Review of Related Literature

Basis.. support for the study

Prove that there is a need for immediate conduct of this research

Prove that there is an existing problem

Topic discussion>> intext citation >> should reflect to reference part of research paper

Bawal Icopy… Paraphrase is a must

Introduce first the variables

Main topic no.1 : Internal control

Subtopic:

1. what is internal control

According to COSO (2013), Internal control is a process carried out at various organizational levels with
the goal of providing reasonable assurance about achievement of the objectives related to efficiency
and effectiveness of operating activities, accounting information reliability, and compliance with
applicable laws. Moreover, internal control is characterized as a risk management tool implemented by
a firm to provide reasonable assurance regarding the achievement of its objectives which does have an
effect to the long-term viability of the business. Ershaid et al. (2017) further emphasized that internal
control system can be used by virtually any organization, large or small, to safeguard asset, ensure
accuracy of record, reduce the likelihood of corporate misconduct and fraud, enhance operational
efficiency, and encourage compliance with laws and regulations. Thus, an effective internal control
systems provide a reasonable assurance that the basic objectives of management will be achieved.

The COSO framework emphasises that internal controls should be designed with consideration for the
entity’s unique environment and its risk tolerance. It does not prescribe specific activities. Instead, it
offers a structured approach to making risk-based, informed decisions. Applying the COSO framework,
leaders can lend analytical abilities to identify risks and optimise controls to support critical processes.

Ndungu (2013) Internal control is a dynamic integral process that is adapting continuously to the
changes facing modern organizations. At all levels of the organization, the management and personnel
have to be involved to address risks and to provide reasonable assurance of the achievement of the
organization’s mission and general objectives.
 2. importance internal control systems

Effective internal control helps an organization achieve its operations, financial reporting, and
compliance objectives. Effective internal control is a built-in part of the management process
(i.e., plan, organize, direct, and control). Internal control keeps an organization on course
toward its objectives and the achievement of its mission, and minimizes surprises along the
way. Internal control promotes effectiveness and efficiency of operations, reduces the risk of
asset loss, and helps to ensure compliance with laws and regulations. Internal control also
ensures the reliability of financial reporting (i.e., all transactions are recorded and that all
recorded transactions are real, properly valued, recorded on a timely basis, properly classified,
and correctly summarized and posted)

4. issues related to internal control systems

6. components of internal control

Also, when considering the five components of internal control, certain components relate more to the
organization as a whole, while other components relate to specific financial reporting areas or transaction
classes.

7. Limitation of internal control

Internal control can provide only reasonable assurance - not absolute assurance regarding the
achievement of an organization's objectives. Effective internal control helps an organization achieve its
objectives; it does not ensure success. There are several reasons why internal control cannot provide
absolute assurance that objectives will be achieved: cost/benefit realities, collusion among employees,
and external events beyond an organization's control.

Risk management encompasses a set of resources, behaviors, procedures and actions that is adapted to
the characteristics of each organization and that enables managers to keep risks at an acceptable level for
the company. Risk management and internal control systems complement each other in controlling the
company‟s activities. Its aim is to identify and analyze the company‟s main risks. Risks that exceed the
acceptable levels set by the organization are dealt with subject to plans of action. For some time now, risk
management in general and internal control more specifically; have been considered as fundamental
elements of organizational governance. As a consequence, risk management is beginning to be perceived
as a new means of strategic business management, linking business strategy to daily risks and then
optimizing those risks in order to realize value (Saarens and de Beelde 2006.)

Main Topic no.2 ---- Profitability of SMEs in the Philippines

1. determinants

Profitability means ability to make profit from all the business activities of an organization, company, firm,
or an enterprise. It shows how efficiently the management can make profit by using all the resources
available in the market. One of the indicator used to determine the status of financial performance of the
company (Hotchkiss, 1995)

business entities with strong internal control systems is expected to outperform those with poor internal
control systems in terms of financial performance. At the same time, internal control is much more than a
device for the prevention of fraud and detection of unintentional misstatement in the accounting process,
but internal control also embraced internal check and balance established by management.

Furthermore, it was concluded in the study that to generate optimality in resource application, which in
return will enhanced performance, SMEs needs to adopt internal control mechanism that ensures that
waste of all sorts are reduced to the barest minimum while striving to increase revenue inflow; by so
doing they can achieve both operational efficiency and cost leadership which can be boosters to their
financial capabilities.// They further asserted that the system of internal control is much more than a
device for the prevention of fraud and dictation of accidental errors in the accounting process, but also as
a whole management, internal control embraced internal check and balance established by management.

Every organization strives to provide products and render some service at a price using the most effective
and efficient operations of its business. It is by the effective and efficient operations in products or
services delivery that revenue flow into the organization. In the Kenya, organizations failures and
widespread dip in revenues over the past two decades have been due to operations that have resulted
into mismanagement thus elevated the importance of effective internal control within the formal
business sectors. Internal control, which assures the stability of every organisation, therefore has gained
importance today. This is because the control systems in place are a pillar for an efficient accounting
system as well as the achievement of organizational goals.

