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The benefit of Internal Control for Small Business Company (Study at PT X

Indonesia)

Joko Susilo
Faculty of Economy and Business, Mercubuana University
Mercubuana University
Prof. Dr. Ir. Hapzi Ali, MM, CMA
joksu.cys@gmail.com

Abstract

The study is aimed to explain the benefit of internal control system for small business company particularly in PT X Indonesia.
The methodology which used is qualitative method with case study approach by interview with personel of PT X Indonesia for
year 2018. Based on the research, it could be concluded that the implementation of internal control system bring to the work more
effective and efficient. In addition, internal control system will help the manager to mitigate risk and make a decision for the
company. In addition, the recommendation is that PT X Indonesia did not use the information system yet to improbve their work
system. Therefore, the researcher recommendation focus on how PT X Indonesia should implement information system
immediatly since the industry environment has been entered in industry 4.0

Keyword: internal control, benefit, effective.

1. Introduction

According to Law Number 20 Year 2008 there are three definitions on SMEs. Micro Business is productive business
owned by individual and / or individual business entity fulfilling the criteria of Micro Business as provided for in this Law. Small-
scale business is a productive, self-contained economic enterprise conducted by an individual or a business entity that is neither
a subsidiary nor a branch of a company owned, controlled, or a part of the direct or indirect business of a medium-sized or large-
scale business that meets the criteria of Small Business as referred to in this law. Medium Enterprise is a stand-alone productive
economic enterprise, conducted by an individual or business entity that is not a subsidiary or a branch of a company owned,
controlled, or becomes part directly or indirectly with a Small Business or a large business with a net worth or annual sales
proceeds as provided in this Law. The value of SMEs based on total assets and turnover is for micro business maximum of 50
million assets and maximum 300 million turnover, small business is asset between 50 to 500 million and turnover between 300
million to 3 billion, and for medium business value of asset between 500 million to 10 billion and turnover between 2.5 to 50
billion. SMEs is the one of the supporting factors in Indonesian economic system. So many thing that we can learn about the
influence of SMEs for supporting Indonesian economic.
The SMEs sector has an important role in the national economy. Micro, Small and Medium Enterprises have been able to
prove their existence in the economy in Indonesia. When the storm of the monetary crisis hit Indonesia in 1998, SMEs were able
to survive compared to large companies, because the majority of them are less dependent on large capital or external loans in
foreign currency. Thus, when there are fluctuations in exchange rates, large-scale firms that generally deal with foreign currencies
are most likely to experience the impact of the crisis. Business SMEs are able to contribute to the GDP recorded reaching 5.89
percent and able to absorb 6.03 percent or about 114,144,082 million total workforce in 2013 (bps.go.id). Indeed, the contribution
is quite large, though only small businesses. It can be said that economic growth is above average. For this national GDP the role
of SMEs is quite important because it can add value up to Rp 1,536,918.80 billion (bps.go.id). Nevertheless, the government also
has its own SME target as the government plans the creative economy's GDP contribution in 2019 to reach 7 - 7.5 percent
(bps.go.id). Furthermore, the growth of export value in 2013 experienced a significant growth rate for the national GDP of 9.29%
better than in the previous year which experienced minus -11.10% (bps.go.id). Looking at the phenomenon of data released by
BPS in 2016 shows that MSMEs should continue to be fostered in order to increase growth for the GDP as a whole for the
National. Although the scale is fairly small to medium, but SMEs have a big role to increase the economy in Indonesia.

Submission Date: 01/09/2019, No. 1, Vol. 1, Issue 1, Sept 2019

Accepted Date: 11/09/2019,
Published Date: 21/09/2019, Page: 1
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According to Oseifuah and Gyekye (2013), majority of business failures has been attributed to lack of internal control system.
Studies have also shown that most new businesses become moribund few years after establishment as a result of poor internal
control systems (Kamau 2014). Adagye, (2015) revealed that weak internal control in small businesses affects the effectiveness
of their employees in the achievement of organisational goals and objectives. Small businesses either have weak control system
or no control system at all (Campbell & Hartcher, 2003). One of the arguments put forward for the absence of effective and
efficient internal control system in small businesses is its costly implementation (Modisane, 2013).
Referring to the explanation above, this study will focus on PT X since the company is categorized as medium entreprise
due to the criteria as follows:
1. PT X Indonesia total asset is amounted to IDR 1 Billion
2. PT X Indonesia turover is amounted to IDR 20 Billion
As stated in the previous research, as medium entreprise PT X faced the problem in regards with internal control.
Therefore, the writer will describe the benefit of internal control for PT X to give another perspective to the similar entreprise.

