Impact of fraud on Ghanaian SMEs and coping mechanisms
| DOI | https://doi.org/10.1108/JFC-05-2017-0050 |
| Pages | 400-418 |
| Published date | 08 May 2018 |
| Date | 08 May 2018 |
| Author | Charles Andoh,Daniel Quaye,Isaac Akomea-Frimpong |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
Impact of fraud on Ghanaian
SMEs and coping mechanisms
Charles Andoh
Department of Finance, University of Ghana Business School, Legon, Ghana
Daniel Quaye
Department of Marketing and Entrepreneurship,
University of Ghana Business School, Legon, Ghana, and
Isaac Akomea-Frimpong
Department of Finance, University of Ghana Business School, Legon, Ghana
Abstract
Purpose –Small and medium-scale enterprises (SMEs) are the engine of growth of most developing
countries, as they employa large number of people as opposed to large firms. Consequently, theseenterprises
should succeed in expanding to becomesignificant employers and producers. However, what seems obvious
at least throughcursory observation is that the current state of SMEsbetrays an economic loss with respect to
the benefits that ought to be forthcoming from their potential. This loss can be triggered by a number of
factors. The study determines the drivers of internal fraud and their impact on Ghanaian SMEs and
prescribescoping mechanisms.
Design/methodology/approach –Primary data collected on 250 SMEs collected from various sectors
across Accra, the capital of Ghana, are used for this study. Using a cross-sectional regression, the authors
identifythe key drivers of internal fraud that hamper the growth of Ghanaian SMEs.
Findings –The regressionresults show that although several fraud variables impact negativelythe growth
of the SME sector, it is onlyaccounting fraud which is significant. This study also revealedthat stealing, fake
currency issued for the paymentof goods or service and non-payment of goods or service accountfor almost
83 per cent of fraudcases experienced by SMEs.
Research limitations/implications –The study was limited to the SMEs located in the Accra, the
capitalof Ghana.
Practical implications –The study will offer SMEs owners methods that will assist in their
determinationto fight fraud in the business that they manage.
Social implications –The survival ofSMEs is paramount to job creation. Consequently,combating fraud
that stifle the growth of SMEs will allow SMEs to grow to their full potential and create more job
opportunities for the unemployed. This will minimizes the social vices such as robbery, stealing, drug
traffickingand prostitution that confront nations.
Originality/value –This study should be usefulto managers of SMEs, auditors and the security agencies
in developingeconomies in particular, in their quest to combatfraud within SMEs.
Keywords Regression, Internal fraud, Accounting fraud, Fraud diamond,
Small and medium enterprises, Stratified sampling
Paper type Research paper
1. Introduction
Small and medium-scale enterprises (SMEs) are important to almost all economies in
the world. They contribute to output and to the creation of jobs; they are a nursery for
large firmsofthefutureandserveasthenext(andimportant)stepupforexpanding
JFC
25,2
400
Journalof Financial Crime
Vol.25 No. 2, 2018
pp. 400-418
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-05-2017-0050
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
micro-enterprises. They contribute directly and often significantly to aggregate
savings and investment, and they are involved in the development of appropriate
technology the world over.
Particularly, from the perspective of developing countries, such as Ghana, SMEs
contribute quite significantly to economic growth and development. Evidence from
literature reveals that SMEs provide about 85 per cent of manufacturing employment and
contribute up to about 70 per cent of national gross domestic product (Abor and Quartey,
2010). Additionally, they constitute about 92 per cent of businesses in Ghana including
retailing, manufacturing and trading businesses (Abor and Quartey, 2010). Available data
from the Registrar General’s Department in Ghana indicate that 90 per cent of companies
registered in Ghana are either micro-enterprisesor SMEs (Mensah, 2004), which underpins
SMEs as the catalyst for Ghana’s economic growth. In view of the strategic importance of
SMEs to socio-economic development, their growth is critical, especially in a developing
country like Ghana wherethe issues of unemployment and income distribution have become
persistent challengesfor successive governments (Palma, 2005).
However, despiteefforts made by successive Ghanaian governments to promote the SME
sector, there has been little success. In fact, it is not far-fetched to indicate that effort to
promote the SME sector has been bedeviled with problems. These challenges include the
absence of adequate and timely banking finance; limited capital and knowledge; non-
availability of suitable technology; low production capacity, ineffective marketing
strategies, lack of capacityto identify new markets, non-availability of highly skilled labour
at affordable cost; bureaucratic delays andthe complex maze of rules in following up with
various governmentagencies to resolve problem.
To address such challenges, several empirical studies have been conducted to establish how
these constraints can be minimized to ensure SMEs’growth. Notwithstanding the effort by
researchers to investigate these problems thus facilitating the growth of SMEs, very little effort
has gone into investigating the effect of fraud on the expansion of SMEs. Yet, the impact of
fraud on SME operations cannot be discounted. For instance, almost half (48 per cent) of
companies surveyed in a recent survey by PricewaterhouseCoopers (PwC) reported being
victims of fraud and the average direct cost of this economic crime was estimated at £1.75bn
(www.managers.org.uk). In fact, the true cost of fraud goes beyond the financial loss and has
implications for firm’s reputation, morale and management time, as well as trust within the
business sector (Savage, 2003).
Similarly, US Chamber of Commerceestimated employee fraud cost businesses $20-40bn
yearly (Hanno and Hughes, 1999). Other authors reported that 30 per cent of workers look
for ways to steal from employers, and another 30 per cent willsteal if given the opportunity
(Krambia-Kapardisand Zopiatis, 2010).
Interestingly, fraudis costlier to SMEs than large businesses (Thomas and Gibson, 2003;
Bierstaker et al.,2006). Bressler and Bressler (2007) corroborate this view by noting that
fraud accounted for 30 per cent of small business failure in the 1990s. Hanno and Hughes
(1999) added that small businesses arelikely to be more susceptible to fraud, owing to their
limited number of employees and the lack of resources to implement efficient internal
controls. Bierstakeret al. (2006) argued that SMEs do not have the resources or the capital to
invest in anti-fraud technology despite the fact that they are the most in need of fraud
detection and prevention technology. Wells (2004) added that SMEs are vulnerable because
they are hardly audited and lack hotlinesand internal controls.
The juxtaposition of the lack of research into the impact of fraud on SMEs with their
vulnerability to fraud as a result of the lack of safeguards to prevent and detect fraudulent
activity, warrants an investigation into the impact of fraud on the growth of Ghanaian
Fraud on
Ghanaian
SMEs
401
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