Abstract

This research topic is to investigate the “Impact of Internal Control on the Growth of Small and Medium Size Enterprises” using Molyko Buea as a case study.

The objectives of this research as seen in the first chapter are; to find out the problems associated with internal control as they relate to small and medium-sized enterprises, to examine the impact of internal control on the growth of small and medium-sized enterprises, and to make recommendations.

The methodology used in this research involves; background to the study area, research design, and brief literature on the case study.

Data was collected by presenting questionnaires. The methodology equally involves the description of variables, sample population, and hypothesis with the sampling plan and techniques.

The major findings were aimed at investigating the relationship between internal control and sound control, risk assessment process, operational control activities, effective information and communication, and effective monitoring and evaluation system.

References were made and literature on concepts concerning this topic such as internal control and growth pertaining to the data collected were analyzed based on the questionnaire. The responses depending on the variables were 90% positive as against 10%.

This shows that internal control has significantly led to the growth of SMEs. To conclude, internal control is of significant importance leading to the growth of SMEs thus accepting the alternate hypothesis and rejecting the null hypothesis.

CHAPTER ONE

INTRODUCTION

This introductory chapter provides a general background to the research. It also presents the general objectives of the study and the research questions are also formulated under this chapter with the view to make the research focused on specific relevant issues.

In what follows, definitions are given for major concepts frequently used in the study. The significance and delimitation of the research is also discussed and finally, a highlight on the organization of the research paper is provided.

Small and medium-sized enterprises (SMEs) are businesses with less than 250 employees and they account for 58% of private-sector jobs and 52% of private-sector turnover.

As long as enterprises have existed, both small and medium-sized enterprises have suffered violence being perpetrated by their stakeholders. This violence can be seen in the form of corrupt practices such as fraud.

Fraud has been an alarming issue suffered by enterprises around the world. Fraud is the crime of obtaining financial or another benefit by deception.

The Australian standard for fraud and corruption control defines fraud as;’ Dishonest activity causing actual or potential loss to any person or entity including theft of money or other property of employees or persons external to the entity and where deception is used at the time, immediately before or immediately following the activity.

This also includes the deliberate falsification, concealment, destruction or use of falsified documentation or intended to use for a formal business purpose or the improper use of information or position for personal financial benefit.’ Small and medium-sized enterprises are currently a major part of economic activities throughout the world.

Nowadays, SMEs represent about 99% of all types of enterprises in Cameroon with providing high job opportunities to its labour force as these enterprises need to focus on their development; the internal control mechanism is a means and a way of directing, monitoring, and measuring the SMEs resources.

It plays an important role in preventing and detecting fraud and protecting the physical and intangible resources as well as leading to the high efficiency of the business operation.

Therefore, focusing on this business area is a timely issue and a rewarding one since it contributes a lot for the majority of business enterprises involved in SMEs. This study examines and describes the impact of internal control on the growth of small and medium-size enterprises in Cameroon.

The study focuses on the main five components of internal control and their impact on the growth of small and medium-size enterprises. In so doing, the study creates a better understanding of effective internal control that may be applicable to the context of SMEs and establish theoretically the features of an effective internal control for sampled SMEs.

To achieve this objective, we formulate one research question: To what extent does internal control affect the growth of small and medium-sized enterprises? This is intended to look into how closely SMEs follow the virtues of effective internal control in their business operation.

Applying an inductive approach in qualitative interviews, the study found out that, contrary to what is generally suggested, SMEs are aware of the importance of having a good internal control system.

The findings of the research enabled the emergence of a theory grounded in the collected data. Indeed, the major features of an effective internal control system applicable for SMEs are found to be sound control environment, sound risk assessment process, sound operational control activities, effective information and communication system, effective monitoring and evaluation system. Therefore, the major findings of the research fit into the theoretical framework.

This chapter focuses us on the introduction to the study in which the concept of Internal Control Systems (ICSs) is put into perspective, as well as bringing out the general perception that; the institution of systems of internal control will always lead to the growth of small and medium-size enterprises.

The Chapter handles the purpose of the study which is establishing the relationship between internal control and the growth of small and medium-size enterprises.

It also concerns the specific objectives of the study that were determined as; determining the functionality of internal control among small and medium-size enterprises (SMEs) and examining the relationship between ICSs and the growth of small and medium-size enterprises.

Research hypotheses which are basically derived from the Research objectives clearly brought out the belief that; there is a relationship between internal control and the growth of small and medium-size enterprises, the level of business knowledge of entrepreneurs in ICSs affect the growth of small and medium-size enterprises, and there is a relationship between growth in profits among SMEs and the strength of ICSs.

The chapter also brings into focus the scope of the study as covering Molyko Buea Cameroon. It tackles the justification of the research and brings out a diagrammatical representation linking internal control and the growth of small and medium-size enterprises.

Internal controls refer to the measures instituted by an organization so as to ensure the attainment of the entity’s objectives, goals, and missions.

They are a set of policies and procedures adopted by an entity in ensuring that an organization’s transactions are processed in the appropriate manner to avoid waste, theft, and misuse of organization resources.

Internal Controls are processes designed and effected by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to the reliability of the financial reporting, effectiveness, and efficiency of operations, and compliance with applicable laws and regulations (Mwindi, 2008).

It is worth noting that internal controls only provide reasonable but not absolute assurance to an entity’s management and board of directors that the organization’s objectives will be achieved. “The likelihood of achievement is affected by limitations inherent in all systems of internal control” (Hayes et al., 2005).

Organizations establish systems of internal control to help them achieve performance and organizational goals, prevent loss of resources, enable the production of reliable reports and ensure compliance with laws and regulations.