2. Literature

Internal Control

Internal control means different things to different people. This causes confusion among business people, legislators and
others. The definition of Internal Control has evolved over recent years as different internal control models have been developed.
According to statement of Auditing standards (SAS,300); Internal Control is defined as all the policies and procedures adopted
by the directors and management of an entity to assist in achieving their objective of ensuring, as far as practicable, the orderly
and efficient conduct of its business, including adherence to internal policies, the safeguarding of assets, the prevention and
detection of frauds and errors, the accuracy and completeness of accounting records, and the timely preparation of reliable
financial information.
However, the Committee of Sponsoring Organization (COSO) 1992, also known as Treadway Commission defined
Internal Control as a process effected by an entity's board of directors, management and other personnel designed to provide
reasonable assurance regarding the achievement of objectives in three categories:
a. Effectiveness and efficiency of operations
b. Reliability of financial reporting
c. Compliance with applicable laws and regulation.
All the above definitions of internal control systems have identified the main objectives of internal controls to be the
assurance that organizational resources will be put to economic, efficient and effective use in order to achieve the objectives for
which the organization was set up.

Small and Medium Entreprise (SMEs)

Small and micro entrepreneurs are an important part of the national economy which needs to be further mentored and
developed. Mentoring and development are aimed to make these business units function well in the national economy, growing
up to become resilient small entrepreneurs. During the economic crisis period of the end of the 1990s, small, micro and medium
entrepreneurs showed their ability to survive under very unstable economic conditions. Even though plenty of mobility occurred
in the form of closing down businesses and opening up new activities and businesses, it was nonetheless MSMEs that became
the backbone that saved the Indonesian business sector during the crisis. Small and micro enterprises became a preferred category
for those who decided to stay in business during such difficult times.
The definition of micro and small enterprise has long been agreed upon. A micro enterprise is a productive enterprise
owned by a family or an individual of the Indonesian society, with gross revenue of a maximum of Rp 100 million per year. This
definition is in line with the Decree of the Minister of Finance No. 40/KMK.06/2003 dated 29 January 2003. A variation of this
definition can be found in a study by SMERU Research Institute written in the Field Report on the Existence of Strengthening
Micro Enterprises (Laporan Lapangan Keberadaan Upaya Penguatan Usaha Mikro) (SMERU, 2003) which defines a micro
enterprise as a non agricultural enterprise (including farming and fishing) which employs ten workers at the most, including
owners and family members, having a turnover of a maximum of Rp 100 million per year, and assets other than land and buildings
of a maximum of Rp 25 million.
Small enterprises, according to Law No. 9/1995 on Small Enterprises, are small scale productive enterprises and meet the
criteria of a maximum net asset value of Rp 200 million, excluding land and buildings for business, or having a maximum annual
turnover of Rp. 1 billion. Small enterprises can receive bank credit at the minimum of Rp 50 million up to Rp 500 million. In

Submission Date: 01/09/2019, No. 1, Vol. 1, Issue 1, Sept 2019

Accepted Date: 11/09/2019,
Published Date: 21/09/2019, Page: 2
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reality it is difficult to separate between micro and small enterprises (Sumantri, 2003). A medium enterprise, according to
Presidential Instruction No. 10/1999, is a business having a net asset of more than Rp 200 million up to a maximum of Rp 10
billion excluding land and buildings for conducting business. Its business setup can be in the form of an individual enterprise, a
business unit with or without legal status. This business unit can receive bank credit from a minimum of Rp 500 million up to Rp
5 billion. Other than the operational definitions, which vary as presented in Table 1, there are also other definitions that are
frequently associated with micro and small enterprises, especially regarding those businesses that are not established as legal
entities. According to an Integrated Businesses Survey, all of the businesses without legal status have gross revenues under Rp 1
billion. In 2003, 96.4 percent of non legal entity businesses employed less than 5 workers (micro enterprises), while 3.6 percent
of this group employed 5-19 workers (small enterprises).