Main Topic no.3---- Business survival/ Sustainability of SMEs in the Philippines

The greater variance in profitability, survival and growth of SMEs compared to larger firms accounts for
special problems in financing. However, empirical evidence shows that most small enterprises never
develop the business beyond a certain scale and only a small minority of them manages to upgrade to the
next level of productivity, income and employment (Berner / Gomez / Knorringa 2008).

Shanmugam (2012) It is emphasized that the factor is rarely examined as having a possible impact on
failure of SMEs are internal control and fraud [6]. In Malaysia, research related to this area is still at a
‘primitive stage’ on SMEs performance. This issue is rarely highlighted and Malaysians seem to regard this
as a sensitive one. As a result, they tend to put this matter aside, even though the real problem of fraud
does exist in the Malaysian business environment. If this issue is neglected, it may badly affect the
performance of SMEs. This would result in an unhealthy phenomenon in this country, which could harm
the growth of SMEs. Consequently, the root of the problem which contributes to the insolvency of SMEs
will not be uncovered and the owners of the businesses are unaware that they are repeating the same
mistakes over their business lifecycle.

Main Topic no.4---- Internal Business Risk/ Operational risk factors of SMEs that compels need for
internal control in SMEs

Risk is ubiquitous and spreads through every issue of life. To business sectors, unforeseen situations
create severe loss exposures. Furthermore, to small-medium enterprises where the capital background
is not sufficiently strong, a catastrophe could likely lead to interruption in operational activities, financial
loss, and bankruptcy. Therefore, managing risks to reduce and minimize the loss exposure is essential
for every small business. Despite the necessity, many SMEs and micro companies rarely carry out
detailed risk assessment and management strategies. It is due to the fact that engaging in risk
assessment and management require a certain budget and human resource, which are limited in small
enterprises. These companies’ decision on how and what to invest in depends on the ongoing activities
and on their structure of control within internal environment of the firm.

A sound internal control process is critical to an entity’s to reduce problems associated with
lowering revenues and too able the entity to meet its established objective. growing concern with
corporate continuity and the reduction of business risks that may prevent business entities from
achieving their objectives encourage regulators and bodies of standard setting to give more attention to
control mechanisms and corporate governance (Corici, 2009; Tseng, 2007).

opined that in order for business to cope with the dynamic and rapidly changing business environment,
there is a need to develop and implement appropriate strategies that would safeguard their operations
and yield the desired results

3. how internal control systems work in SMEs

Shanmugam(2012) Previous studies found that effective internal control in SMEs have led to the success
of the business and it is also a fundamental and important step in reducing employee theft [11], [12].
For example, the implementation of internal control is fulfilled by follow-up or oversight the employee
functions by delegation of their duties. Internal control also was effective on SMEs and it is a tool to
measure the SMEs performance [13] and within a firm, better internal control should yield more reliable
on internal data such as inventories, payables and performance measure, thus leading to better internal
decision making, improved operations, and lower employee fraud [14], [15]. Strong internal control
system strengthens enterprise governance, allows management objectives to be achieved and mitigates
the risk of fraud by increasing employee perception of detection [16].

Organizations should continuously improve their revenue and have an internal control system that is
intervened with organizations operating activities and it is most effective when controls are built into
the organizations infrastructure in terms of continued improvement on performance standards as part
of the competitive advantage of the organization All these control actions ensure that any risks that
may affect the company‟s ability to achieve its goals are appropriately avoided and should occur at all
levels and in all functions of the organization. Most organizations no longer set up internal control
system as a regulatory requirement but also because it helps in ensuring that all management activities
are appropriately carried out

In a highly competitive and dynamic market, growing businesses face a range of challenges. As a
business grows, different problems and opportunities demand different solutions. This creates greater
difficulties in carrying out monitoring functions and can produce risks that can prevent the business from
achieving its objectives. Each organization must assess and improve the effectiveness of the aspects of
control

Further, there are three major classifications of internal controls; preventive, detective, and corrective
(Singleton, 2006). Preventive controls predict potential problems before they occur, make adjustments,
and prevent an error, omission or malicious act from occurring. The detective controls are used to
detect and report the occurrence of an omission, an error or a malicious act. Finally, the corrective
controls help in ensuring that the impact of a threat is minimized, identify the cause of a problem as
well as the correct errors arising from the problem. Corrective controls correct problems discovered by
detective controls and modify the processing system to minimize future occurrence of the problem.

