Internal control (IC) system in SMEs: Challenges and implications for SMEs in the manufacturing sector in Malaysia




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De Montfort University


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Peer reviewed


This study provides insight into the implementation of internal control (IC) systems in Small and Medium-Sized Enterprises (SMEs) in the manufacturing sector in Malaysia. Although SMEs have been recognised as the backbone of the Malaysian economy, their success is challenged by various types of business challenges. One of the alarming issues that is faced by the Malaysian SMEs is concerning the lack of professionalism in the business conduct. Unlike the large businesses, SMEs are lacking specific monitoring procedures in the conduct of the business. To explore these arguments, this study investigates the implementation of IC system in SMEs in the manufacturing sector in Malaysia. This study was conducted in Sabah, Malaysia- a state that have more than 90 percent of SMEs establishments. This study adopts a qualitative research strategy and utilises in-depth interviews and documentary analysis as data collection technique. The main data collection technique used in this study is a semi-structured interview. This method was used to explore the perceptions and views of 16 SME owners (SMEOs) and 14 key employees (KEs), two government officials and two external auditors on the IC system practices in SMEs. All interviews were recorded and participants’ consents were obtained. To capture the triangulation issue in qualitative research, the documentary analysis was adopted as the second data collection technique. The findings indicate that SMEs have an inadequate internal control system. The inadequacy is apparent in terms of the delegation of authority, risk assessment, segregation of duties and monitoring process. The findings also demonstrate that the extent to which IC systems are being implemented is influenced by various internal and external factors. While internal factors relate to personal competencies and personal belief and values of SME owner managers and KEs as well as firm characteristics, resources and culture, external factors refer to environmental uncertainty, cultural practices and government compliance. The important elements that emerged are the significance of the family culture, religious beliefs and community involvement in influencing the extent to which IC systems have been implemented in SMEs. The findings demonstrate how the family culture creates a strong element of trust within the organisation, thus constraining the effective implementation of IC practices. On the other hand, religious beliefs are significant in encouraging the development of the sense of accountability. This study highlights the significance of government monitoring that encourages the establishment of IC systems in SMEs, thus contributing to the IC’s literature on the role of government organisations as an external stakeholder that is significant in influencing the implementation process of IC systems in SMEs. Finally, this study has shown that the benefits of implementing IC system are not limited to provide reasonable assurance on aspects such as safeguarding assets, reliability of financial and operational information and compliance of rules and regulations. This study has highlighted that the implementation of IC in SMEs is beneficial in facilitating the expansion of their business into the international markets, thus adding new evidence on the IC’s literature.





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