Abstract

This project is titled the effects of the internal control system in detecting and preventing fraud in SMEs Buea, specifically the main objective of this study was to investigate the effects of the internal control systems in detecting and preventing fraud in SMEs.

The investigation was further broken down into assessing the effect of control environment and activities on the level of fraud prevention and detection in SMEs, to determining the effect of information on the level of fraud prevention and detection in SMEs Buea.

This was to understand the variables of internal control in detecting and preventing fraud that affects SMEs in Buea which are: control environment and information. The explanatory research design was implemented and Data were collected from 50 respondents through a self-administered questionnaire using the Likert scale by Cronbach alpha of five responses.

Data were analysed using SPSS 20V for descriptive statistics and correlation analysis was further used to estimate the parameters of reliability and validity of internal control on the business establishment. Our findings show that control environment and information control were significant at 5% level of significance. It was therefore recommended that a control environment should be implemented so that fraud will be eliminated.

Furthermore, information should be implemented as well so that managers should track where those frauds are coming from and know the continuity of the business with regards to computerized software to track all financial records to best eliminate fraud in small and medium-size enterprises in Buea municipality.

CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background of the Study

Nowadays small and medium-sized enterprises (SMEs) play an important role in the development of every economy (world bank,2009). They create jobs by promoting the welfare of the population to over 90% of enterprises in Africa, the Caribbean, and Pacific countries (Bowale & IIesanmi, 2014).

SMEs leaders are responsible for tackling corporate fraud by detecting and preventing such acts through adopting strategies to improve internal control on their activities in business. Managers introduce controls to protect assets and ensure the preparation of enterprises’ financial records. Corporate fraud and business failures lead to greater demand for better internal control among businesses (Fourie & Ackermam, 2013).

The global financial crisis of 2007 and 2008 are indicators of the need to improve internal control for the business. SMEs are the backbone of every economy and a key source of economic and dynamic growth and flexibility.

In Africa, SMEs refers to firms that have 250 workers which distinct and separate business entities including cooperative firms and non-governmental organization that is owned and manages by private individuals. The world bank defines SMEs as those enterprises with a maximum of 300 employees, 15 million annual revenue and asset (world bank, 2013) while the European union defines SMEs as an enterprise which employs fewer than 250 persons with an annual turnover of 50 million Euros (European commission, 2011).

However, SMEs broadly define as business entities that have more than 5 and fewer than 50 employees and they are critical agents of economic transformation as they account for more than 50% of the GDP of many developing countries.

They also constitute a major source of innovation and technological development by supplying both human capital and raw material to larger businesses (Fjose et al, 2010) as a result they constitute the major source of employment in most African countries.

In Cameroon the official definition of SMEs is derived from law 2010/001 of April 13, 2010) on the promotion of small and medium SMEs (world bank 2013), the law states that small enterprise refers to those that hire less than 5-20 people with annual revenue of 15 million CFA, whereas medium-size enterprises apply to those that hire from 20-100 employees with an annual turnover of 100 million-10 billion.

The national statistics institute (INS) states that over 90% of Cameroon’s economy with a share of GDP is estimated at 34% (World Bank, 2013).In this economy, SMEs are being determined by the number of employees that is to say the larger the enterprise the more employees (Ayyagari et al, 2005).

This notion is not acceptable in our current business environment reasons being so is that SMEs are striving to become more efficient by making their operation learner to be profitable (Levine, 2020).

Using turnover to categories the size of firms, it can mislead the information because businesses with high-profit margin and wider net asset can be wrongly categories when the focus is placed on turn over and a number of employees. In this context of study Cameroon’s definition of SMEs will be used given that the survey is conducted in Cameroon (Buea municipality). Internal control encompasses the Policy, task and behaviors and another aspect of the company such as to facilitate its effective and efficient operation by enabling it to respond appropriately to SMEs (Gree & Thurnik, 2003) these include the safeguarding of assets from inappropriate use or fraud and ensuring that liabilities are identified and managed.