Risk management encompasses a set of resources, behaviors, procedures and actions that is adapted to
the characteristics of each organization and that enables managers to keep risks at an acceptable level
for the company. Risk management and internal control systems complement each other in controlling
the company‟s activities. Its aim is to identify and analyze the company‟s main risks. Risks that exceed
the acceptable levels set by the organization are dealt with subject to plans of action. For some time
now, risk management in general and internal control more specifically; have been considered as
fundamental elements of organizational governance. As a consequence, risk management is beginning
to be perceived as a new means of strategic business management, linking business strategy to daily
risks and then optimizing those risks in order to realize value (Saarens and de Beelde 2006.)
Organizations continue to experience low levels of revenue generation most of which are man
made and therefore avoidable. Despite the numerous rules and regulations, the varying levels in
revenue generation occur across all entities in the government and private sectors. No matter
how well it is designed and operated, an internal control system can only provide a reasonable,
not absolute assurance that the objectives of the company‟s internal control system are met in
terms of revenue generation.

This heightened interest in internal controls is, in part, a result of the increased revenue in the the
academic programs in Module II. An analysis of the problems related to this whether there are
effective internal control system since such systems help in preventing or enable earlier detection
of the problems that led to the losses (Rezaee, 2002).

According to (Kirsty, 2008) an internal control system creates an organization‟s confidence in its
ability to perform or undertake a particular task and prevents errors and losses through
monitoring and enhancing organizational and financial reporting processes as well as ensuring
compliance with pertinent laws and regulations. Muio (2012) studied the impact of internal
control systems on the financial performance of private hospitals in Nairobi and established a
significant relationship between internal control system and financial performance. Kakucha
(2009) evaluated the level of effectiveness of internal controls operating in Nairobi and
established that there are deficiencies in the systems of internal controls, with the degree of
deficiencies varying from one enterprise to another. Njui (2012) investigated the effectiveness of
internal control and audit in promoting good governance in the public sector in Kenya and found
that internal control has the greatest effect on corporate governance within Kenya government
ministries followed by risk management while compliance and consulting had the least effect.
Ngugi (2011) survey of internal control systems among the listed private companies and the
public sector companies in Kenya in which the results indicated that the private sector compared
to the public sector has a strong internal control system.

Limited research has been carried out to examine the effect of the internal control system on
revenue generation in Kenya. All the above research on internal controls has a gap as they did
not take into consideration on the components of internal control and risk analysis. It is due to
this background that the study sought to fill the knowledge gap by assessing the effect of internal
control on revenue generation in Kenya while focusing on UNES Limited..

By definition, internal control is a broad term that covers a vast of operations in firms‟ revenue
generation through the prevention and detection of losses (Rezaee, 2002; Kumar and Sharma,
2005). Globally, organizations and firms perform a fraud risk assessment and assess related
internal controls in revenue loss detection and control for better revenue generation. The assess
ment consists of identifying scenarios in which funds can be lost or stolen and determining if
existing control procedures effectively manage the risk to an acceptable level (Bronson et al.
2006). Internal control involves a number of methods and measures that exercised by the
management to ensure smooth and economic functioning of a business entity. According to
Kumar and Sharma (2005), internal control assists the management in the performance of
various functions aimed at achieving the objectives of the organization. Doyle et al. (2007) and
Millichamp (2002) add that internal control is a whole system of controls established by the
management for the business entity to check the conduct of the business in terms of internal
check, internal audit and other forms of control. Internal control is thus designed and
implemented to address identified business risks that threaten the achievement of an organiza
tion‟s objectives

According to Price (2005), accountability processes and corporate governance and are geared at
protecting shareholders‟ interest as one of the priorities in most organizations. As such, effective
internal controls are essential in ensuring that the responsibility placed on management is carried
out effectively and efficiently by: preventing losses through fraud; ensuring both accurate and
reliable accounting; securing compliance with the policies of the organization; and evaluating the
level of performance in all organizational units of the organization. Sarens and De Beelde (2006)
add that the checks and balances of the organizational form a basis for the authority functions to
minimize the potential losses, abuse and mismanagement. In other words, in any organization,
internal control systems perform a watchdog's role on behalf of management and therefore, any
organization without effective internal control system is more prone to low income due to irregularities
and errors.

As such, a more proactive preventive approach to the problem

requires a critical evaluation of existing internal control structures in organizations to determine
their capacity to ensure that the organizations activities are carried out in accordance with
established goals, policies and procedures.

