Abstract

This study had as prime objective to assess the contribution of internal control systems towards the performance of agricultural SMEs in Douala Cameroon. The study specifically seeks to examine the extent to which assets control practices predict the performance of agricultural SMEs in Douala; To establish the extent to which financial control practices predict the performance of agricultural SMEs in Douala; to assess the extent to which compliance control practices predict the performance of agricultural SMEs in Douala and to examined the problems facing agricultural firms in in Douala Cameroon.

In order to achieve these objectives, the study employed Stratified sampling and convenient sampling techniques to sample 70 respondents across different agricultural SMEs in Douala, using a structured questionnaire. Collected data were analysed using SPSS (25.0) where descriptive statistics and inferential statistics of variables were generated. Findings revealed that 72.25% (R2= 0.7225) of performance of agricultural firms performance is accounted for by its internal control practices.

Hypothesis testing revealed that internal control has a significant effect on agricultural firms’ performance. Correlation analysis revealed that internal control components such as assets control, financial control and compliance control have a positive association with firm performance.

The conclusion was that generally, there is a strong positive correlation between internal control systems and the performance of Agricultural SMEs in Douala Cameroon. The study recommends additional research on the relationship between Informational Technology, agricultural mechanization, stability and availability of markets, participative management and agricultural SME performance.

CHAPTER ONE

INTRODUCTION

1.1 Backgrounds of the study

Historically, Internal controls in organizations have existed since ancient times. In Hellenistic Egypt, there was a dual administration with a set of bureaucrats charged with collecting taxes and another charged with supervision for purposes of internal controls. In the ancient Republic of China, the “Jiancha Yuan or Control Yuan” was one of the agencies that monitored the other branches of Government for purposes of internal controls (Yuan, 2009).

The history and evolution of the concept of internal controls in contemporary times have largely been influenced by events and developments in the USA and the UK. The concept of internal control was first officially defined in 1949 by the American Institute of Accountants. Since then, the definition and concept of internal controls have been the subject of debate. Different interest groups have had diverse perceptions but agreed that internal controls improve financial reporting and are beneficial to capital providers and other stakeholders (Chye, 2007).

In the UK, the collapses of the Bank of Credit and Commerce and the Maxwell Empire in 1991 sparked widespread concern that led to the creation of the Cadbury Committee that recommended listed companies to report on the effectiveness of financial control, while the Rutteman   Committee guided how the board should review and report.

Legislations issued after the Cadbury Committee such as the Hempel Committee, the combined code, as well as the Turnbull Committee have reiterated their recommendations in support of internal control (Chye, 2007).

In the USA, successively the Cohen Commission 1978, the Securities and Exchange Commission, the US congressman Ron Wyden of the House Oversight and Investigations Sub-Committee, the Federal Deposit Insurance Corporation of the Treadway Commission, the Public Oversight Board and more recently the Sarbanes – Oxley Act of 2002 have recommended the strengthening of internal controls (Spira & Gowthorpe, 2008).

In the Sub-Sahara African context, the importance of internal controls was perhaps highlighted by the introduction of Structural Adjustments Programs (SAPs) recommended by the International Monetary Fund (IMF) as far as policy and budget reforms in the public service were concerned.

In Cameroon, the Ministry of the Supreme State Audit (MINCSP) was established to fight against the practice of corruption, embezzlement and other malfunctions in the country. The MINCSP in Cameroon has also undertaken to encourage transparency in the management of public affairs measures for management in corporations to establish controls and check their effectiveness to increase the reliability of audited financial statements following the collapse of micro-financial institutions like the National Corporate Fund (NCF), Global Business Financial (GBF), Compagnie Financière de L’estuaire du Cameroun (CO-FINEST).

Eyaa & Ntayi (2010) observed that poor performance and subsequent high rate of collapse are far superior to the rate of success among all SMEs. Among the biggest contributors to these failures is believed to be poor management. Management implies many functions including controlling. The inadequate internal control mechanisms may not only lead to poor performance of an SME but also total collapse. The next section enlightens on the theoretical rationalization of the role of internal controls in SME performance.

Theoretically, Cybernetics (theory of Communication and Control) by Norbert Weiner in 1948 asserts that entropy is very common in systems and its increase causes systems to become less organized and eventually malfunction as long as there is no means of control that force a system to maintain the structure. Malik (2004) from the holistic system-oriented standpoint criticizes pure shareholder value orientation and education programs in business administration and argues that applying the laws, models and methods of management cybernetics, enables an organization to function more effectively and efficiently.

