An Exploratory Study of Internal Control and Fraud Prevention Measures in Smes

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Jaya Kumar Shanmugam, Mohd Hassan Che Haat & Azwadi Ali

http://cscjournals.org/csc/manuscript/Journals/IJBRM/volume3/ Issue2/IJBRM-75.pdf

An Exploratory Study of Internal Control and Fraud Prevention Measures in SMEs Jaya Kumar Shanmugam
Department of Accounting and Finance Faculty of Management and Economics Universiti Malaysia Terengganu 21030 Kuala Terengganu, Malaysia

jaya_jkumar@yahoo.com

Mohd Hassan Che Haat
Department of Accounting and Finance Faculty of Management and Economics Universiti Malaysia Terengganu 21030 Kuala Terengganu, Malaysia

hassan@umt.edu.my

Azwadi Ali
Department of Accounting and Finance Faculty of Management and Economics Universiti Malaysia Terengganu 21030 Kuala Terengganu, Malaysia

azwadi@umt.edu.my

ABSTRACT Small business and entrepreneurship has emerged as an important area of research over the past 40 years. This paper revolves around the issues of the internal controls and fraud prevention measures on SMEs performance. The level of fraud incidence as reported by owners is still at a very low level and the overall cost incurred is still within expectation. However, there is a question of whether the low reported rate of fraud is due to adequate preventive actions currently employed by owners, or whether the owners are reluctant to reveal the truth in order to portray their efficiency and effectiveness in running their businesses. This conceptual paper attempts to analyze relevant literature on internal control, fraud, current trends on fraud and business crime prevention measure adopted by SMEs. Based on the literature, a future research could be suggested in the context of Malaysia. It is hoped that future research in this aspect will uncover the relationship between the effectiveness of internal control within SMEs and to gauge the adequacy of fraud prevention measure taken by owners of SMEs in Malaysia. It is expected that effective internal control and the presence of appropriate fraud preventive measures will help to improve SMEs performance. Keywords: Internal Control, Fraud and Prevention Measures, Small and Medium Enterprises

1. INTRODUCTION
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; knowledge on entrepreneurship at high schools and colleges; the growing towards self-employment as well as small business being

International Journal of Business Research and Management (IJBRM), Volume 3 : Issue (2) : 2012

90

Jaya Kumar Shanmugam, Mohd Hassan Che Haat & Azwadi Ali

attractive to people of all ages [3]. The research will be focusing on the effect of internal control and fraud prevention measures on SMEs performance.

2. RESEARCH BACKGROUND
The Association of Certified Fraud Examiners (ACFE) of the United States (1998) reported that businesses employing less than 100 persons were the most vulnerable to fraud and abuse by employees. According to KPMG’s Fourth Fraud Survey Report Malaysia 2009, it is showed that a significant number of respondents believe that fraud is a major problem for businesses in Malaysia. 61 percent of...
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