INTERNAL CONTROL SYSTEM AND FINANCIAL PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES IN SOUTHWESTERN NIGERIA

Abstract

The study assessed the internal control system on the performance of Small and Medium Enterprises in south western Nigeria. Ogun Oyo and Ondo states were selected for the study. The study was carried out with a view to determine the effect of internal control system on the performance and sustainability of SMEs. The study was carried out in five predominant sectors for SMEs in the study area. These sectors include Agro Processing, Hospitality, Wood Processing, Construction and Quarry. A sample of three hundred and sixty four (364) SMEs from population of six thousand nine hundred and ninety seven (6,997) registered SMEs under (CAMA) cap 20 (L.F.N.) 2004 part B of the Act were selected for the study. The five sectors in the three states in Southwestern Nigeria were used for the study. Krejie and Morgan sample determination of formula was used to determine the sample for the study. A response rate of 86.26% was obtained i.e. three hundred and fourteen (314) SMEs from sample of three hundred and sixty four SMEs. Inferential and descriptive statistics were employed in analyzing the data collected for the study. Inferential statistics used were Ordinary Least Square (OLS) Regression method, while descriptive statistics include percentage, frequency count, Likert ratings and Relative importance index. Data were collected from primary source through administration of questionnaire. The result shows that all types of internal controls existed in most of the SMEs in the study area. Segregation of duties, physical control and supervisory controls existed in all the sampled SMEs with a percentage of 100% for each of them, while the existence of other types of control ranges between 79.3 % and 93%. The internal control system that existed in SMEs was not adequate only physical control and authorization and approval control were adequate with mean rating of 3.7 and 3.8 respectively. All types of internal control techniques except management control had moderate effect on sales level with mean rating between 2.5 and 3.3 while management control had little effect on sales level with a mean rating of 2.4. The study also revealed that the internal control factors that significantly affect the performance of the SMEs in the study area include profitability (0.157; ∝ = 0.000), asset turnover (0.037; ∝ = 0.000), staff turnover (0.012; ∝ = 0.000) and sales turnover (0.026; ∝ = 0.000). It was further revealed that a positive relationship exists between the internal control measures and the performance of the SMEs. The result of hypothesis tested revealed that the internal control measures have a significant effect on the performance of the SMEs in the study area. It was revealed that the highest ranked factors that can improve the effectiveness of the internal control system among the SMEs is rectifying of any observed internal control deficiencies (RII = 0.765. The study concluded that a positive relationship exists between the internal control measures and the performance of the SMEs and if SMEs is to serve as engine of industrial growth, the internal control system in this organization must be improved. It was recommended that SMEs should ensure to improve on the adequacy and effectiveness of internal control system to boost their performance.