CHAPTER ONE

1.1. Background of the study

Internal control systems can be described as the whole system of control, financial and otherwise established by management in order to carry out the business of the enterprises in an orderly and efficient manner as well as to improve on profitability. Internal control refers to the processes, procedures, and mechanisms put in place by an organization to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud and errors (Committee of Sponsoring Organizations of the Treadway Commission [COSO], 2013). Effective internal control systems are essential for sound financial management, operational efficiency, and strategic decision-making. For SMEs, which often face resource constraints and management inefficiencies, internal controls can serve as a critical tool for improving business performance and profitability.

Every organization operates on these set of procedures and policies on how to go about doing their day to day activities. These set of task need to be done in a sequence and in a way as to ensure the accomplishment of enterprise goals (profitability), Internal control is a process that guides an organization towards achieving its objectives, these objectives include operational efficiency and effectiveness, reliability of financial reporting, and compliance with relevant laws and regulations.(Committee of Sponsoring Organizations of the Treadway Commission (COSO)2013)

Small and Medium Enterprises (SMEs) are widely recognized as the backbone of economic development in Africa, significantly contributing to employment generation, poverty alleviation, and GDP growth. According to the African Development Bank (AfDB, 2021), SMEs represent over 90% of businesses and account for about 63% of employment in low-income countries across the continent. Despite their economic importance, many African SMEs struggle with sustainability, growth, and profitability. A major contributor to this struggle is the lack of effective internal control systems.

Research has increasingly emphasized the link between internal control and financial performance. Studies conducted in Nigeria, Ghana, Kenya, and South Africa have consistently found that SMEs with well-established internal control systems demonstrate better profitability, reduced financial risk, and improved operational efficiency (Agyapong et al., 2022; Musiega et al., 2020). For example, Adebayo and Ogundele (2021) observed that SMEs in Lagos, Nigeria that adopted internal control measures such as segregation of duties, authorization procedures, and financial audits were more profitable and resilient compared to those with weak or non-existent controls.

In the African context, the effectiveness of internal control is influenced by several unique challenges. These include limited access to financial management training, lack of qualified personnel, informal business structures, and weak regulatory environments (World Bank, 2022). Additionally, the prevalence of corruption and fraud in many African countries exacerbates the vulnerability of SMEs that lack strong internal governance mechanisms. Many SME owners, particularly in rural or informal settings, do not prioritize internal controls due to lack of awareness or financial constraints. Nevertheless, efforts to strengthen internal control practices in African SMEs have gained traction. Governments, development partners, and financial institutions are increasingly promoting financial literacy, business formalization, and capacity-building programs.

For instance, the African Union’s Agenda 2063 highlights the need to improve corporate governance and financial transparency among African enterprises, including SMEs. Similarly, regional development banks have introduced funding programs tied to compliance with financial reporting and internal control standards. In conclusion, the establishment and maintenance of effective internal control systems are critical for enhancing the profitability and sustainability of SMEs in Africa. While the potential benefits are substantial, achieving this requires addressing the structural and contextual challenges that inhibit the adoption of such systems. Understanding the dynamics of internal control and its impact on SME profitability can provide valuable insights for policy-makers, business owners, and development practitioners working to strengthen Africa’s entrepreneurial ecosystem.(Oduro & Kwaku (2021)).

Small and Medium Enterprises (SMEs) are the bedrock of Cameroon’s economy, playing a critical role in job creation, poverty reduction, innovation, and GDP growth. According to the Ministry of Small and Medium-Sized Enterprises, Social Economy and Handicrafts (MINPMEESA), SMEs represent over 90% of businesses in Cameroon and contribute approximately 36% to GDP (MINPMEESA, 2022). They also account for over 70% of employment in the private sector, making them a key driver of socio-economic development. Despite their potential, the majority of SMEs in Cameroon operate below capacity and face significant challenges that affect their profitability and long-term sustainability.

Among the critical issues facing SMEs in Cameroon is weak internal control systems. Poor internal control has been linked to financial mismanagement, fraud, low productivity, and business failure. Internal control, as defined by the Committee of Sponsoring Organizations of the Treadway Commission (COSO, 2013), is a process designed to provide reasonable assurance regarding the achievement of objectives related to operations, reporting, and compliance. For SMEs, internal control serves as a mechanism for monitoring performance, safeguarding assets, ensuring accuracy of records, and enhancing strategic decision-making—all of which are essential for improving profitability. Cameroon presents a mixed economic environment characterized by a relatively stable macroeconomic framework but also significant bureaucratic, infrastructural, and regulatory challenges. The World Bank (2023) ranks Cameroon 167th out of 190 in the Doing Business Index, citing issues such as corruption, weak institutional frameworks, and inefficient public services.