Internal Control Activities in Small Scale Entreprise

Internal control system is a critical component of an organization’s management and a foundation for its safe and sound
operations. Control activities include performance reviews, information processing, physical controls, segregation of duties,
management, routine supervision, sound manpower sourcing and maintenance (Adeniji, 2012; Ndifon and Patrick 2014).
Oseifuah and Gyekye (2013) investigated the effectiveness of internal controls in SMEs in South Africa. The study focuses
on SMEs in the Vhembe District of the Limpopo Province. Questionnaire was used to collect data and Chi-square statistical
procedure was employed to establish the relationship between levels of internal controls among businesses by size of business
and type of business in the study area. The result showed that internal control practices among small business sector enterprises
was low, with only 45 percent of firms surveyed having adequate internal controls systems in place.
Similarly, Boyle and Desai (1991) found that the majority of businesses fail because of internal factors affected by
management’s actions and discipline. They also found a negative correlation between the duration a firm is in business and its
likelihood of failure; that is, if firms survive long enough, it is reasonable to expect that they have resolved their internal control
issues.
Doyle, Ge and McVay (2005) attributed the accounting scandals in 2001 in United States of America, to material
weaknesses in internal control and the need for regulation. They also found that material weaknesses were more likely to occur
in firms that are smaller, weaker, and younger. The risk and control awareness have an influence on the scope of the internal
control system (Sarens & De Beelde, 2006). These results suggest that when management is aware of risks and control activities,
they are more likely to understand the role of the internal control system in monitoring risk and control activities, thus it is more
likely that they will support a relatively larger internal control system. Lack of or weak internal control systems are therefore an
indicator of poor financial performance.
Aladejebi (2016) studied the effects of procurement management on agribusiness performance in Ondo State, Nigeria
using 35 selected agribusiness establishments. The study revealed that monitoring and control play signifcant positive roles in
determining company performance. Also, the result showed a weak functional Enterprise Resource Planning (ERP) system used
in procurement process. From the foregoing, most of the studies were conducted in non-maufacturing SMEs which made this
study relevant and necessary in view of the high premium placed on SMEs in Ondo State.

Challenges of Internal Control in Small Company

Lucier (2001) argued that management must always know the position of the business: whether it is growing or shrinking,
whether amassing profit or going down the hill as a result of losses. Once management knows the stability and capability of the
business, they can then make decisions that lead to growth and expansion of the company (Lucier, 2001). The majority of family-
owned businesses have had concerns about internal controls overridden because of the level of trust based on the special
relationships among the family members involved (Aronoff & Ward, 2007). This relationship, however, can become problematic
because of expansion of the business (Arnoff & Ward, 2007). Furthermore, when employees without any previous relationship
with the business owners are hired, the importance of regulating control structures becomes a necessity (Arnoff & Ward, 2007).
No system of internal control is without weaknesses. As long as control procedures are performed by people, the internal
control system will be vulnerable to human error. Errors may arise from misunderstandings, mistakes in judgment, carelessness,
distraction and fatigue (Roth, 1997). Separation of duties can be defeated through collusion by employees who secretly agree to
deceive the company. In addition, established procedures may be ineffective against employees’ errors or dishonesty, and controls
that were initially effective may become ineffective when conditions change. In some cases, the cost of establishing and
maintaining elaborate systems may exceed the benefits. In small businesses, active involvement by the owner can be a practical
substitute for the separation of some duties.
Epstein and Myers (2005) explained that internal control structure may be unfit for a small business that has few
employees. One person may perform two or more duties at a time. This may result in negligence on the part of the staff and the

Submission Date: 01/09/2019, No. 1, Vol. 1, Issue 1, Sept 2019

Accepted Date: 11/09/2019,
Published Date: 21/09/2019, Page: 3
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quality of the work may be affected (Epstein & Myers, 2005). The authors further argued that the purpose of the internal control
may not be achieved and the cost of the internal control may exceed the cost of errors and frauds (Epstein & Myers, 2005). In
addition, management may not care if internal controls work properly (Ridley, 2008). Management and staff can at times view
internal controls as red tape, unnecessary and a waste of time. In a small business staffs are under tight budgets and will be
tempted to cut corners (Harrer, 2007).

