Fraud prevention in Malaysian small and medium enterprises (SMEs)
| DOI | https://doi.org/10.1108/JFC-05-2017-0049 |
| Pages | 499-517 |
| Date | 08 May 2018 |
| Published date | 08 May 2018 |
| Author | Abdoulaye N’Guilla Sow,Rohaida Basiruddin,Jihad Mohammad,Siti Zaleha Abdul Rasid |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
Fraud prevention in
Malaysian small and medium
enterprises (SMEs)
Abdoulaye N’Guilla Sow,Rohaida Basiruddin,Jihad Mohammad
and Siti Zaleha Abdul Rasid
International Business School,
Universiti Teknologi Malaysia, Kuala Lumpur, Malaysia
Abstract
Purpose –In Malaysia, as in most of the developing countries,small businesses play pivotal roles in the
economy. Yet, despite the contribution of smallbusinesses, previous researchers have overlooked the fraud
issues that are threating thesustainability of those businesses and instead focus mainly on largeand public
listed companies. Therefore, the purpose of this study is to identify how small businesses can prevent
fraudulentactivities.
Design/methodology/approach –This study used self-administer questioners and distributed 126
questionnaires to general managers, financial managers and supervisors in Malaysian small and medium
enterprises(SMEs). Multiple regression was usedto test the theoretical model.
Findings –The output of multiple regressionsshowed that culture of honesty and high integrity, anti-fraud
processes and controls and appropriateoversight functions has a positive and significant effective on fraud
preventionmechanisms.
Practical implications –Overall, thisstudy suggests effective fraud prevention measuresto mitigate the
fraud risksurrounding Malaysian SMEs and other SMEs in emergingcountries.
Originality/value –There has been a dearth of empiricalstudies on the effect of culture of honesty, anti-
fraud processesand appropriate oversight functions on effectivefraud prevention in non-western context, and
this study has fulfilledthe need for this research.
Keywords Fraud, Small and medium enterprises (SMEs), Anti-fraud measures
Paper type Research paper
1. Introduction
Fraud is considered as one of the main problems that created serious challengesfor all type
of business organisation(Law, 2011;Perri and Brody, 2012). For organisation to survive and
sustain, they have to detect this problem and tackle it wisely (Button et al.,2011). The
concept of fraud refers to any intentional activity conducted by one person or a group of
people for the purpose of deceiving another party (Halbouniet al.,2016).In the twenty-first
century, numerous large,historical and well-established companies collapsedbecause of the
fraud scandals (Kummer et al.,2015). The widespread incidence of fraud scandals all over
the world has made fraudulent behavioura major business crime of this century (Kapardis
and Papastergiou, 2016;Wells, 2004). According to the Association of Certified Fraud
Examiner (ACFE), a typical organisationloses approximately 5 per cent of its revenue each
year. At first glance, this percentage seems insignificant; however, by applying this
percentage of loss to the entire USA, the estimatedloss is more than $3.5tn (ACFE, 2012). In
a similar study conducted by KPMG-Malaysia,only 26 per cent of the respondents were able
to give the exact value of the losses they incurredbecause of fraud, which was evaluated at
Malaysian
small and
medium
enterprises
499
Journalof Financial Crime
Vol.25 No. 2, 2018
pp. 499-517
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-05-2017-0049
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
RM2.047m, and 46 per cent of the respondents reported that their losses ranged between
RM10,001 and 100,000 (KPMG, 2013). Although these figures are just an approximation of
the losses incurred as some fraud scandals were not discovered, they clearly display how
fraud is harming businesses.
Fraud scandals do not only harm large companies but also affect small businesses.
According to ACFE (2012), the median loss incurred by small businesses was estimated at
$147,000, whereas the median loss for large organisations was $100,000. Besides financial
losses, fraud impacts the reputation of the SME and the confidentiality of its stakeholders
(customers, shareholders, creditors, etc.). In addition, fraud represents one of the reasons
SMEs fail in strategic activities, and in extreme cases, it may put thewhole company out of
business. For instance, an entrepreneur may spot a good business idea to launch a new
venture and establish his or her business plan with the assumption that his strategies will
move smoothly. However, if there is a failure to undertake preventive measures against
fraud, the business may not succeed. Finally,when fraud becomes a cost of doing business,
it will put SMEs at a competitive disadvantage(Adams et al., 2006).
In Malaysia, as in most developing countries, SMEs are considered the top contributors
to the economy. According to SMECorp Malaysia (2013),SMEs account for 97.3 per cent of
the firms established in the country. As a result, they represent the major employer in the
country and the primary contributor to the country’s GDP. SMEs could perform better and
expect to compete internationally if they were able to avoid the hurdles threatening their
sustainability. KPMG (2013) found that nearly 50 per cent of fraud scandals reported in its
survey occurred in small and medium size enterprises. This high incidence might be owing
to low application of anti-fraudpolicies compared to large organisations or to the negligence
of anti-fraud policies and procedures by SME owners and managers (Laufer, 2011;ACFE,
2012). In addition, the occurrence of fraud in SMEs could be because of less commitment
given by the practitionersand researchers on fraud issues in SMEs. Because of the disparity
of resources existing between largeand small businesses, it is difficult to recommend SMEs
to fully apply the fraud prevention measures that result from studies mainly conducted on
large companies. Therefore, it is important to conduct more research that focus mainly on
fraud preventionmeasure in SMEs and this study represent one of these efforts.
In view of the magnitude of the adverse effects of fraud on businesses, especially in
SMEs, proactive measuresneed to be taken against this phenomenon. Failure to considerthe
issue of fraud in SMEs will severely affect their performance. Ultimately, because of the
actual weight of SMEs in the economy of emerging countries, the failure of the SMEs may
jeopardise the economy of theirhome countries (Shanmugam et al., 2012). Hence, this study
was conducted to overcome thelimitation of previous studies that has overlooked thefraud
issues in small businesses, andit aims to assess the degree of existence of fraud prevention
measures in SEMs specifically in non-western context like Malaysia. Moreover, this study
suggests effectivefraud prevention measures for small businesses owners and managers.
The remainder of this article is organised as follows. In the second section, previous
studies on fraud prevention and detection are reviewed, along with examples of fraud
fighting methods. In the third section,the research design is discussed. In the fourth section,
the findings of the study are presented, and in the final section, the conclusion and
recommendationsof the study are covered.
2. Motivation of study
According to Shanmugam et al. (2012), SMEs in Malaysia are more likely to be subject to
fraudulent activities by its workforce and less capable of bearing its negative
consequences compared to giant organisations. Although this problem is present in
JFC
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