The empirical relationship between the managerial conduct and internal control activities in South African small, medium and micro enterprises

Abstract

Background: Although South African small, medium and micro enterprises (SMMEs) play an imperative role in the stimulation of the national economy, previous research studies show that these business entities have severe sustainability problems as approximately 75% of them fail after being in operation for only 3 years. The latter dispensation is pinned on the belief that South African SMMEs make use of inadequate and ineffective internal control systems.Aim: Since a system of internal control comprises five inter-related elements, while also taking into consideration that management is ultimately responsible for the internal control in their respective business entities, which is greatly influenced by their managerial conduct, this research study placed focus on determining the relationship which exist between the managerial conduct and the internal control activities evident in South African SMMEs.Setting: This study was conducted in the Cape Metropole, South Africa by obtaining responses from 240 stakeholders of SMMEs: 120 members of management and 120 employees.Methods: In order to achieve the latter, quantitative data were collected through a questionnaire and analysed accordingly through both descriptive statistics and inferential statistics.Results: From the results, a very weak negative statistically significant relationship was identified between the managerial conduct and the internal control activities evident in South African SMMEs.Conclusion: Essentially, management and employees should revisit the internal control activities evident in their respective SMMEs through placing emphasis on those internal control activities which can be built on their control environment.

The perceived adequacy and effectiveness of internal control activities in South African small, medium and micro enterprises

“…Furthermore, research (Tazilah & Hussain 2015) supports the component 'internal control activities' as the one crucial element that should be present to ensure a sound internal control system. Based on a study by Bruwer (2016), it was found that South African SMMEs made use of (manual) preventive controls to safeguard assets while also making mostly use of (manual) independent checks to strengthen their internal control systems, with limited use of source documents (original and duplicate), detective controls to safeguard assets and proper authorisation activities -rendering their implemented internal control activities as customised. Although customised internal control activities can add value in relation to business culture and business values (Christ et al 2012), whether this is the case in South Africa SMMEs is debatable and needs to be investigated further.…”

“…However, Siwangaza (2013) found that South African SMMEs have inadequate and/or ineffective internal control systems because they do not provide reasonable assurance in relation to the attainment of relevant business objectives. Bruwer (2016) found that South African SMMEs predominantly make use of customised internal control activities that primarily consist of preventive measures, which are strongly associated with the categories of 'independent checks' and the 'safeguarding of assets'. Because SMMEs are mainly informal in nature (IFC 2013), it is unsurprising that these business entities have mostly unstructured systems and processes (Lee & Ahn 2009;Majid, Dora & Kamarudin 2008).…”

Do Internal Control Activities Adversely Influence the Profitability and Solvency of South African SMMEs?

“…economic environments, political environments and technological environments) to optimally mitigate risks (Agbejule & Jokipii, 2009). By doing so, these activities will reasonably assure management that the relevant business entity will attain its objectives in the foreseeable future which, in turn, relate to the fulfilment of associated economic responsibilities, social responsibilities and/or environmental responsibilities (Rodgers, 2010) (Buys, 2012) (Bechtold, et al, 2013).In most cases, the manner in which economic responsibilities are fulfilled will ultimately determine whether a business entity will fail or not (Amendola, Giordano, Parrella, & Restaino, 2017) (Small, Smidt, & Joseph, 2017).Notwithstanding the above, in a South African SMME dispensation, two local studies (Siwangaza, 2013) (Bruwer, 2016) (Bruwer, Coetzee, & Meiring, 2017) found that internal control activities are regarded as ineffective and/or inadequate as they do not provide reasonable assurance surrounding the attainment of relevant pre-determined business objectives in the foreseeable future. This view is further supported by who found that implemented internal control activities within these business entities do not provide any assistance toward the financial sustainability of these business entities.…”

“…According to two previous local studies (Siwangaza, 2013) (Bruwer, 2016) it was found that South African SMMEs make use of inadequate and/or ineffective internal control activities which, in turn, do not provide reasonable assurance regarding the attainment of business objectives in the foreseeable future. This view is supported by a recent study which points out that implemented internal control activities in South African SMMEs do not provide reasonable assurance surrounding the financial sustainability 3 (the attainment of financial objectives) of these business entities.…”

The Role of Basic Business Skills Development and Their Influence on South African Small, Medium and Micro Enterprise Sustainability

“…In 1996 South African Small, Medium and Micro Enterprises (SMMEs) were first formally recognised by the South African government as drivers of the national economy (Bruwer, 2016). According to legislation 1 these business entities have the responsibility to attain three main socio-economic objectives.…”