Wainaina
(2011) shows that as a substitute of its presence on the scene of operations, management must
rely on internal control techniques to implement its decisions and to regulate the activities for
which she would ultimately be responsible for. It is in this light that use of effective Internal
Control Systems (ICS‟s) is deemed crucial in the management of business resources. As a result,
the management of any organization designs internal control procedures to allocate, control and
ensure efficient utilization of resources, in order to achieve the overall corporate goals. It was
found that Internal Control Systems (ICS‟s) play an important role in preventing and detecting
fraud and protecting the organization's resources, both physical and intangible. This is achieved
through proper authorization controls and documentation

Normally control is the main task of executives either owners’ or managers and these control is
important as part of internal control on SMEs performance [17]. In a typical small business, the
executive is in a better position to exercise control over the organization activities than his counterpart
in a larger business. The executive should be aware of employee activities which may in high possibility
of fraud occurrence such as incoming orders, production and shipping schedules, receipts goods, cash
receipts and disbursements and customer complaints. Another key element of executive controls is the
approval of transactions. Even though the executive may not be able to review or approve all the
transactions and documents related to these transactions, at least he or she should consistently identify
types of transactions, amounts of transactions, credit practices and inventories policies
Tam (2021) Effective internal controls are essential no matter how small the company for many valid
reasons. Fraud prevention, embezzlement detection, and accurate financials are all reasons to justify for
good internal control practices. Implementing controls into the financial accounting software alone is
not enough to ensure compliance because it takes some people’s power too [16]. Since most small
business owners have very little accounting background, accountants are expected to play a key advisory
role in helping a business design and implement sound internal controls [15]. Many private companies
are benefited from implementing internal control provisions relating to accountability, independent
audits, internal controls and document retention.

Internal control can provide reasonable, not absolute, assurance that the objectives of SMEs will be met
[14]. The concept of reasonable assurance implies a high degree of assurance, constrained by the costs
and benefits of establishing incremental control procedures that can lead to high performance of SMEs.
Effective internal control implies that the small business generates reliable financial reporting and
substantially complies with the laws and regulations that apply to it [13]. However, whether a small
business achieves operational and strategic objectives or not may depend on factors outside the
enterprise such as competition or technological innovation. Therefore, effective internal control
provides only timely information or feedback on progress towards the achievement of operational and
strategic objectives, but cannot guarantee their achievement.

SMEs have been classified into micro, small and medium-sized enterprises (Vietnamese Government,
2018). SMEs have a simple organizational structure, in which management tasks are integrated to
optimize the use of resources. The investment capital of SMEs is relatively low and their production
processes that create products and services are generally simple. Thus, the management structures of
SMEs are flexible to change. In practice, SMEs’ competitive advantages are as strong as large companies
in many industries. Despite differences in organizational structures of SMEs and large companies, the
internal control system of SMEs generally includes all components which are control environment,
371
The Impact of Internal Control on Performance risk assessment, control activities, information and
communication systems, and monitoring activities. In smaller entities, functions of the internal control
system emphasize on cost-effectiveness, management override, monitoring activities, information
technology, and board of directors (COSO, 2012).
In reality, SMEs shall establish a sound internal control to protect their assets and eliminate risks as well
(Jiang & Li, 2010). Internal control helps to prevent fraud in SMEs. In other words, internal control
provides a reasonable assurance to meet SMEs’ objectives. Internal control in SMEs showed its
importance since it played a significant role in SMEs’ operations (Uzun, 2011). Internal control plays a
supporting role to assist organizations to reach their performance goals. A sound and effective internal
control helps to improve corporate governance and eliminate risks in organizations (Shanmugam et al.,
2012). IFAC indicated that possessing an effective internal control creates competitive advantages for
business (IFAC, 2012) or sustains business growth (Wang & Ding, 2019). In relation to internal control, an
internal audit is crucial in most effective internal control systems to enhance the reliability of the reports
and the responsibility of preparers and managers (Jensen, 2005).
IFAC (2012) showed that internal control created competitive advantages since a company that has a
sound internal control system would have a higher capability to cope with business risks. The
components of internal control certainly have impacts on financial and operational performance

Result of the study #1 Ndungu(2013)

Majority of the respondents indicated that ICS contributes to revenue
generation at the company (82%). Only 7% of the respondents said that ICS does not contribute
to revenue generation

The respondents who indicated that ICS contributes to revenue generation at UNES play a
number of roles in supporting the systems. Two respondents said that they ensure all documents
are authentic and correct and confirm that the relevant officers have signed all documents before
processing to prevent misappropriation of revenues. One respondent from the internal audit
section see to it that any weaknesses identified within the system are addressed through relevant
recommendations made. This helps in the continuous review of the systems particularly in cases
of new business development. They also assist in appraising the systems of internal control to
ensure effectiveness and provide assurance to the management on adequacy of the internal
control system.

Respondents from the expenditure section ensure that supplies of goods that act as factors of
production are paid for in line with the agreement. This ensures that IGUs have adequate goods
to facilitate production that brings about revenue to the company. Other respondents commented
that they undertake timely bank reconciliation, customer records reconciliation and report
accurately on revenue collections. Those that receive revenue collection reports from unit
cashiers verify and accurately post them in the system to facilitate accurate monthly
reconciliation of revenue ledger.