3. Methodolgy

This research includes the type of case study using descriptive qualitative method. Case study has the characteristics as
stated by the experts as a study that is conducted intensively, detailed and depth toward an organization, institution or certain
phenomenon. Case can be an individual, an institution or a group considered as a unit in the research.

4. Result and Discussion

Internal Control Activities in PT X Indonesia

PT X Indonesia is a company engaged in the savings and loan cooperative business. In general, each company in carrying
out its functions requires supervision and control in all its activities, this is performed for implementation of the activities of the
company can achieve the desired goals, and can avoid cheating or fraud committed by certain parties. The existence of internal
control structures that can maintain company wealth as well as investor wealth implanted in the company. PT X Indonesia has
been running internal control itself since the establishment of the company that is in 2008, which was overseen by the supervisory
board.
The Supervisory Board along with the Chairperson of Supervisors will come once a month to check the company activities
at the head office, even though it was only a conversation by the Chairperson of the company and not only that, they came a week
once to check or just oversee marketing and front office activities at the company head office and at the branch office. The purpose
of the Supervisory Board is to check office at least to do face-to-face with employees. It is very important to do for them, because
it really works make employees more enthusiastic and feel their work very much appreciated. Therefore from the supervisor did
it as much as possible to be able to motivate employees for improving the effectiveness of their work. Monitoring carried out by
the Supervisory Board is also included in the third and fifth elements from internal control which is:
1. Control Environment
2. Risk Assesment
3. Control Activities
4. Information and Communication
5. Monitoring
Because the purpose of monitoring is to determine whether internal control is still running in accordance with the
objectives want to be achieved or there is improvement. For a period of 5 years since the inception of PT X Indonesia, only once
experienced a system change internal control. That is preceded by an employee who cheating on his work. Therefore, PT X
Indonesia started to overhaul the internal control system so that no such event occurs again.
The internal control system that is currently still used by PT X Indonesia namely each marketing has own schedule for checking
deposits and financing income as well as a call center, provided by PT X Indonesia for members so that it's easy to check deposit
balances or checking the maturity of the financing carried out by each member of PT X Indonesia and checking the payment
amount it does. The following are schedule of each team of marketing division:
Table 1 Schedule of Marketing Team
No Marketing Team Schedule
1 Team 1 The first week of the month
2 Team 2 The second week of the month
3 Team 3 The third and fourth week of the month
Source: management of PT X Indonesia
Based on the schedule above, it could be seen the flow of audit funds and deposit financing:

Submission Date: 01/09/2019, No. 1, Vol. 1, Issue 1, Sept 2019

Accepted Date: 11/09/2019,
Published Date: 21/09/2019, Page: 4
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Marketing Administration General Affair Manager

Marketing:
a. Perform savings calculations on that day
b. Perform the calculation of financing issued on that day
After calculating the savings and financing that day, don't forget the marketing copy everything in the notebook as well manual
paper cutouts to the administration.
Administration:
a. Recap data submitted by marketing into the computer.
b. Manually write the notes submitted by marketing.
c. Recalculate the data submitted by marketing, is there any error or nothing.
After all perfomed by the administration, then they are give the data immediately to the general affair.
General affair:
a. Copy the data submitted by the administration into the computer as monthly notes.
b. Evaluate calculation errors or records if they occur error.
After the general affair evaluate all records and calculation, then immediately submitted all the data to the manager.
Furthermore, in reaching the leader the data is not straightforward declared correct, but is checked again until it is completely
valid. Likewise all of each marketing. The data will be collected each month for one year. And the data will be managed again
and recap for one year. After the data is recapitalized for one year, then the company will conduct an Annual Member Meeting
with supervisors, all employees and representatives, which is usually conducted once a year. This was performed so that the
members of PT X Indonesia can find out the amount of income and expenses for a year once, this system is carried out so that
transparency between employees and their members continues to run well, without cheating and meaningful crime within the
scope of PT X Indonesia. For call center services, PT X Indonesia provides the marketing numbers of the members, not forgetting
in the brochure the administration number and office number are listed for contacted by its members. The call center itself is
useful for members who don't want to come to the office to transact or check savings balances. Only by using the application are
the members already can make transactions and find out savings balances, even checking the due date and the number of
installments it does at home or wherever the company members are located.

