THE IMPACT OF INTERNAL CONTROL PRACTICES ON SMALL AND MEDIUM SIZE ENTERPRISES FINANCIAL PERFORMANCE IN CAMEROON

Abstract

SMEs are critical to any country’s economy, but more so in developing countries.

 Despite their contribution to the economy as a whole, SMEs continue to struggle to thrive and compete with larger corporations.

As a result, efficient internal control in SMEs has the ability to reduce employee fraud, allowing SMEs to achieve their objectives and aims, which includes increasing earnings.

 The impact of internal control techniques on financial performance of SMEs in the Buea municipality was investigated in this study.

In this study, a descriptive research design was used. The participants in this study were all SMEs in Buea.

 A random sample of 25 SMEs was chosen using a simple random sampling technique.

The study included both primary and secondary data, with primary data acquired through self-administered questionnaires and secondary data on SMEs’ financial performance obtained from their financial reports.

The findings revealed that the control environment and risk assessment have a detrimental impact on small and medium-sized businesses’ financial performance.

The findings also demonstrated a link between control activities, information and communication, and monitoring, as well as the financial performance of Buea’s SMEs.

According to the findings, the financial performance of SMEs in Buea is inversely related to the control environment and risk assessment.

The study also discovered that control activities, information and communication, monitoring, and the financial performance of SMEs in Buea are all linked.

SMEs should ensure that they have appropriate environmental control, effective risk and control activities, and proper monitoring procedures, according to the report.

More materials: The Effect of Internal Control on the Financial Performance of micro finance institutions in Buea

THE FIRST CHAPTER

INTRODUCTION

1.1 The Study’s Background

Small and medium-sized businesses make up the majority of businesses in the world, and they account for a significant share of overall employment and production (Hussain, Millman, and Matlay, 2016).

Small and medium-sized businesses (SMEs) play an important role in the economy.

SMEs are profit-generating enterprises for their owners, a source of national output and revenue, and a source of raw materials for larger entities or corporations (Olatunji, 2013).

 Small and medium-sized businesses (SMEs) play a significant role in the global economy, accounting for 90% of businesses and 60% of job possibilities.

SMEs are giving an alternative to traditional industrialisation in the face of rising unemployment rates around the world (Mutandwa, Taremwa, and Tubanambazi, 2015).

SME’s are the engine that propels the world’s economies and the stepping stone to industrialization for both emerging and industrialized economies.

Enterprises make up 99 percent of all businesses in emerging countries, demonstrating their significance (Fjose, Grunfeld and Green, 2010).

For example, in the United States (USA), SMEs account for 52 percent of the private workforce and 51 percent of GDP (Longenecker et al., 2012), whereas in the United Kingdom (UK), they account for 62 percent of total employment and 25 percent of GDP (Longenecker et al., 2012). (Borns, 2001; Day, 2004).

SMEs, like the United States and the United Kingdom, account for 79 percent of Italian employment, 63 percent of French employment, and 60 percent of German employment, respectively (Borns, 2001). SMEs employ 80% of the urban population in China and account for 60% of GDP (Sham, 2014).

Small and medium-sized enterprises (SMEs) in Africa play an important role in the economic landscape of most economies around the world, particularly in emerging countries.

Small and medium-sized businesses (SMEs) account for around 60% of private-sector employment globally, according to estimates (Ayyagari et al.., 2011).

In South Africa, Ghana, and Nigeria, SMEs account for a larger proportion of firms (Abor and Quartey, 2010; Gbandi and Amisssah, 2014), and their contribution to GDP in Ghana, for example, was over 49% in 2012. (PWC, 2013).

According to Cameroon’s law number 2015/010 of 16 July 2015 on the promotion of small and medium-sized enterprises, businesses are classified as SMEs if they employ between 6 and 100 people and have an annual Chiffre D’affaire Hors Tax (CAHT) of between 15 million and 3 billion FCFA.

Small businesses with 6 to 20 employees and a CAHT of 25 million to 250 million FCFA are classified as small businesses, whereas medium-sized businesses with 21 to 100 employees and a CAHT of 251 million to 3 million FCFA are classified as medium-sized businesses.

Small and medium-sized businesses are critical to a country’s economic success (Arigo, 2015). They are important to the economies of developing countries like Cameroon, where issues like poverty eradication, corruption, and unemployment are still a major concern for inhabitants.

