Deficiency definition – Business companies in the current Internet of Things era seem to be very strict. In fact, it is so strict that there are often various unhealthy company operating practices because management is forced to earn 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 the management in charge of running the company and the shareholders who own the company are often the cause of internal problems in the company.
For example, management may submit reports that the company’s achievements and performance are very good to shareholders in order to secure their position. Although for example the facts on the ground are inversely proportional.
Besides that, human nature that is never satisfied can also be a problem. This can also lead to various frauds in managing the company, such as embezzlement, mark up, fraud, and so on.
Therefore, a company must conduct 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 definition of deficiencies, their types, and their relationship to audit findings. Listen to the end, okay?
Definition of Deficiency
Basically, a deficiency is a deficiency, usually found in company management. The company conducts management audits to correct these deficiencies which will improve management performance.
Therefore, deficiencies can also be considered as a point of concern from management audits. A thorough management audit will be able to find and correct the causes of deficiencies so that the auditor can achieve the audit objectives. As explained by Hery SEMSI. CRP. RSA. CFRM. CIISA in his book Terms – Terms of Accounting and Auditing. In this book you can find important terms or concepts regarding the basics of accounting as well as general knowledge in the field of auditing.
On the other hand, Tagiman (1997) says deficiency can also be related to wealth. 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 an asset owned by the company.
In addition, the auditor must also see how the company’s assets are protected from various types of losses such as theft or illegal activities with proper and appropriate inspection procedures.
In short, audits are carried out to improve management systems such as preventing losses, avoiding improper payments, making operational efficiency, or something else. In the process, the auditor is 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) warned that the auditor also needs to give recognition to the work that produces a good effect if there is one. So the management audit results will be objective and clear.
Deficiency Types
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 previously mentioned, deficiency is the same as deficiency. This means that deficiencies in the system can be interpreted briefly as deficiencies in a company’s system. Some things in the company’s 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 set of interrelated, integrated and mutually supportive internal controls.
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 objective is divided into three categories, namely the effectiveness and efficiency of the company’s operations; compliance with applicable procedures and regulations; and reliable financial reporting.
Well, the company’s internal control is said to be effective if the three categories of company goals can be achieved with the following conditions:
- The Board of Directors and management obtain an understanding of the direction of achieving company goals which includes achieving goals or targets, performance, profitability levels, and also the security of company resources (assets).
- The rules and procedures that have been set by the company are strictly adhered to and complied with properly.
- Published financial reports are reliable and trustworthy and include interim and segment reports.
That is, if any one of the conditions is not met, then it can be said that the company’s internal control system is deficient. For example like:
- There is inadequate design or internal control system implementation
- The documentation belonging to the internal control section is not functioning properly
b. human resources (HR)
Human Resources (HR) is a potential that belongs to everyone to produce something as a social being. It can also be defined as the ability of a person’s intellect and physical power that is influenced by heredity and environment. This ability will work because a person is motivated to realize his desires and fulfill his satisfaction.
Human Resources (HR) is also the only resource that is intelligent, has feelings, is knowledgeable, has skills, and also has 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 today’s technological developments are, 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 qualified human resources, it is impossible to reach the goal.
So, it can be said that companies or organizations are required to have qualified 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 the qualifications and do not have a training development plan to be able to carry out the various tasks assigned.
c. Organization system
The system is a synergy concept that is expected to produce output greater than the individual output or the output of each part. Because ideally joint activities carried out by several separate sections but still interconnected can indeed produce a greater effect.
That is why, the system of an organization always prioritizes work in teams and requires work to be carried out in an integrated manner. Both work related to humans, methods, equipment, or resources used.
Of course, each system has its own purpose. Some have only one purpose, some 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 exercise 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 have a deficiency problem in its organizational system. For example, there is no internal process to report deficiencies in the system to management in a timely manner.
2. Deficiencies in company operations
Operations (operations), together with finance and marketing are the 3 strategic functions of the company. Operations itself is more closely related to production activities in a company.