SMEs in Cameroon often operate informally, without proper registration, structured accounting systems, or standardized control processes. This informality is compounded by:Limited access to finance and training, Poor record-keeping and documentation, Lack of qualified accounting and internal audit professionals, Minimal awareness of internal control importance among SME owners. These constraints result in poor internal governance, which directly impacts operational efficiency and profitability. Many SMEs in regions such as Douala, Yaoundé, and Bamenda struggle with internal fraud, unapproved expenditures, and mismanagement of working capital due to the absence of systematic internal controls (Nkengafac & Ndifor, 2021).

Studies support the correlation between internal control and financial performance. For example, Fomba and Awa (2021) found that SMEs in Yaoundé and Douala that implemented internal control practices such as segregation of duties, authorization procedures, and inventory control recorded higher net profit margins and reduced operational losses. Similarly, Ndefru and Tangwa (2020) observed that SMEs with monitoring and control mechanisms had stronger financial stability and were more likely to secure loans from microfinance institutions and commercial banks. Cameroon operates under a bipartite legal system (common law and civil law), and its accounting and control frameworks are guided by OHADA (Organisation pour l’Harmonisation en Afrique du Droit des Affaires).

The OHADA Uniform Act on Accounting (SYSCOHADA Revised), effective from 2018, introduced new standards aimed at enhancing financial transparency and internal control. In addition, institutions such as: MINPMEESA, National Credit Council (CNC), Agence de Promotion des PME (APME), Cameroon Employers Association (GICAM)…have initiated support programs to build SME capacity in accounting, governance, and financial management. However, these efforts are still limited in scope and largely inaccessible to rural and micro-enterprises. Numerous academic and policy studies have examined the impact of internal control systems on SME profitability in Cameroon. Key findings include: Nkengafac and Ndifor (2021):

In a study involving 150 SMEs in Buea and Limbe, the authors found that internal control activities, particularly monitoring and segregation of duties, had a statistically significant positive effect on profit margins and liquidity. Ndefru and Tangwa (2020): Surveyed SMEs in the Northwest Region and found that internal controls helped reduce cash flow leakages and supported better budgetary discipline. Fomba and Awa (2021): Highlighted that SMEs with trained personnel in financial control and bookkeeping recorded consistent profit growth over a three-year period compared to those that did not implement such controls. Chifon and Ngum (2023) highlighted that most SMEs that failed within the first three years lacked basic internal controls such as inventory management, expense monitoring, or sales reconciliation. Despite this evidence, the adoption rate of formal internal control systems remains low due to financial constraints, lack of education, and resistance to change among SME operators.

Globally and across Africa, there is growing evidence that effective internal control systems contribute to the financial health and profitability of SMEs. For instance, Adeyemi et al. (2021) demonstrated that Nigerian SMEs with well-structured internal control frameworks recorded significantly higher profit margins and better financial reporting practices. Similarly, Mulili (2022) highlighted that Kenyan SMEs with structured controls exhibited improved credit access and revenue consistency. However, the situation in Cameroon is relatively under-researched, especially in specific regions like the North West, where insecurity, limited regulatory oversight, and informal business practices prevail.

The North West Region has faced economic instability in recent years due to the socio-political crisis, which has disrupted business operations, led to capital flight, and made access to finance and market opportunities more difficult for SMEs. In such an environment, robust internal controls are crucial not only for minimizing losses due to fraud and inefficiency but also for enhancing strategic decision-making, improving resource utilization, and building investor or lender confidence. Despite this, many SMEs in the North West Region continue to operate without formal accounting systems, proper documentation of financial transactions, or segregation of duties all of which are core components of an internal control system. These gaps make them vulnerable to internal and external threats, limiting their ability to sustain profitability over time. As Ngwa and Mbuh (2023) pointed out, the lack of adequate internal controls in Cameroonian SMEs often results in cash flow problems, poor inventory management, and undetected financial fraud.

Moreover, SMEs in the region are often owner-managed, meaning that the same individual may oversee operations, finance, and procurement, which increases the risk of error and fraud. Such setups, while cost-saving, are contrary to best practices in internal control design, which recommend segregation of duties, regular audits, inventory checks, access controls, and proper documentation. This research is therefore timely and necessary. It aims to assess the effectiveness of internal control systems on the profitability of SMEs in the North West Region of Cameroon. The study will evaluate the extent to which SMEs implement internal controls, the challenges they face, and how these controls or lack thereof impact their financial performance.

Ultimately, the findings of this study are expected to contribute to policy development, guide SME managers, and encourage financial institutions and development partners to support capacity-building in internal control practices. This will help enhance SME sustainability and profitability, contributing to regional and national economic development goals. In Bamenda, SMEs operate under unique and challenging conditions, including political instability, limited access to financing, a weak regulatory environment, and insufficient professional training. The Anglophone crisis, in particular, has disrupted local businesses, undermined investor confidence, and increased operational risk (Ngwa & Mbuh, 2023). In such an uncertain environment, the presence of a strong internal control framework is not just a matter of good governance it is a necessity for business survival and profitability.

