Abstract

SMEs play a vital role in the 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 the economy as a whole.

As such, effective internal control in SMEs has the potential of reducing employees’ fraud leading to the success of SMEs in achieving their objectives and goals, which is the creation of more profits. This study examined the impact of internal control practices on performance in the financial perspective of SMEs within the Buea municipality.

A descriptive research design was adopted in the study. The population of this study comprised all SMEs in Buea. Using a 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 the financial perspective of SMEs was collected from SME’s financial reports.

The results established that the control environment and risk assessment had a negative relationship with the 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 of SMEs in Buea.

The study concluded that there is an inverse relationship between the 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 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 the 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 the 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 significance going by the 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 levels all over the globe, SMEs are providing an alternative to conventional industrialization (Mutandwa, Taremwa, and Tubanambazi, 2015).

Small and medium enterprises (SMEs) are the engine that drives the world’s economies and the stepping stone to industrialization, 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 workforce and 51 percent of 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 of the urban population and contribute 60 percent of GDP (Sham, 2014).

In Africa, the operations of small and medium-sized 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 in 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-sized enterprises.

Small and medium-size enterprises play a crucial role in the development of a country’s 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 the 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 employing more than 50 percent of the workforce in the private sector (INS, 2009)).

The recent enterprise 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 show that about 33000 enterprises have been created in Cameroon since 2010 (CFCE, 2015). SMEs are also believed to contribute greatly to a countries GNP.

In Cameroon, formal and informal SMEs contribute 50 percent of GNP and account for about 92 percent of business in Cameroon (INS, 2005). As far as employment and poverty alleviation is concerned, SMEs remain the backbone of the economy.

They 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 informal SMEs paid 208billion as salaries per year (INS, 2006). As far as investments are concerned, SMEs still stand out clear as an important entity of 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). The majority of SMEs are really struggling to survive.

Those that can survive still perform 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 problems arising from SMEs owners and employees, small businesses fail to grow and flourish, and the rate of business entities’ failure continues to rise.

Most of the reviewed empirical studies indicate that internal controls are vital to any business organization. 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 the performance of SMEs since most of the studies in internal controls globally and in Cameroon focus more on large firms 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, comes growth, setting in complexities in the 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-sized enterprises in the Buea municipality. The following research questions can be raised.

Read more: THE EFFECT OF INTERNAL CONTROL ON DETECTION AND PREVENTION OF FRAUD IN SMALL AND MEDIUM SIZE ENTERPRISES

1. What are SMEs?
2. What is internal control?
3. What are internal control practices?
4. How can you evaluate the financial performances of SMEs?
5. What is the relationship between internal control and financial performance?
6. What is the role of internal control on SMEs?
7. To what extent can internal control guarantee return on investment of SMEs?
8. To what extent can internal control ensure growth?
9. To what extent can internal control guarantee profitability?
10. Is the information on the control activity and control environment timely and effectively communicated?

1.3 Objective of the Study

1. To identify the problems of internal control practices in relation to the financial performance of small and medium-sized enterprises.
2. To examine the impact of internal control practices on financial performances of small and medium size enterprises.
3. To make a recommendation.

1.4 Hypothesis

Ho. Internal control does not have a significant impact on the financial performance of small and medium-size enterprises.

Ha Internal control has a significant impact on the financial performance of small and medium-size enterprises.