The Impact of Internal Control Practices on Financial Performance of Small and Medium Size Enterprises (SMEs) in the Buea Municipality
Department: Accounting
No of Pages: 68
Project Code: ACC7
References: Yes
Cost: 5,000XAF Cameroonian
: $15 for International students
ABSTRACT
SMEs
play a vital role in an economy of any nation more especially the developing
ones. However, SMEs are still finding it hard to survive and compete with other
well-established firms despite their contribution to an economy as a whole.
As
such, an effective internal control in SMEs has the potential of reducing
employees’ fraud leading to success of SMEs in achieving its objective and
goals, which is creation of more profits. This study examined impact of
internal control practices on performance in financial perspective of SMEs
within the Buea municipality.
A
descriptive research design was adopted in the study. Population of this study
comprised of all SMEs in Buea. Using simple random sampling technique, a sample
of 25 SMEs was randomly selected.
Both
primary data and secondary data were utilized in the study, which was collected
using self-administered questionnaires and secondary data on performance in
financial perspective of SMEs was collected from SMEs financial reports.
The
results established that the control environment and risk assessment had a
negative relationship with financial performance of small and medium
enterprises. The results also revealed a positive relationship between control
activities and information and communication and monitoring and financial
performance financial performance of SMEs in Buea.
The
study concluded that there is an inverse relationship between financial
performance of SMEs in Buea and the control environment and risk assessment.
The study also concluded that there is a direct relationship between control
activities, information and communication, monitoring and the financial
performance of SMEs in Buea.
The
study recommended that SMEs should ensure there they have a good environment
control, effective assessment of risk and control activities and proper
monitoring strategies.
CHAPTER ONE
INTRODUCTION
1.1 Background to the
Study
Small
and medium size enterprises constitute majority of entities in the world and
account for a great portion of total employment and total production (Hussain,
Millman and Matlay, 2016). SMEs play a significant role in an economy.
SMEs
are income generating entities to their owners, a source of national output and
revenue as well as acting as feedstock for large entities or firms (Olatunji,
2013). SMEs have a great significant going by a fact that they account for 90
percent of entities and 60 percent of employment opportunities all over the
world.
Due
to the current increase in both unemployment level all over the globe, SMEs are
providing an alternative to conventional industrialisation (Mutandwa, Taremwa
and Tubanambazi, 2015).
Small
and medium enterprises (SMEs) are the engine that drives the world’s economies
and the stepping stone to industrialisation, both for developing and developed
economies. The businesses account for 99% of all businesses in developing
countries thereby signifying their importance (Fjose, Grunfeld and Green,
2010).
For
instance, SMEs account for 52 percent of the private work force and 51 percent
to United States (USA) GDP (Longenecker et al.., 2012) while in the United
Kingdom (UK), they are associated with 62 percent of the total employment and
25 percent to GDP (Borns, 2001; Day, 2004).
Like the USA and UK, SMEs contribute 79
percent of Italian employment, 63 percent and 60 percent of France and Germany
employment respectively (Borns, 2001). In China, SMEs employ 80 percent o urban
population and contribute 60 percent of GDP (Sham, 2014).
In
Africa, the operations of small and medium size enterprises (SMEs) occupy an
admirable position in the economic landscape of most economies in the world,
especially in developing countries.
It
is estimated that more than 95 percent of enterprises across the world are SMEs
and account for approximately 60 percent of private sector employment (Ayyagari
et al.., 2011).
SMEs
account for a greater share of businesses in South Africa, Ghana and Nigeria
(Abor and Quartey, 2010; Gbandi and Amisssah, 2014) and their contribution to
GDP, in Ghana for example, stood at about 49 percent in 2012 (PWC, 2013).
According
to law number 2015/010 of 16 July 2015 on the promotion of small and medium
size enterprises Cameroon; enterprises are considered as SMEs no matter their
domain of activity when they employed between 6 to 100workers and when they
annual Chiffre D’affaire Hors Tax (CAHT) ranges between 15million and 3billion
FCFA.
This
implies enterprises with 06 to 20 personnel and a CAHT of 25million to
250million FCFA are considered as small enterprises, while enterprises with 21
to 100 personnel and with a CAHT of 251million to 3million FCFA are considered
as medium size enterprises.
