The changing internal control framework in growth-oriented firms

Abstract

Purpose: The aim behind this research project is to evaluate the impact of growth on the internal control structure of entities. It seeks to identify the changes which need to occur in the internal control approach adopted by growth-oriented companies so that it remains effective as the entity grows. Furthermore, weaknesses in existing control systems are highlighted and relevant recommendations are provided. Design: A qualitative approach was adopted in order to collect the necessary information. Semi-structured interviews were conducted with top management personnel of entities in different industries, which have grown and which continuously strive to grow further. Findings: The study revealed that internal control is considered to be very important, especially as owners and managers attempt to pursue and implement growth opportunities and to manage their growing enterprise. However, it was noted that the regular reviewing and updating of controls, which is necessary to ensure that they remain applicable, rarely takes place. This often results in controls not being aligned with the entities’ stage and future strategies. Despite the fact that such entities have grown substantially over their life cycle, better alignment of controls could help them in growing further and in managing the entity in a more effective manner. Conclusions: Participating entities have relatively strong controls, subject to the availability of resources. However controls are often overlooked as entities try to focus on growth opportunities. Internal control and growth should be considered together rather than separately as they tend to be highly dependent on each other. Value: Recommendations which are aimed at addressing weaknesses in the control systems of entities are provided. These include adopting a more proactive approach towards internal control, the more frequent use of financial reporting in decision making, the development of an internal control framework, continuous reviewing and updating of controls, and increased communication. Such recommendations lead to the improvement of internal control systems, thereby ensuring that they remain relevant and in line with the entities needs and circumstances.