The main weakness of cybernetics is that the position of the observer of the system (e.g. the organization) pre-defines how the system is observed. This problem of placing the observer in the centre became the Achilles’ heel of cybernetics, with the result that its wide acceptance and use have declined over time, so much that today it has limited application in organizational and management sciences.

State of New York Comptroller (2010) introduces the COSO model and says that the integrated internal control framework is made of five interrelated elements as identified by COSO; fostering a favourable control environment, conducting risk assessment, designing and implementing control activities in the form of policies and procedures, providing for effective communication throughout the organization, and conducting ongoing monitoring of the effectiveness of control-related policies and procedures.

However, Amundo & Inanga (2009) through their study on the evaluation of internal control systems in Cameroon contest that the COSO framework approach may be relevant to larger organizations, yet inappropriate for smaller ones due to costs and operational complexity.

In this study, the Agency Theory was used to describe, predict and explain the phenomenon of internal control, as a function of management, and its perceived contribution towards the performance of small and medium agricultural enterprises. According to the Agency Theory, internal controls established by both management and administration of a firm are one of many mechanisms used to address the agency problem (Kevan, Jensen& Jeff, 2003). Furthermore, research has proven that internal controls reduce agency costs (Barefield, Claver & O’Keefe, 1993).

The Agency Theory is about the separation between ownership and control. One person (the Principal) engages another person (the Agent) to perform duties. An agency problem arises if the cooperative behaviour, which would maximize the group’s welfare, is not consistent with each individual’s self-interest. Because owners of resources will have less information than those who manage the resources, these agents may take advantage of the situation for their benefit. As a result, different contracting agreements and controls need to be designed to mitigate agency-related problems (Arwinge, 2013).

Benisiu& Hangula (2011) while reviewing the theory, practice, and dynamics of agricultural cooperatives in Namibia, noted that the Agency Theory is relevant to the institutional structure of agricultural enterprises because it explains how employed agents in agri-business may not act in the best interests of cooperative owners hence the need for internal control mechanisms as suggested in the model.

Rost, Inauen, Osterloh, & Frey (2010) also studied organizations and the success of their longevity in the guidance of the agency theory and concluded that longevity success in organizations is attributed to an appropriate governance structure that relies strongly on internal control mechanisms, as suggested in the agency theory.

Conceptually, Internal controls are procedures put in place by firms’ owners, executives, managers and staff to ensure efficient and effective operations of activities to meet the firms’ objectives. Internal controls also help the auditors and evaluators assess the business risks, minimize loss and maximize wealth.

Research has proven that there is a strong relationship between weak internal controls and the perpetuation of fraud in organizations. Arsenault (2008) found that good internal controls provide a working environment in which good employees are not tempted to do something they would not ordinarily do.

There are various approaches to analyzing the competence of internal control systems. The Application Control Approach promoted by Namiri & Stojanovic (2012) presents a novel view on the modelling and implementation of internal control in the business process. The main idea in this view is the introduction of a semantic layer in which the process instances are interpreted according to given control statements, without changing the original (business goal-driven) business process.

The COSO interpretation of internal controls, on the other hand, notes that internal controls systems consist of five interrelated components namely: Control Environment, Risk Assessment, Control Activities, Information, and Communication, as well as Monitoring (Schneider & Becker, 2011).

Amundo & Inanga (2009) through their study on the evaluation of internal control systems in Uganda contest that the COSO framework approach may be relevant to larger organizations, yet inappropriate for smaller ones due to costs and operational complexity.

In this study, the concept of internal control systems with more relevant variables was adopted from CPA Australia (2008) which suggested four broad areas that may constitute firms’ internal control systems notably mechanisms for controlling all assets, a sound financial system, a keen interest in compliance with the environment, legal and regulatory systems, as well as supervisory management.

However, the study concentrated on the three areas (assets control, finance control, and compliance control) within the milieu of agricultural firms in Douala as contextualized below.

Contextually, In Cameroon, internal control measures are practised by the Government, establishing the Ministry of the Supreme State Audit (MINCSP) to fight against the practice of corruption, embezzlement and all malfunctions in the public sector of Cameroon.