However, many SMEs in Bamenda remain informally structured, often lacking adequate financial record-keeping systems, segregation of duties, asset protection mechanisms, and independent audits. Business owners frequently serve as both managers and financial controllers, which concentrates power and increases the risk of internal fraud or mismanagement (Achu, 2021). As a result, these businesses are exposed to high levels of operational and financial risk, which directly affect their ability to generate and sustain profits. Research has shown that effective internal control systems can enhance financial performance by improving decision-making, reducing waste, minimizing fraud, and building confidence among lenders and investors (Adeyemi et al., 2021; Mulili, 2022). Yet, such systems are either nonexistent or poorly implemented in many Bamenda-based SMEs, mostly due to limited awareness, lack of training, and cost constraints.

Moreover, in the absence of strong controls, many SMEs are unable to track inventory, monitor expenses, or reconcile bank transactions accurately, leading to cash flow problems and unrecorded losses. For instance, uncontrolled access to cash and poor documentation of purchases and sales are common practices that severely affect the financial integrity of these enterprises (Mbah & Fon, 2022). Given this context, it becomes vital to explore how the presence or absence of internal control systems affects the profitability of SMEs in Bamenda. Profitability is a key indicator of business success and sustainability. It reflects a firm’s ability to generate returns above its operating costs, and is directly influenced by how well the business manages its resources, risks, and financial data.

This study aims to evaluate the nature and effectiveness of internal control mechanisms in SMEs in Bamenda and determine their impact on business profitability. The results will provide insights for SME owners, policymakers, financial institutions, and development agencies on how to strengthen internal control frameworks to enhance enterprise performance in volatile towns like Bamenda.

1.2. Statement of Problem

Despite the critical role that Small and Medium-sized Enterprises (SMEs) play in driving local economic growth, reducing unemployment, and supporting household incomes in Bamenda, a growing number of these enterprises are grappling with financial instability, stagnating growth, and declining profitability. Alarmingly, many SMEs in the region collapse within their first few years of operation, often not because of market failure, but due to internal weaknesses, chief among them being the absence of inadequacy of internal control systems. In Bamenda, the majority of SMEs are informally managed and lack structured frameworks for monitoring, accountability, and financial discipline. Basic internal control elements such as segregation of duties, cash management protocols, inventory controls, periodic audits, and reliable record-keeping are frequently ignored or poorly executed. This creates fertile ground for fraud, theft, accounting errors, unauthorized transactions, and resource leakage, which cumulatively diminish profit margins and threaten business continuity. The situation is worsened by the ongoing Anglophone crisis, which has disrupted governance structures and weakened institutional oversight in the region. In this environment of uncertainty and limited regulatory enforcement, many SME operators continue to rely on informal, intuition-based management practices that leave their businesses exposed to operational and financial risks.

What is particularly concerning is that there is limited empirical evidence on the extent to which internal control practices or the lack thereof affects profitability among SMEs in Bamenda. While broader studies in Cameroon and other African contexts have established a positive correlation between sound internal controls and improved financial performance, these findings cannot be readily applied to the unique socio-economic and conflict-prone setting of Bamenda, where SMEs face specific and compounded vulnerabilities. As a result, critical questions remain unanswered: To what extent do SMEs in Bamenda implement internal controls? How effective are these controls in safeguarding assets and supporting profitability? And what factors hinder their implementation? Without clear answers, both SME managers and policy actors are unable to make informed decisions or design effective interventions to reverse the trend of poor financial outcomes and premature business failure.

This research, therefore, seeks to fill this knowledge gap by investigating the relationship between internal control systems and the profitability of SMEs in Bamenda. Understanding this link is essential not only for improving SME sustainability in the region but also for revitalizing local economic development amid on going instability.

1.3. Research questions

1.3. 1 Main research question

What are the effects of internal control system on the profitability of SMEs in Bamenda?

1.3.2 Specific research questions.

 What are the effects of preventive control on the profitability of  SMEs in Bamenda?

What are the effects of corrective control on the profitability of  SMEs in Bamenda?

What are the effects detective control on the profitability of  SMEs in Bamenda?

1.4 Research Objectives

1.4.1 Main Research Objectives

To examine the effects of internal control system on the profitability of SMEs in Bamenda.

1.4.2 Specific Research Objectives.

To examine the effects of preventive control on the profitability of SMEs in Bamenda.

To determine the effects of corrective control on the profitability of SMEs in Bamenda.

To assess the effects of detective control on the profitability of SMEs in Bamenda.