Small
and medium size enterprises play a crucial role in the development of a
countries economy (Arigo, 2015). They are significant to the economy of
developing countries such as Cameroon, where challenges such as poverty
eradication, corruption, unemployment are still considered as majority issue
facing citizens.
In
Cameroon, SMEs are the main driver of the
economy, accounting for about 90 percent of the country’s economic
fabric and employ more than 50 percent of the work force in the private sector
(INS, 2009)).
The
resent enterprises survey conducted by the national institute of statistics
(2009), revealed that there are 93969 enterprises in Cameroon out of which 99.2
percent are SMEs. Statistics shows that about 33000 enterprises have been
created in Cameroon since 2010 (CFCE, 2015). SMEs are also believed to
contribute greatly to a countries GNP.
The
account for about 62 percent of permanent employment in Cameroon (INS/RGE, 2009).
It is also important to know that SMEs to the creation and redistribution of
wealth in Cameroon. Between 2003 and 2005 formal and in formal SMEs paid
208billion as salaries per year (INS, 2006).
As
far as investment are concerned, SMEs still stand out clear as an important
entity of the Cameroon, accounting for 40 percent of the Cameroonian economy
(INS\RGE, 2009).
1.2 Problem Statement
SMEs
in play a vital role in the economy of any nation particularly for developing
nations and economically emerging nations (Chakraborty, 2015). Majority of SMEs
are really struggling to survive.
Those
that can survive still performing so badly despite their contributions to the
entire economy (Neneh and Zyl, 2012). As such an effective internal control in
SMEs has the potential of enabling them to succeed and reduce employee fraud
(European federation of Accountants, 2014).
However,
many small businesses comprise of only the owners of the business with possibly
one or two executives and some few employees who focus on the business
performance and not accounting and undervalue the importance of strong control
internal controls (Long, 2009).
Several
studies have also been undertaken on the effect of internal control on
performance. For example, a study by Oseifuah and Gyekye (2013) investigated
internal control effectiveness in South African SMEs and revealed internal
control practice among SMEs in South Africa was very low, with only a few of
them having adequate internal control system put in place.
Dineshkumar
and Kongulacumar (2013) also studied an extent to which systems of internal
control influences firm’s performance and revealed a strong relationship
between systems of internal control and firm’s performance of Sri Lanka Telcom
limited but the study did not focus on the effects of internal control
practices on SMEs performance.
Cameroonian
SMEs have a high failure rate with many of them failing within the first three
years of operation. Past statistics in Cameroon indicate that 3 out of 5
business entities fail in the first few months of their operation (Ministry of
Small and medium size Enterprises, 2016).
As
such, Kinyua (2014) posits that due to agency problem arising from SMEs owners
and employees, small businesses fail to growth and flourish, and rate of business
entities failure continues to rise. Most of the reviewed empirical studies
indicate that internal controls are vital to any business organisation.
However,
even though internal control is a vital factor affecting a firm regardless of
its size, there are there is little evidence on the effect of internal control
practices on performance of SMEs since most of studies in internal controls
globally and in Cameroon focus more on large firm’s than SMEs.
Thus,
a literature gap, which this study intends to determine by examining, what the
effects of internal control practices on performance in financial perspective
of SMEs in the Buea municipality are SMEs are on a large scale, trying to
maintain an elevated level of financial success.
With
these, come growth, setting in complexities in running of SMEs, unless the
issue of internal control is addressed urgently. This study investigates the
relationship between internal control systems and financial performance among
the small and medium size enterprises in the Buea municipality.
The
following research questions can be raised
- What are SMEs?
- What is internal control?
- What are internal control practices?
- How can you evaluate the financial performances of an SMEs?
- What is the relationship between internal control and financial performance?
- What is the role of internal control on SMEs?
- To what extent can internal control guarantee return on investment of SMEs?
- To what extent can internal control ensure growth?
- To what extent can internal control guarantee profitability?
- Is the information on the control activity and control environment timely and effectively communicated?
1.3 Objective of the
Study
- To identify the problems of internal control practices in relations to financial performance of small and medium size enterprises.
- To examine the impact of internal control practices on financial performances of small and medium size enterprises.
- To make recommendations
