Internal Control Systems and Financial Fraud Prevention in SMEs: A Component-Level Analysis

Purpose: This paper will concentrate specifically on the implementation of ICS for financial fraud prevention within the context of Bangladeshi SMEs. In addition to being a broad test of the effectiveness of controls, this review includes controls such as segregation of duties and monitoring. Design/methodology/approach: The sample is a quantitative survey. This survey was conducted among 200 SMEs across the manufacturing, services, retail, and construction sectors operating in Bangladesh. The ICS components they assessed were the control environment, risk assessment, authorization procedure, financial reconciliation, and control monitoring systems. The control monitoring systems included the internal audit process, audit follow-up, and communication of controls to employees. Hypotheses defined as normative connections between premises have primarily been verified through correlation and regression analyses. Findings: Not surprisingly, the total number of ICS strength measures is weakly negatively related to non-reporting of fraud. Then, at the component level, it's even more complicated: not only are we still facing a mixed bivariate correlation, as it is not significant, but the regression equation indicates that the two most negatively correlated with fraud are the segregation of duties and monitoring controls. Then their processes of approval, post-audit follow-up, risk analysis, etc. In practice, their actual effect might differ slightly depending on how these controls are implemented in everyday finance. Practical implications: SMEs in Bangladesh can reduce the risk of fraud by taking into account controls that are easy to implement without hiring an army of new employees. The above controls can be summarized as: First: segregation of duties (authorization, recording and custody of assets); Second: recording authorized transactions; Third: independent review of recorded transactions; and Fourth: action on audit issues. Policy makers, lenders, and industry representatives can cooperate to encourage the practices by distributing policy templates, holding low-cost training workshops, and developing sector-focused, very easy-to-use practical guides. Originality/value: The study described in this paper is one of the few to address fraud prevention (especially for SMEs) in Bangladesh. This paper describes a component-based research methodology. In addition, it discusses why small businesses should not consider internal control merely a single checklist, but rather a collection of practices whose outcomes can vary, particularly when resources are limited.