The Benefit of Internal Control in PT X Indonesia

Referring to literature above, the following are the benefit of internal control system which implement in PT X Indonesia
based on the principle of internal control:
1. Qualified and trusted employees
Judging from the first principle, the majority of its employees are only graduates of the Senior High School, but they
can all be committed and can be invited to work together in building and maintaining company.
2. Separation of authority
Separation of authority in PT X Indonesia is very good, it can be seen from the composition of its members, and all work
has been separated according to their respective portions. Therefore, the work performed is also not messy, everything
is neatly arranged and good, and certainly arranged systematically, even though most of them performed manually.
3. Supervision
Each job performed by employees at that day will be evaluated in the afternoon, all employees both from the branch
center even the cash office will gathered all at the surveillance desk at the head office. Their work will be evaluated
directly by the manager, all financial statements will be deposited to the department administration, and everything will
be evaluated again by the manager. If there are mistakes and even difficulties, the manager does not hesitate provide
solutions, whether it gives authority to the parties employees resolve it themselves or even leaders who will go straight
to the field to solve it.
4. Determination of individual responsibility
Each employee has been given responsibility in completing his task. Managers only direct and tell if they don not
understand and the employees do not forget to give the results of their work or report the results of their work to the
manager.

Submission Date: 01/09/2019, No. 1, Vol. 1, Issue 1, Sept 2019

Accepted Date: 11/09/2019,
Published Date: 21/09/2019, Page: 5
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5. Recording
a. Marketing Financing
Marketing will travel face to face to the members who make financing installments, marketing will withdraw
money to them every day, the amount is appropriate with prior approval, and will record it in a book member
installments owned by each member, and marketing also has its own notes in order easy to calculate. And if
there are members who will make a submission financing then marketing gives the form financing that will be
filled by members who will apply for financing, the form will be submitted to the manager to be approved or
even disapproved.
b. Marketing Recognition
The task of marketing is to make a disbursement of funds to members who have requested funding at marketing
financing, if it has been approved by the manager, this marketing task will come to members' homes do the
financing, marketing here brings file in the form of a letter of agreement, receipt, and member books. Therefore,
the members are neat and organized in marketing archives, each letter is given a letter number, so it is easy to
find and register it.
c. Administration
This section is the middle between marketing with the manager, marketing submit data to administration first,
here the administration section performs data writing manually and also using technological tools such as
computers, both data these must have in common, not be different, because the data contains all data belonging
to members. After that the administration will submit data to the manager. The managers also have to have a
copy of the data, and it is stored properly in his closet.
d. Manager
The chairman has a neatly arranged copy of the document in their desk work, therefore it is easy if one day the
data will be used again by him or even by his employees. These data will be numbered, both from date, month,
even to the year of writing.
e. Physical Guard
Physical protection here is intended for tools used by PT X Indonesia. For example such as safes, cash registers,
and CCTV. PT X Indonesia has used all this, the vault which is locked which contains important documents,
both documents which is highly classified even those that are used daily by employees. Cash registers are
always tightly locked, only eratin people who can open it. And also the CCTV installed in every corner of the
room. This makes everything move people who came clearly recorded there. So losses due to cheating will be
many reduced. At least minimize the crime that occurred.
f. Inspections by officers who are free from routine duties
The inspection here is carried out by the Supervisory Board conducted once a month or even once a week,
sometimes even the manager himself go straight to the field for routine checks, so that the employees also felt
even more energized work.
From all the discussion above, that the control system good internal to prevent irregularities in the funds deposits and
financing funds, namely:
a. Recording which can be arranged with a good and correct system
b. Transactions carried out in accordance with the approval of the manager
c. Employees do not have to have a high education, most importantly he is qualified and can be trusted
d. Proper division of tasks can help prevent deviations that, because each person only has one responsibility
responsible in his work, so that if deviations occur immediately visible.
e. Scheduled and good supervision is very helpful to prevent these deviations.
In general, it can be said that internal control good is if no one is in the position of being make it possible to make mistakes
and carry on undesirable actions unnoticed in time.