Supreme State Audit incriminates SODECOTON General Manager, Iya Mohamed who was found guilty of 20 managerial lapses that cost the state 9 billion. The MINCSP in Cameroon has also undertaken to encourage transparency in the management of public affairs measures for management in corporations to establish controls and check their effectiveness to increase the reliability of audited financial statements following the collapse of micro-financial institutions like FIFFA, National Corporate Fund (NCF), Global Business Financial (GBF), Compagnie financière de l’estuaire du Cameroun (CO-FINEST).

The Supreme State Audit (SAI) appointed by the Head of State has also got jurisdiction over businesses in Cameroon. One of the major roles played by the SAI to control corruption in the Public sector is by carrying out punitive actions against government officials for poor management, fraud and corrupt practices. ‘‘Operation Sparrow Hawk’’ is also a corrective measure taken by the Head of State to fight against corruption and the misuse of public funds.

In this respect the discrepancies in the Higher Education sector and weaknesses in secondary education can also be attributed to embezzlement for this, we can notice the removal of the former Minister of Secondary Education Louis Bapes Bapes sentenced to 20 years of jail due to misuse and embezzlement of funds.

Another scandal is the case of Marafa Hamidou Yaya, former minister of territorial administration and decentralization and Yves Michel Fotso, former Director of defunct state air transport company CAMAIR who was held guilty of misappropriation and sentenced to 25 years of jail.

This led to the closure of Yves Fotso’s corporations such as FGH-SA and Clean OIL. Equally the National Anti-Corruption Commission (CONAC), is an institutional body established by the Head of State to fight against corruption in the country.

In the context of agricultural SMEs, the lack of appropriate finance at reasonable costs to support their operations has continuously affected their investment and production levels and hence lowered their return on investment. Studies revealed that 70% of commercial banks in the region still perceived agribusinesses as low-income earners lagging in development ladders, with low profits and therefore not worth financial services as they are a potential liability.

In the same report, agriculture finance service providers also highlighted that there is up to 17% loan defaulting among agribusinesses, which highlights poor performance among agricultural SMEs. This situation represents the major ingredient of the problem of SMEs in Douala as specified in the statement of the problem.

1.2 The Problem Statement

The internal control structure of any organisation may affect its performance in terms of financial management, risk management, fraud detection and prevention, growth and profitability and customer satisfaction. The system of controls of every organisation must be one that limits avenues for errors, fraud and other misconduct.

The ineffectiveness of numerous organisational control frameworks has been highlighted because of the huge financial scandals in recent years.

Hence, the increased attention on risk management, internal controls, internal audit and their roles in cutting edge institutions. The aim of control policies formulated in financial institutions is to make certain that it gives credit only to customers who satisfy the laid down conditions including payment on time.

This is a fundamental element of control that keeps banks from becoming illiquid because of improper and un-facilitated lending. Despite these financial control policies, some financial institutions fail within the first five years of operations. This is attributed to their poor compliance policies, financial controls and poor assets control which alternately can affects the performance of these organizations.

Wai (2008) noted that although the importance of an internal control system is widely acknowledged among large companies, an efficient system of internal control is typically said to be absent or not strong in most SMEs in general.

Douala Town is famously known for its many agro-based small enterprises that have earned it respect in the economy of Cameroon. Additionally, financial institutions have invested in training owners and managers of agri-businesses in Douala in effective record keeping and internal control and creating market linkages to boost Agribusiness performance and maintain Douala as the food basket.

There are also cases of alleged corruption and financial malpractices. This is because of weak and inadequate internal control systems given that some internal control systems are costly and the cost might outweigh the benefit. In auditing standards, the concept of reasonable assurance recognizes that the costs of control should not exceed the benefits that are expected from controls. However, there is no measure of how small internal control should be to be considered insignificant and if the tone set by management is not effective, internal control can be minimized to the extent that it can drastically pull down performance.

This research will therefore attempt to investigate the effect of internal control systems on the performance of agricultural firms in Douala Cameroon which has hitherto been ignored.

1.3 Research questions

1.3.1 Main Research Question

What is the effect of internal control systems on the performance of agricultural firms in Douala Cameroon?

1.3.2 Specific Research Questions

1. How does asset control contribute to the performance of agricultural firms in Douala Cameroon?
2. What are the effects of financial control on the performance of agricultural firms in Douala Cameroon?
3. How does compliance control contribute to the performance of agricultural firms in Douala Cameroon?
4. What are the problems facing agricultural firms in Douala Cameroon?
5. What recommendations can be made in order to improve the performance of agricultural firms in Douala Cameroon?

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