The effect of internal control systems on business performance of SMEs in Uganda

Abstract

This study examined effect of internal control systems on business performance of SMEs in Uganda. The study used a sample of 30 wholesale shops in new taxi park as a case study. The study was a descriptive quantitative survey. A total of 105 respondents in the SMEs, participated in the study. Data was obtained using a questionnaire. Primary Data was collected using a questionnaire completed by both the SME business owners and the employees and analyzed using descriptive and inferential quantitative methods. The findings showed that there is a directional relationship between internal controls and business performance where the extent to which SMEs implement internal controls is the same extent to which business performance is improved. The findings indicated that most SMEs implement internal controls at a minimal extent. Most of these SMEs only consider a few elements of controls: approval of transactions, verification and reconciliation of business transactions when carrying out business activities. In most cases, these SMEs place emphasis on preventive controls, to prevent fraud and ignore the detective and corrective controls. The findings showed that preventive controls were done by the different SMEs through thorough documentation and authorization practices. Therefore, internal controls employed by SMEs were done to secure important documents for the business. These findings revealed that SMEs place need to place more emphasis on having accurate records for tax purposes and to prevent fraud. The findings have also shown that most SMEs have a wrong perception about internal controls. Most SMEs look at internal control implementation as for only large corporate organisations and therefore restrict the awareness of the value of internal controls and the skills to implement the internal controls .Majority of the employees even in management of the different SMEs were not well trained on the business skills to use in the different businesses. Constant implementation of internal controls in SMEs through stronger internal auditing can greatly assist in having greater opportunities for growth and a new strategic outlook. However, the challenges of lack of skills, lack of support and awareness of internal controls by proprietors have to be resolved through practical training, support and appropriate policies. The study recommends that: SME proprietors should be encouraged to implement the given practical training and education on how to use internal controls in running their businesses; organisations that provide business services to SMEs, such as Enterprise Uganda and the Private Sector Foundation should sensitise and emphasise aspects of internal controls in their training and service provision; government and organisations that provide business services to SMEs should put in place favourable policies that will encourage SMEs to use internal controls. Institutions should encourage SMEs that implement internal controls by awarding credit to SMEs; such as commercial banks, insist, on evidence of implementing internal controls before, extend credit to SMEs.