Common to all the respondents was that they actively participate in implementation of internal
control systems and perform all their duties according to laid down procedures and policies. The
respondents who indicated that ICS does not contribute to revenue generation cited the existence
of loopholes through which revenue is lost. They further indicated that internal control means too
much bureaucracy in the paper work hence delays in service delivery and reduced revenue
generation.

Systems of internal control are functioning as per the intended plan as indicated by most of the
respondents. It has enhanced efficient and accurate data capturing. This is enhanced by the
numerous that are conducted in line with technological changes to ensure the systems‟
sustainability. The systems have enhanced easy detection of few errors that have occurred. The
frequent audits have helped in evaluating and improving the effectiveness of the systems.

UNES play a number of roles in supporting the systems by ensuring all documents are authentic,
correct and confirm that the relevant officers have signed all documents before processing to
prevent misappropriation of revenue
Systems of internal control were functioning as per the intended plan thus enhancing efficiency
and accurate data capturing. Internal controls are essential to corporate success and survival
because they provide reasonable assurance on the achievement of objective in a number of
categories including: effectiveness and efficiency of operations; reliability in financial reporting;
and compliance with applicable laws and regulations (Chambers, 2009).

Checks and balances of the organizational form a

basis for the authority functions to minimize the potential losses due to fraud, abuse and
mismanagement (Sarens and De Beelde, 2006).

Management identifies risks that affect achievement of the objectives of the organization and has
put in place mechanisms for mitigation of crucial risks that may result from fraud. Amudo and Inanga
(2009) add that monitoring of operations ensures effective functioning of internal controls system. It‟s
through monitoring that an organization determines whether or not its policies and procedures
designed and implemented by management are being carried out effectively by employees

The study found out that ICS contributes to revenue generation at the company. UNES play a
number of roles in supporting the systems by ensuring all documents are authentic, correct and
confirm that the relevant officers have signed all documents before processing to prevent
misappropriation of revenues. Timely bank reconciliation, customer records reconciliation and
report accurately on revenue collections are undertaken. There were delays in service delivery
and reduced revenue generation. There was existence of loopholes through which revenue is
lost

The study found out that specific lines of authority and responsibility have been established to
ensure compliance with the policies and procedures. Responsibilities were delegated and follow
up action was made to get feedback on results of performance of all tasks delegated. Management
identifies risks that affect achievement of the objectives of the organization and has put in place
mechanisms for mitigation of crucial risks that may result from fraud.

The study found out that reporting system on the organizational structures spells out all the
responsibilities of each section/unit in the organization. All employees understand the concept
and importance of internal controls, including the division of responsibility. Accounting records
are limited to employees with designated responsibility for such records. Procedures exist to
prevent the interception or alteration by unauthorized persons of billings or statements before
posting. Internal reviews of implementation of internal controls in units are conducted
periodically.

Policies, procedures, and mechanisms should be put in place to ensure directives of the manage
ment are properly carried out.

According to the shareholder model the objective of the firm is to maximize shareholder wealth through
allocative, productive and dynamic efficiency i.e. the objective of the firm is to maximize profits. The
criteria by which performance is judged in this model can simply be taken as the market value (i.e.
shareholder value) of the firm. Therefore, managers and directors have an implicit obligation to ensure
that firms are run in the interests of shareholders. The underlying problem of corporate governance in
this model stems from the principal-agent relationship arising from the separation of beneficial
ownership and executive decision-making. It is this separation that causes the firm’s behavior to diverge
from the profit maximizing ideal. This happens because the interests and objectives of the principal (the
investors) and the agent (the managers) differ when there is a separation of ownership and control.
Since the managers are not the owners of the firm they do not bear the full costs, or reap the full
benefits, of their actions. Therefore, although investors are interested in maximizing shareholder value,
managers may have other objectives such as maximizing their salaries, growth in market share, or an
attachment to particular investment projects, etc.

A sound financial internal control systems helps an organization to prevent and detect frauds, errors and
minimize wastage. It strengthens custody of assets; and provide assurance to the management on the
dependability of accounting data, it also eliminate unnecessary suspicion and maintenance of adequate
and reliable accounting records.

internal control systems is not an end in itself but a means to an end

there are problems hindering the company’s effectiveness of internal control systems on financial
performance, this is well indicated in the company’s financial Report (2014) which revealed inadequate
liquidity, delayed compliance to timely presentation of financial reports, lack of proper accountability,
fraud and misuse of organizational resources. According to Procasur Africa Report (2012), Poor internal
control systems affect performance of organization, and Gapco has not been exception. Poor internal
control systems have led to huge investments lost through fraud and misuse of assets that are used to
generate revenues and forced institutions to suffer big losses,

establishing and maintaining effective internal control systems provides a clear understanding about the
major risks associated with company, setting acceptable levels for these risks and ensuring that
necessary steps are taken to identify, measure, monitor and control these risks”.

