Internal control systems of SMEs in Nigeria: a proactive or reactive strategy against employees’ fraud?

Abstract

Purpose

The purpose of this study is to determine the strategy adopted by small- and medium-scale enterprise (SME) owners in setting up internal control systems, examine the relationship between the numbers of employees’ fraud and strategy adopted in setting up internal control and evaluate the difference between proactive and reactive strategies in employee’s fraud prevention among SMEs.

Design/methodology/approach

A survey research approach was adopted to determine whether proactive or reactive strategies were adopted by the SME owners. Specifically, a survey questionnaire was used to gather primary data from selected respondents in Lagos and Oyo States. Descriptive statistics, Spearman correlation and the Mann–Whitney test were used to analyse the primary data.

Findings

The study found that most of the SME owners used reactive internal control strategies in setting up their internal control systems after they suffered financial losses occasioned by employees’ fraud. Also, the study found a positive relationship between the number of employees’ fraud and reactive strategy. Finally, the study found a significant difference in the number of employees’ fraud occurrences between proactive and reactive internal control strategies in SMEs.

Research limitations/implications

The study provides further confirmation that where internal control is properly set up and strengthened, a lower number of employee frauds will occur. Thus, giving credence to the fraud theory. The study was, however, conducted in six selected local government areas in two states.

Practical implications

The study provides recommendations on the adoption of a proactive strategy for curbing employees’ fraud at the onset of business operations and not until devastating events of employees’ fraud become a reality.

Originality/value

The study is original, as it focuses on the strategy adopted by SME owners in setting up internal control systems, which is rare in fraud empirical studies, particularly for studies conducted in emerging markets like Nigeria. It provides the need for the sustainability of SMEs as engine of growth and employment through the adoption of appropriate strategies in setting up internal control systems.

Citation

Ololade, B.M. (2024), "Internal control systems of SMEs in Nigeria: a proactive or reactive strategy against employees’ fraud?", Journal of Financial Crime, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFC-10-2023-0259