Also, it ensures the qualities of internal and external reporting which requires the maintenance of proper records and processes to generate a flow of timely, relevant, and reliable information. Internal control systems can be described as the whole system of control, financial and otherwise established by management in order to carry on the business of the enterprises in an orderly and efficient manner (Jenfa, 1991).

Every organization operates on these set of procedures and policies on how to go about doing their day to day activities, these set of task need to be done in a sequence and in a way as to ensure the accomplishment of enterprise goals, Internal control is a process that guides an organization towards achieving its objectives, these objectives include operational efficiency and effectiveness, reliability of financial reporting, and compliance with relevant laws and regulations (COSO, 1992).

According to the University of California (2008), strong internal controls will depend on its components, such as the control environment; which is the control consciousness of an organization; it is the atmosphere in which people conduct their activities and carry out their control responsibilities.

An effective control environment is an environment where competent people understand their responsibilities, the limits to their authority, and are knowledgeable, mindful, and committed to doing what is right and doing it the right way

1.2 Statement of the Problem

Buea municipality is the capital of the South West Region of Cameroon which is located on the eastern sloop of mount Cameroon with an estimated population of 47300 people (http://en.m.wikipdia .org >) has an abundant economic resource such as land, labor, and capital which can increase the growth and performance of SMEs.

For example, significant portion of the region is blessed with fertile volcanic alluvial soil which constitutes a substantial potential for agric businesses. In addition, Buea has vibrant youth population with universities and higher-level education institute that trains and graduate thousands of students into the labor market, thereby ensuring a steady supply of skilled labor. In the same line there are significant of unskilled labor by the indigenous population and workers who have been attracted from various areas in Cameroon due to political instability of the country.

Although the region has potentials as seen above, SMEs in this locality have some loopholes such as loss of assets, fraud, waste, and mismanagement due to internal control failure. Those SMEs who are able to survive still perform badly despite the crucial contribution to the entire economy (Neneh & Zyl), however lack of internal control has a negative effect on the profit and continuity of business (Oath man &Ali, 2014) because 38% of small businesses and 88.3% of large enterprises have these departments but faces internal control challenges like following concretely accounting principles, employee’s performance just to mention few.

Internal controls have been very crucial towards the contributions of many corporate successes around the world. It eliminates risk, move actions towards pre-set targets and goals and equally make organizations to have good corporate governance which increases financial reporting and trustworthy directors, increasing wealth for companies’ shareholders and GDP of nations.

But still, when companies suddenly collapse or report errors, there’s often a resounding question, “what went wrong?” A breakdown in the internal control system is the usual cause. Absence of these variables often results in organizational failure.

Internal controls as a risk management component is aimed at detecting all material fraud and errors, but the resulting case in the recent trend in business establishments has not been same as many fraud and error cases keep emerging. When all of these failures and errors occur, then we begin to ask ourselves if the internal controls are really working to detect and eliminate fraud and errors in the management of companies.

The reason why I chose this topic is because of the weaknesses of internal control in preventing and detecting fraud and errors from occurring in business establishments, I will like to find out solutions to the problem of ineffective internal controls.

With the research problem in the above paragraph, this work will try to solve this problem and help add to the existing body of knowledge, this process will go through by trying to answer question; what is the role of internal control in detecting and preventing fraud in business establishments?

This is for the reason that most businesses do not employ effective internal controls which mostly leads to a poor performance of the institutions. Also the problem of mismanagement can be identified with poor internal controls, hence there is a quick need in exploring the possibilities of implementing appropriate and efficient internal controls that will aid in the efficient management of businesses.

1.3 Research Questions

The main research questions regarding this study may be formulated as follows,

Does internal control system in detecting and preventing fraud in Buea municipality has an effect on SMEs or not?

Specific questions

1. To what extent does internal control system in the detection and prevention of fraud on SMEs?
2. What effect does information have on the detection and prevention of fraud in SMEs Buea?
3. To what extend does control environment and activities effects the detection and prevention of fraud in SMEs Buea municipality?