Internal controls are essential to corporate success and survival because they provide reasonable
assurance on the achievement of objective in a number of categories including: effectiveness and
efficiency of operations; reliability in financial reporting; and compliance with applicable laws and
regulations (Chambers, 2009). Numerous audits are conducted in line with technological changes
to ensure the systems‟ sustainability. This enhances an easy detection of errors that have occurred.
Frequent audits have helped in evaluating and improving the effectiveness of the systems. Checks and
balances of the organizational form a basis for the authority functions to minimize the potential
losses due to fraud, abuse and mismanagement (Sarens and De Beelde,2006).

**Owners normally entrust their resources in the hands of managers. Managers are required to use the
resources entrusted to them in the furtherance of the entity’s objectives. Managers normally report to
the owners on the results of their stewardship for the resources entrusted to them through a medium
called financial statements. It is these financial statements that reveal the financial performance of an
entity.

It is recognized by the standard setting bodies and

regulators all over the world that good internal control systems provide managers with a
reasonable assurance that the basic objectives of management will be achieved (Postan, 2010;
Mawanda, 2008; O’Leary et al., 2006; Conrad, 2003; Venables and Impey, 1991). The IFAC
(2012a) stated that one of the best defenses against business failure and an important driver of
business performance is having an effective internal control system.

Therefore, it is generally accepted that a good internal control system will provide reasonable
assurance that the business is doing well. It is expected that the financial performance of business
entities that have strong internal control systems is better than the performance of those entities
that have weak systems(Tseng, 2007; Chirwa, 2003; Greenley. and Foxall, 1997). Tseng (2007)
stated that firms with weak internal controls have lower market-value

The IFAC (2012a)

ascertained that successful organizations know how to take advantage of opportunities and
counter threats, in many instances through effective application of internal controls, and
therefore improve their performance

Brown (2008) suggested a positive effect

of internal control regulation on earnings quality

Altamuro and Beatty (2007) investigated the relationship between earnings characteristics and
mandated internal control reforms. They investigated the impact of internal control on earnings
persistence, earnings’ ability to predict future cash flows, and the earnings response coefficient.

Mawanda (2008) investigated the relationship

between internal control systems and financial performance in an institution of higher learning in
Uganda. He concluded that there is a significant relationship between internal control systems
and financial performance in an institution of higher education.

Jeffrey et al. (2007) stated that poorly performing firms simply may not be able to adequately
invest time and/or money in proper controls. Good internal control requires both financial
resources and management time, and this may not be a priority for firms that are concerned with
simply staying in business. Wijewardena et al. (2004) stated that there is a positive relationship
between internal control complexity and performance.

rishnan (2005) stated that the existence of a loss is positively associated with
reporting an internal control problem in audit-change firms. He expected to find fewer internal
control weaknesses in firms with stronger financial health.

Research study #2 Abedalqader et al. (2015)

. The analysis revealed that
all dimensions of internal control including control environment, risk assessment, control
procedures, information and communication and monitoring had positive relationships with all
profitability measures including EPS, ROA, ROE and PM. The statistically significant effect of some
components of internal control over profitability seems to support the idea that there is an
effective implementation of some internal control activities,

The achievement of internal control objectives

provides a solid ground for enhancement of profitability (Postan, 2010; Williams, 2005;
Venables and Impey, 1991; Greenley and Foxall 1997). Many researchers suggested that internal
control is expected to act as a power that prevents deviations from the predetermined objectives
and policies of organizations (Bejide, 2006; Conard, 2003; Hermanson and Rittenberg, 2003;
Okezie, 2004). This part of our results suggests that internal control, if effectively implemented,
can enhance the organization’s performance in certain issues.

We have to remember that regardless of the power of internal control systems there
are some limitations for any internal control system that may prevent it from achieving a high
degree of effectiveness, that is, we receive only reasonable assurance of the achievement of
internal control objectives (Elder et al. 2012; IFAC, 2012; Rittenberg and Schwieger, 1997).
Therefore, even when we find that there is a high degree of compliance with internal control
requirements, the limitations may reduce the effectiveness of internal control in the achievement
of the companies’ objectives

That is the compliance with internal control requirements may not lead to effective
implementation. We may have a proper designed internal control system but not properly
implemented (O’Leary et al., 2006). The other idea we need to consider is that there are many
other factors that may influence performance and result in reducing or improving the power of
internal control in persuading the objectives of the organization. For example Welsh et al.(2013)
found that management practices, marketing capability and technological capability of
microenterprises have a positive impact on performance sales, net profit and growth. Kung et al.
(2013) stated that differentiation strategies have a significantly positive influence on
performance.