So if a company experiences a shortage in its production activities, it means that the company is dealing with a deficiency in the company’s operations. Some things that may have deficiencies, including such as:
a. Company inventory
Inventory is a list in which there are important resources and assets belonging to the company that are used for the continuity of the company in general. Starting from company development, resource management, and also the production process.
This record is important to have because later there are many things that will depend on the information in it. Therefore, the company must ensure that all data in the records is correct and valid in terms of quantity and quality.
Of course, the data is not valid so many processes will be disrupted and cannot run optimally. This is what is meant by a deficiency in the company’s inventory. When inventory recording experiences a shortage, 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. Application of company regulations
Every company in the field of services and goods, on a small scale, national or multinational, must have regulations that apply and must be obeyed by all employees. The goal is that management and operations can run well as they should.
Usually these company regulations are prepared by the entrepreneur and will be his responsibility. In drafting it, regulations will be made by 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 authorities and obligations of employers will be more secure. Not only that, regulations can also serve as guidelines for workers and employers in carrying out their respective duties so as to create a safe, harmonious and dynamic working relationship.
If all of these objectives are achieved, efforts to promote, guarantee and improve the welfare of the company, workers and their families can be achieved. However, to achieve this goal, regulations must be obeyed by workers as well as employers. If the compliance function with the applied regulations is not running effectively, then the company is said to have a deficiency in the implementation of 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 used as a reference for people who want to learn and know more about internal and operational auditing.
Audit Findings and Deficiencies
It was discussed earlier that deficiencies are usually found when a company conducts a management audit. In other words, deficiencies are part of the audit findings. The audit findings themselves are matters relating to statements of fact, both positive and negative.
From the clarification above, deficiency means entering into audit findings that are negative and represent an area with a high level of risk. Because of this, auditors usually include recommendations for correcting deficiencies in those areas.
In principle, reporting of audit findings, both positive and negative, needs to be presented proportionally. The negative audit findings (deficiencies) that are worth reporting are as follows:
- Be concrete and supported by audit evidence in the form of facts, not opinions.
- Objective and relevant to the problem at hand
- Supports logical and reasoned conclusions, and is able to encourage management to make improvements based on audit results.
- It may not be significant but should indicate a problem that will occur in the future.
Gondodiyoto (2004) argues that negative findings are findings based on audit evidence that it is known that there are non-compliance with provisions or regulations, spending money that should not be, inefficiency, inefficiency, and ineffectiveness which can result in losses to the company.
Examples include lost or damaged assets; work procedures/provisions/company policies that are not complied with; there is an error; or misuse occurs.
Audit findings themselves are the result of a comparison process between expected criteria or practices with actual conditions or facts, including the causes of differences and the consequences that might arise. The last step that can be taken by the auditor on this matter is to make recommendations which will be given to management.
Conclusion
Deficiencies in the context of company management are deficiencies or weaknesses possessed by management. Deficiencies are usually disclosed as audit findings when the company conducts a management audit process.
These deficiencies need to be identified and disclosed during the management audit process. The goal is that management can find out what deficiencies are happening in the company and how to fix these deficiencies.
There are many more types of deficiencies, apart from in systems and operations. It could be that company deficiencies arise due to systems created by weak management or the ability of Human Resources (HR) owned by management is still not optimal.
Whatever the cause, the types of deficiencies need to be recognized quickly by management. That way, the company’s performance can be improved more quickly and the company is able to adapt to the ever-changing business environment.
Deficiencies in company management are important to disclose at the end of the management audit process. Various deficiencies described in audit findings must also be conveyed clearly and objectively. The goal is that management can find out that the organization actually has deficiencies or weaknesses.
From the audit findings in the form of deficiencies, it will be known what are the main causes and the impacts and consequences that will occur in the company if deficiencies are not corrected immediately.
From these impacts and consequences, management will then find out 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, the auditor can make recommendations to correct deficiencies that can be implemented by management within a certain time.
In conclusion, the purpose of looking for deficiencies in company management is to help companies use their available resources efficiently and economically.
It could be that the deficiencies that have existed in the company have caused the company to use its 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.