SMEs are the key economic drivers in Cameroon, accounting for almost 90% of the country’s economic fabric and employing more than 50% of the private sector’s workers (INS, 2009).

According to a recent enterprise study done by the national institute of statistics (2009), Cameroon has 93969 businesses, with 99.2 percent of them being SMEs.

According to statistics, around 33000 businesses have been established in Cameroon since 2010. (CFCE, 2015). SMEs are also thought to make a significant contribution to a country’s GDP.

In Cameroon, official and informal SMEs account for 50% of the country’s GDP and 92 percent of all business (INS, 2005). SMEs remain the backbone of the economy in terms of employment and poverty eradication.

They employ around 62 percent of Cameroon’s permanent workforce (INS/RGE, 2009). It’s also vital to understand the role of SMEs in wealth generation and redistribution in Cameroon.

Between 2003 and 2005, formal and informal SMEs paid a total of 208 billion dollars in salaries (INS, 2006). Small and medium-sized enterprises (SMEs) continue to be a significant part of Cameroon’s economy, accounting for 40% of the country’s GDP (INS\RGE, 2009).

1.2 Statement of the Issue

Small and medium-sized businesses (SMEs) play a critical role in the economy of any country, particularly in developing and rising economies (Chakraborty, 2015). The majority of SMEs are battling to stay afloat.

Those who are able to survive continue to do poorly despite their contributions to the economy as a whole (Neneh and Zyl, 2012). As a result, efficient internal control in SMEs has the potential to help them prosper while also lowering employee fraud (European Federation of Accountants, 2014).

Many small organizations, on the other hand, consist of simply the owners of the company, probably one or two executives, and a few workers who are more concerned with business performance than accounting and undervalue the necessity of robust internal controls (Long, 2009).

Several research on the impact of internal control on performance have also been conducted. For example, Oseifuah and Gyekye (2013) evaluated the efficacy of internal control in South African SMEs and found that internal control practice was relatively low, with only a few of them having suitable internal control systems in place.

Dineshkumar and Kongulacumar (2013) investigated the extent to which internal control systems influence firm performance, finding a strong link between internal control systems and Sri Lanka Telcom Limited’s performance, but the study did not look at the effects of internal control practices on SMEs.

SME failure is common in Cameroon, with many failing within the first three years of business. According to statistics from Cameroon, three out of every five businesses fail within the first few months of existence (Ministry of Small and medium-size Enterprises, 2016).

As a result, Kinyua (2014) claims that small enterprises fail to expand and thrive as a result of agency issues coming from SMEs owners and employees, and the rate of business failure continues to rise.

Internal controls are critical to any company organization, according to the majority of the empirical studies analyzed. Despite the fact that internal control is a critical factor affecting a firm’s performance regardless of its size, there is little evidence on the impact of internal control practices on the performance of SMEs because most internal control studies conducted globally and in Cameroon focus on large corporations rather than SMEs.

As a result, there is a gap in the research, which this study aims to fill by analyzing the effects of internal control methods on financial performance of SMEs in the Buea municipality, where SMEs are seeking to maintain a high level of financial success on a big scale.

Growth comes with these, bringing with it challenges in the operation of SMEs unless the issue of internal control is addressed quickly.

The relationship between internal control systems and financial performance among small and medium-sized firms in the Buea municipality is investigated in this study.

The following are some possible research questions.

RESEARCH QUESTIONS

What exactly are SMEs?

What is the definition of internal control?

What do you mean when you say “internal control practices”?

How can the financial success of SMEs be assessed?

What’s the connection between internal control and financial results?

What function does internal control play in SMEs?

To what extent can internal control ensure that SMEs get a good return on their investment?

Objectives of the study

Internal control can only go so far in ensuring progress.

How reliable is internal control in terms of ensuring profitability?

Is information about the control activity and the control environment conveyed in a timely and effective manner?

1.3 The Study’s Purpose

To identify the issues with internal control practices in connection to small and medium-sized business financial performance

The purpose of this study is to see how internal control practices affect the financial performance of small and medium-sized businesses.

In order to make a suggestion

1.4 Hypothesis

Ho.

Internal control has little bearing on the financial performance of small and medium-sized businesses.

Ha

Small and medium-sized businesses’ financial performance is heavily influenced by internal control.

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