An internal control system comprises the whole network of systems established in an organization to provide reasonable assurance that organizational objectives have been achieved.

Benefits of an internal control system include effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations.

The small and medium scale business enterprises form the informal sector which has been recognized not only to play a major role in Cameroon’s economy but also provide much-needed employment opportunities.

Studies have shown that the sector has the necessary ability to alleviate poverty through the creation of employment opportunities and generation of income (Webster, 1991).

In recognition of the steady increase in unemployment, the Cameroon government has appreciated the International Journal of Social Sciences and Entrepreneurship.

Within the business population, small and medium-sized businesses are the predominant form of business organization a factor that has contributed to the urgent need for ICSs.

They provide extensive contributions to Gross National Products (GNP), job generation, and wealth creation. Nevertheless, in ICS, this form of the business group is largely underrepresented.

SMEs have concentrated on the availability, accessibility, and cost-efficiency in the utilization of finances. Little attention has been paid to the great role played by the internal control systems in the performance of businesses.

Small and medium scale enterprises have operated in total disregard of internal control systems leading to the mass failure of these business organizations (Lydia Were, 2011).

Studies show that 90% of the business start-ups do not operate beyond the third anniversary due to a lack of sound internal control systems (Katuntu, 2005).

Therefore, the study sought to contribute to the existing literature by empirically investigating the role of internal control systems on financial performance and their importance in small and medium-sized enterprises.

1.1 Background to the Study

The research of internal control has a relative remote origin. In 1949, the US CAPO first proposed the concept of internal control. In 1992, the US COSO promoted the concept and elements of internal control in its report “Internal Control-Integrated Framework”. COSO published “ERM-IF” in 2004 and made the internal control and Enterprise risk management closely integrated by breaking the previous limitations of internal control.

Research on internal control in China began in the 1980s. The research on internal control of small and medium-size enterprises are not so many; most of them are concentrated in how to improve internal control.

For example (Zong Xiusong,2006) thought that there are many problems in the internal control of small and medium-sized enterprises now, such as deficiency in understanding of internal control, lack of constraints in the mode of management, and lack of effectiveness of internal control objectives, so the enterprises need to strengthen the moral training and the education of internal control system of all staff, establish an effective internal control system with the actual and strengthen supervision.

Zhang Wei, (2004) suggested that the internal control issues for SMEs included weakness of the internal audit function, so the enterprises need to strengthen the audit of internal control.(Lu Bingqing,2007) studied the existing problems in small foreign enterprises from the organization structure, internal control systems, and internal control mechanism in business processes.

Limited to the internal control systems and internal process, most studies neglected the organic combination between internal control and risk management, and internal control in enterprises today cannot play well in reducing the risks.

Therefore, based on comprehensive risk management, this paper builds an internal control framework analyzing the status of internal control and risk management of small and medium-sized enterprises, so as to provide a reference to Small enterprises and medium-sized enterprises size enterprises in China. Small and medium are defined by their size, turnover or balance sheet total.

In the European Union, small enterprises have between 10 and 49employees and an annual turnover not exceeding EUR 7 million or an annual balance-sheet total not exceeding EUR 5 million. Medium-sized enterprises have fewer than 250employees.

Their annual turnover does not exceed EUR 40 million or their annual balance sheet total should be less than EUR 27 million. In the case of Cameroon, all enterprises with fewer than 250 employees are categorized as medium-size enterprises and those with fewer than 50 employees are categorized as small.

SMEs constitute currently the major part of economic activities in Cameroon. Nowadays, they represent about 99% of all types of enterprises in Cameroon and provide high job opportunities to its labour force. This business structure is not different from the EU business structure.

Internal control is a means by which resources of these SMEs are directed, monitored, and measured. It plays an important role in preventing and detecting fraud and protecting the physical and intangible resources; moreover, it leads to high efficiency of the business operation.

Therefore, unless they have strong internal control system to monitor and run their businesses, the prospect of bankruptcy threatens each and every Cameroon small and medium size enterprise.

The focus of this research is to examine the impact of internal control on the growth of small and medium-size enterprises in Cameroon.

Therefore, focusing on this business area is a timely issue and a rewarding one since it contributes a lot for the majority of business enterprises involved in small and medium-size enterprises.

The background information of small and medium-size enterprises was necessary because different business sectors or forms of ownership are likely to give varying feedback on the study variables.

1.2 Problem Statement

As a result of inadequate internal control systems, it has led to the collapse of many small and medium-sized enterprises.

This collapse is seen to be caused by factors such as fraud, embezzlement, inadequate information systems, and the lack of professional ethics being portrayed by the enterprise stakeholders.

This study will investigate the underlying issues that internal control has on the growth of small and medium-sized enterprises in Molyko. As such internal control systems were put in place by small and medium-sized enterprises and this gave rise to the following research questions;

1.3 Research Questions

1. What are the impacts of internal control on the growth of small and medium-sized enterprises?
2. To what extent do accounting information systems affect the growth of small and medium-sized enterprises in Molyko?
3. How does auditing affect the growth of small and medium-sized enterprises in Molyko?
4. How do security checks affect the growth of small and medium-sized enterprises in Molyko?
5. To what extent does cloud computing base technology affects the growth of small and medium-size enterprises in Molyko?
6. To what extent does segregation of duties have an impact on the growth of small and medium-size enterprises in Molyko?
7. What impact do information systems and modeling have on the growth of small and medium-sized enterprises?
8. To what extent does internal control lead to the growth of small and medium-sized enterprises. Does it end theoretically in the enterprises?

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