financial, and information technology audits. Businesses that operate the internal audit mechanism will have the opportunity to get one step ahead of their competitors in managing risks more effectively, preventing losses, healthy growth, and increasing competitiveness by strengthening their internal systems and, thus, their corporate structures.

SMEs entering the internal audit process will also experience changes in their business culture. In businesses where information is provided objectively, for example, there will be no need for activities such as searching for compliance of transactions with the legislation, searching for errors, instead, dissemination of good practice examples, future-oriented thinking, and most importantly, becoming system and process-oriented from partner, manager or transaction-oriented.

Internal Control in SMEs

SMEs that establish internal control mechanisms increase the effectiveness and efficiency of operations affected by partners, managers, and employees, increase the confidence level of financial reports, and become more compliant with laws and regulations. The benefits of internal control in SMEs are as follows:

  • Conducting operations effectively, economically, and efficiently in accordance with objectives, policies and legislation
  • Protection of assets and resources,
  • Keeping accurate and complete accounting records,
  • Timely and reliable production of financial and management information
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Internal Control and Internal Audit Relationships in SMEs

In small and medium-sized enterprises, the need to establish an internal control system increases as the possibility of direct control of activities decreases. Internal audit activity is required to evaluate the effectiveness of this system. Internal audit is a part of internal control, and these are two different but complementary concepts.

Internal audit provides information, evaluates, and makes recommendations to management regarding the adequacy, effectiveness, and functioning of the internal control system. On the other hand, internal control is all the operations, methods, and rules established in the organization, unlike an internal audit, which is performed by a functionally independent person.

Internal audit is conducted continuously or at specific times to assess the effectiveness of the internal control system. Internal control is a continuous control mechanism. No matter how valuable information internal audit provides to SME managers, it cannot provide sufficient contribution without strong and effective internal control.

However, in SMEs, which need to make decisions quickly, corrective measures regarding the detected failures should be implemented immediately. Shareholders and managers should be able to monitor all the main and auxiliary activities of the company and make their evaluations within this framework.

The effective and efficient functioning of the internal control system is directly dependent on all managers, starting with the shareholders, knowing, and fulfilling their roles and responsibilities.

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Why is Internal Audit and Internal Control Important for SMEs?

We observe that business partners and managers who aim to enter global markets while maintaining their position in the local market are more enthusiastic about corporate governance. There are some logical reasons why SME managers, who have an innovative perspective in applying modern management techniques, choose this path even though it is not mandatory. 

  • Gaining the trust of investors
  • Increasing the level of objectivity and transparency
  • Establishing an audit mechanism at the management level
  • Improving the quality of accounting information and using it for managerial purposes
  • Increasing both internal and external confidence
  • Evaluating partnership and acquisition decisions in line with growth targets

SME Risk Advisor Teolupus

TeoLupus offers specialized services to micro, small, and medium-sized SMEs within the scope of professional SME consultancy in line with its expertise. 

With our Certified Internal Auditor (CIA), Teolupus examines the internal control and internal audit structure of SMEs within the scope of the COSO Internal Control Framework. We help your business increase efficiency, effectiveness, and reputation with our value-added services.

Contact us to run SME internal control and internal audit mechanisms, establish an internal audit department, assess the risks your SME is exposed to, and better manage your corporate risks.

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