ASSESSING THE EFFECTS OF FRAUD ON THE FINANCIAL STATEMENT AND PERFORMANCE OF SMALL AND MEDIUM SIZE ENTERPRISES IN BUEA

ABSTRACT

This study examined the effect of fraud on financial statements and performance of SMEs in Buea. Specifically, in actual fact, dependence on the information provided in financial statements constitutes one of the greatest global challenges for businesses. The survey method was used wherein 40 SMEs in Buea where surveyed. Although the number of SMEs surveyed was not large, the survey was distributed across all the SMEs in Buea to ensure representativeness.

Data was obtained through a structured questionnaire designed for that purpose and the data was analyzed using descriptive and regression analysis with the help of Statistical Package for Social Sciences (SPSS) version 25. The hypothesis was tested through a regression test, and it revealed that there is a strong positive relationship between the variables (r=0.819) whereby 66.4% of performance of SMEs could be attributed to fraud.

The study concluded thus that fraud has a significant impact on financial statements and performance of SMEs. It was recommended that enterprises management should come up with a policy which clearly indicates steps to be taken on any staff found committing fraud. This will help reduce internal fraud which is more elaborate in the enterprise than external. Also, the study recommended that enterprises should ensure that there is segregation of duties, efficient internal controls, jobs satisfactions and job enrichment.
KEYWORDS: Misappropriation of assets, improper revenue recognition, overstatement of assets, financial statements, SME’s performance.

CHAPTER ONE
INTRODUCTION

1.1 Background of the Study

Since the 1960s to date, Small and Medium Enterprises (SMEs) have been given due recognitions especially in the developed nations. This can be seen from the fact, that they play very important roles towards fostering accelerated economic growth, development and stability within several economies comprising of over 90% of African business operations and contributing to over 50% of African employment and GDP (Yitzhaki, 2006).

As a matter of fact, they make up the largest proportion of businesses all over the world and play tremendous roles in employment generation, provision of goods and services, creating a better standard of living as well as immensely contributing to the GDP of many countries (OECD, 2000). Over the last few decades, the contributions of the SME sector in the development of the largest economies in the world have beamed the searchlight on the uniqueness of SMEs.

As a result, this has succeeded in overruling previously held views that SMEs were only miniature version of larger companies (AI Shaikh 1998, Gaskill et al, 1993).
Although SMEs have been at the center of the policy debate for quite some time in both developed and developing countries, little analytical work has been undertaken in this area. Therefore information that exists among researchers on SMES however provides a sense of how important this sector is for sustainable development in emerging economies (Medina, 2001).

For instance, recent studies Carried out by the United Nations Industrial Development Organization (UNIDO) states that SMEs are labour intensive providing more opportunities for low skilled workers, correlated with lower income distribution inequality, necessary for agricultural dependent nations transitioning to an industrial and service oriented economy, excellent sitesfor innovation and sustainable initiatives due to their inherent flexibility and risk taking ability (Patricoff and Sunderland, 2005).
Globally, the growth of any economy is dependent on vibrant SMEs and when the reverse seems the case, the entire economy suffers. The stunted growth of the economy has often been blamed on many factors top of which is the challenge of uncoordinated fraud management in the preparation of financial statements that has crippled production capacity of SMEs (Yitzahki, 2006).

One of the major impediments to the growth of SMEs is the issues of improper financing, lacks of planning and poor fraud management (Longenecker, 2010).
Fraud is a practice that is not to be trusted, deceitful, dishonest or immoral. Fraud is theintentional, deliberate act to obtain unjust advantage Kula, Yilmaz, Kaynar, &Kaymaz (2011).

For fraud to be present there needs to be a wrongdoer, a victim and a nonexistence of control or safeguards. Brody (2010) states that within occupational fraud, there are three categories: asset misappropriation, corruption and fraudulent statements.

A huge size of employees in any organization is honest and straightforward. Though, businesses are currently establishing to realize and recognize the level of the danger created by the small percentage of employees who act fraudulently and deceive their company.
There is no question that financial fraud is a pressing concern. With billions of dollars in losses impacting on estimated tens of millions of victims, fraud is a major problem (Anderson, 2013). But the wide range of fraud prevalence estimates makes it difficult for organizations to assess the true scope and impact of the problem. Fraudulent activities in companies are experienced all over the world.

A report done by the Federal Bureau of Investigation in the US stated that the most common fraudulent activities in organizations relate to computer fraud (Rennison and Rand, 2007 cited in Addington, 2008). The most recent Federal Trade Commission (FTC) survey of fraud in organizations estimated that 37.8 million incidents of fraud took place in 2011 (Anderson, 2013).

Yet the FTC Consumer Sentinel Network, the database of consumer complaints, received just over 1 million organization fraud-related complaints in 2011 (FTC, 2013). According to a 2007 report of 30 countries in organization fraud, over one in ten companies have on average been a victim of fraudulent activities in the past year. Greece and Bulgaria each had unusually high rates of over 20%, and Japan had the unusually low rate of 2%. With a victimization rate of 12.5%, the United States had higher fraud prevalence than the international average.
Moreover, in Kenya, there is increasing cases of fraudulent activities in most organizations within the country (Nichols, Bruguier and Marcos, 2006). The case of fraud in majority of these organizations is related to lack of personal finance discipline of individual employees working in these organizations. Garman, Leech and Grable, (1996) argue that personal finance behavior of employees if not positive and leads to employee stress related challenges.

purport that when employees have poor personal financial discipline, theyfall pray of fraud attempts. Organizations have been faced with a lot of fraudulent activities ranging from their own staff moving funds internally to their own accounts and in some cases, staff moving funds to offshore accounts.
Also, financial fraud is a rampant phenomenon in developingeconomies. It is a culture where people make plans to cover up accounting records for personal gain. According to (Association of Certified Fraud Examiners, 2019) , the sustainability of companies become questionable when they do not have sufficient capital.

This is no different from the situation in Cameroon where the majority of medium-sized enterprises suffers financial losses caused by poor financial treatment. Medium-size businesses play crucial roles in economic development and poverty alleviation in the majority of developing economies. Yet, despite these contributions, insufficient scholarly attention has been directed towards the effects of frauds on the sustainability of medium-size businesses.

On the contrary, significant research efforts have been focused on the effects of frauds in public sector companies and government parastatals, a gap this study intends to fill.
Furthermore, the latest trend has advanced and some of these staff colludes with customers to defraud companies. Many businesses are increasingly losing funds through staff instigated fraud
(KPMG, 2003).

This happens through collusion by staff and customers and only 60% of such fraud is reported since they try to prevent negative publicity by attempting to deal with such disciplinary cases internally. Although studies have been generally conducted about fraud, in organizations, a direct linkage of study which has attempted to relate influencing factors in the context of the private sector in Cameroon has not been done.

These organizations continue to suffer as a result of the fraudulent activities surrounding the (Cheptumo, 2010). Interaction with some stakeholders of private institutions in Cameroon indicates theprevalence of occupational fraud in general and financial fraud in particular in some of these institutions. Some complained of poor accountability and transparency in the management ofnthe resources placed at their disposal.

Placing fraud in the private sector in Cameroon will help us understand the current effects of fraud on the financial statements and performance in these institutions and provide a direction for how accuracy of reporting and measurement can be improved in the future. This study therefore, wishes to shed more light on the effectsfraudon the financial statementand performance of SMEs in Buea as well as the measures taken to mitigate fraud in the financial statements prepared by SMEs.
1.2 Statement of the Problem