(Tambari, Chioma, & Abara, 2019) It was concluded in the study that to generate optimality in resource
application which is a sine quanon for enhanced performance, SMEs needs to adopt internal control
mechanism that ensures that waste of all sorts (financial and non financial) are reduced to the barest
minimum while striving to increase revenue inflow; by so doing they can achieve both operational
efficiency and cost leadership which can be boosters to their financial capabilities. From the findings and
conclusion above, the paper recommend as follows; SMEs should establish appropriate control
environment that takes into cognizance the peculiarities in their industry and that Internal control
should be fused into the overall strategies of SMEs, this will facilitate monitoring and prompt reporting
of changes in their cost drivers for appropriate managerial decision and actions

The operations of most small and medium scale enterprises (SMEs) in Nigeria are often challenged by
both external environment induced constraints and constraints associated with poor internal
procedures, undefined line of difference between personal and business funds, lack of distinction
between ownership and management etc. These challenges and more may have made the complexity in
the operations of SMEs intense, cultivated and entrenched role ambiguity thereby given room for abuse
of process and other wasteful organizational practices that vitiates the organization’s ability to reach its
goals. SMEs are therefore beleaguered with the burden to review their operational models in order to
meet the needs of their numerous stakeholders. This is the thrust of internal control system. The
concept of internal control system emphasizes the need to put the activities of the operators of
organizational processes in check so that at all times, their end results will be in alignment with standard
procedures as laid down by the management and environmental exigencies. Defining internal control
system, Ehiedu and Ogbeta (2014), described it as all measures employed by an organization for the
purpose of safe guarding its resources against waste, fraud and inefficiency, promoting accuracy and
reliability in accounting and operating data, encouraging and measuring compliance with organizational
policy and judging the efficiency of operation in all decision of the business. They further asserted that
the system of internal control is much more than a device for the prevention of fraud and dictation of
accidental errors in the accounting process, but also as a whole management, internal control embraced
internal check and balance established by management. Internal control system defers from
organization to organization. They recognized top management decision, the nature of the business, size
of the organization and the volume of transactions as critical factors that determines the extent to
which the control system is appropriate to the organization.

It is important to state clearly that control systems in the organization are not all about financial. Reid
and Ashelby (2002) alluded to this when they posited that internal control is divided into financial
internal control and non-financial (administrative) internal control. Financial internal control pertains to
financial activities and may be exemplified by controls over company’s cash receipts and payments
financing operations and company’s management of receipts and payments. On the other hand, they
defined Non-financial internal control as activities that are indirectly financial in nature i.e. controls over
company’s personnel section and its operations, fixed assets controls and even controls over laid down
procedures

Amudo and Inanga (2009) posited that a sound internal control system helps an organization to prevent
frauds, errors and minimize wastage. Custody of assets is strengthened; it provides assurance to the
management on the dependability of accounting data eliminates unnecessary suspicion and helps in
maintenance of adequate and reliable accounting records

Mawanda (2008) corroborated the views of Amudo and Inanga by stating that there is a general
perception that institution and enforcement of proper internal control systems will always lead to
improved financial performance. It is also a general belief that properly instituted systems of internal
control improve the reporting process and also give rise to reliable reports which enhances the
accountability function of management of an entity. Preparing reliable financial information is a key
responsibility of the management of every public company. The ability to effectively manage the firm’s
business requires access to timely and accurate information

In the recent, organizations are leveraging on technology as a key drive in system control. Technologies
like close circuit television (CCTV) are installed in workplace environment as both a security measure and
as a spy on the activities of the employees. How well this has helped to stop wasteful organizational
practices like lateness to work, loafing, indolence, pilferage, report manipulation, expense padding etc
has left much to be desired. Moreover, the cost to acquire, install and maintain such technology may
create a huge financial burden on the organization

Internal control system is very key to the creative and efficient management of an organization. Internal
control system sees to it that roles are clearly defined, assigned, monitored and evaluated in absence of
which the organization may run into role conflict that may reduce employees’ productivity, lead to
negative work behavior and even personality clashes that can cause outright sabotage to a group effort.
Again, part of the wasteful organizational practices that affects the ability of organizations to deliver on
their goals is expense padding by staff members. This over bloats the operational cost of the
organization thereby place the organization in a disadvantaged position that denies them cost
leadership and may even lead to pricing their product out of the market. Finally, lack of a robust internal
control system may lead to the destruction of intangible organizational assets like reputation which is
one of the drivers of a firm’s competitiveness. It can also lead to destruction of tangible asset which may
lead to high cost of managing industrial accidents.

However, the core of it all is to enable organizations optimize resources by avoiding wastefulness and
where they occur, detect and correct them promptly for the purpose of generating accurate and reliable
data for management/business decisions.