Challenges of Internal Control in PT X Indonesia

Despite the benefit of internal control, PT X Indonesia faced the challenges regarding in implementing internal control system
within the company. The following are some of challenges based on the analysis:
1. Changes in operating environment or organizational regulations
Changing organizational rules are the first challenge, here PT X Indonesia has never made a change regulations for
employees, just change the internal control system iwhich was not going well, and crime occurred which is performed
by its own employees.

Submission Date: 01/09/2019, No. 1, Vol. 1, Issue 1, Sept 2019

Accepted Date: 11/09/2019,
Published Date: 21/09/2019, Page: 6
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2. Substitution of employees
New personnel can just have a different focus on understanding of internal control, but new employees PT X Indonesia
can prove it. In general, the new employee will get the pre-introduction of the company and will supervise directly by
their manager.
3. Implementation of new information systems
PT X Indonesia still uses information tools improvised, but all went well so far, step by step have started to use modern
tools, but it's not eliminate activities that are used manually.
4. Rapid organizational growth
The rapid expansion of operations can put pressure to control and increase the risk of failure in control. This is returned
to Human Resources. During three years, PT X Indonesia has been able to open a cash office in the region Limpung,
this is a rapid development for managers. This proves that the organization inside PT X Indonesia is very strong well.
5. New technology
New technology does not make PT X Indonesia even worse, in fact increasingly well developed, although they still are
using a manual system. But new technology is very helpful they all finished their work.
6. Introduction of new business or product divisions
By entering into a business or transaction within it entities that have no experience can bring new risks related to internal
control. PT X Indonesia chairman will help everyone employees who have difficulty, especially new employees, the
leader will approach, and will tell how the work will be completed. Although not like a bank conduct seminars, but with
an approach through the heart and with family way, employees will easily understand each his work.
7. Corporate restructuring.
Separation of tasks performed by PT X Indonesia can reduce crime committed HR and it would be more effective.
8. Expansion of business abroad.
PT X Indonesia is aggressively expanding business abroad, this can be seen from the new products that are vigorous
marketed, the Umrah Bailout Fund, and this raises a lot risk, PT X Indonesia has already recognized it, from the start of
the risk currency and time. This product was dead, but this year started again.
9. Application of new accounting principles.
During the founding of this company, they still used it the same accounting system, manual recording and calculation
the manual.
From this it follows that the views of the objectives and risks that can arise, PT X Indonesia can be said to be effective,
because all objectives can be performed and proven to be good to use in their cooperation, the risk can also be reduced because
of the internal control system that they use as expected.

5. Conclusion and Recommedation

Conclusion

PT X Indonesia prove that using of internal control system bring to the work more effective and efficient. In addition, internal
control system will help the manager to mitigate risk and make a decision for the company.

Recommedation

During the research, it could be seen that PT X Indonesia did not use the information system yet to improbve their work system.
Therefore, the researcher recommendation focus on how PT X Indonesia should implement information system immediatly since
the industry environment has been entered in industry 4.0.

References

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Submission Date: 01/09/2019, No. 1, Vol. 1, Issue 1, Sept 2019

Accepted Date: 11/09/2019,
Published Date: 21/09/2019, Page: 7
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Submission Date: 01/09/2019, No. 1, Vol. 1, Issue 1, Sept 2019

Accepted Date: 11/09/2019,
Published Date: 21/09/2019, Page: 8