Its efficient working not only guarantees management as to the reliability of accounting information,
independent auditors also rely on system of internal control in determining the timing, nature, and
extent of the audit work.>>> Cabrera(2021)

There are different types of internal control system. Dittenhofer (2001) listed the types of internal
controls to include; safeguarding assets, separation of duties, supervision, verification, approval and
authorization, documentation and reporting. DiNapoli (1999) discussed the types of internal control to
include; directive controls, preventive controls, compensating controls, detective controls, and
corrective activities

The study adopted descriptive design and drew its sample from five selected small and medium scale
enterprises from the major industrial hubs of Anambra State. the finding from hypothesis one shows
that the effect of internal control system on operational efficiency is positive and significant

Conclusion: The goal(s) attainment and sustainability of SMEs is largely dependent on optimal resource
application. This study conclude that to generate such optimality, an internal mechanism that ensures
that waste of all sorts (financial and non financial) are reduced to the barest minimum while striving to
increase revenue inflow must be entrenched in SMEs; by so doing they can achieve both operational
efficiency and cost leadership which can be boosters to their financial capabilities
Recommendation: the paper recommend as follows;
i. SMEs should establish appropriate control environment that takes into cognizance the peculiarities in
their industry
ii. Internal control should be fused into the overall strategies of SMEs, this will facilitate monitoring and
prompt reporting of changes in their cost drivers for appropriate managerial decision and actions

Facts about SMEs/ Situation

Karel,(2013) The sector of SMEs occupies in the economy very important place as the driving force of
business, growth, innovation and competitiveness. SMEs sector plays decisive role in job creation and
generally is a factor of social stability and economic development. By Ministry of Industry and Trade
(MPO, 2012), in the Czech Republic SMEs contribute to employment 60,9 % which is 1,856 million jobs
and 49,5 % of total output of business community. The SMEs sector in the Czech Republic participated in
2011 in the total exports of 51,5 %, i.e. 1 478 billion CZK. The share of SMEs in total import in 2011
amounted to 56,6 %, i.e. 1 515 billion CZK. In the European Union SMEs are the backbone of the
economy, employing more than 87 million EU citizens. SMEs generate every second newly created job
and produce nearly 60% of the GDP of the European Union (EC, 2012). However, SMEs were increasingly
afflicted by the crisis. Research shows that only 50 % of businesses survive the first five years of its
existence and economic crisis definitely decreases this number. Estimated full 1,7 million jobs were lost
in 2009 due to insolvency of companies, what represents an increase of 22 % compared to 2008

Shanmugam(2012) Small and medium enterprises (SMEs) are much more vulnerable proportionally to
fraud by employees, and much less able to absorb these losses than large corporation. The
entrepreneur’s principal objectives are profitability and growth, the business is characterized by
innovative strategic practices and continued growth and may be seen as having a different perspective
from small business owners in the actual development of their firm [1] Contribution from SMEs to the
Malaysian economy is also very important. They provide indirect support or income to economic
growth. SMEs are also able to provide goods and services the same as large companies do albeit in
smaller quantities. SMEs play a vital role in the Malaysian economy and are considered to be the
backbone of industrial development in the country [2]. There is always an increase in the interest to
establish SMEs because of small firms generating most new employment; the public favoring on small
business

The merit of that paper lies in empiric recognition that thorough (detailed) strategic planning is
definitely reasonable activity of any company, since enterprises who did prepare detailed strategic
document proved in 80 % of observed performance parameters better results than enterprises without
written business plan. gaining competitive advance and better economic results. Parnell (2016), who
confirms that retail SMEs with high strategic clarity will outperform those with moderate strategic
clarity, but SMEs with low strategic clarity outperformed those with moderate strategic clarity.

Small and medium-sized enterprises (SMEs) account for a large number of businesses in the world and
have important contributions to employment and economic stability. SMEs have inherent advantages of
size and flexibility. They have the ability to innovate, diversify their products and services, and
contribute significantly towards job creation (Tam&Tuan, 2021). SMEs are the “backbone of Asia’s
economy” and are a major driving force in Asia. SMEs account for 97% of the total number of businesses
and 69% of employment in Asia, but their contribution is limited to an average of 41% gross domestic
product per country (ADB, 2020). SME’s distinctive features are low investment capital, quick turnover,
and simple organizational structure. Accordingly, SMEs possess dynamic adaptabilities and have the
capability of penetration in niche markets and industries with high a profit. SMEs have been known as
playing an important role in any country (ADB, 2020; Pham, 2017)

Research Gap: Several authors have studied the role of internal control in business and have stressed
the role of internal control in SMEs. However, its impact on performance has not been reported most of
the highlighted studies in the literature review do not explicitly address the effect of internal control on
revenue generation in the business organizations in Kenya. A scarcity of literature in the area of study
exists, particularly in the developing states like Kenya. The few that have been conducted in the third
world nations have eluded criticism in the criteria, title, scope; methodology used hence the research
gaps in terms of literature. The literature review highlights a number of theories in relation to the
variables (independent and dependent) and the conceptual framework of the variables by analyzing the
relationships between them the variables

The Impact of Internal Control on Performance of Small and Medium-Sized Enterprises in an Emerging
Economy