Internal Control Systems and Operating Performance: Evidence from Small and Medium Enterprises (SMEs) in Ondo State

Abstract

This study examined the internal control systems and operating performance of SMEs in Ondo State. Specifically, the study analyzed the impact of internal control system components on the profitability of SMEs in Nigeria and a total of 120 SMEs were sampled for the study. Data used in the study were collected with a questionnaire. Collected and collated data were analyzed using logistic regression estimation. The result showed that the probability that an SMEs will have high level of operating performance in terms of higher actual annual profit increases insignificantly by 0.78% and 1.95% respectively, when there is a unit measure of improvement in the control environment and control activities and that the probability declines insignificantly by 0.051%, 0.33% and 4.53% respectively, with a unit measure of improvement in risk assessment, information and communication and monitoring activities. The study established that the components of internal control system has no significant impact on the operating performance of SMEs in Ondo State, though the control environment and control activities have a positive impact on the probability of an enterprise recording a high operating performance. Hence, SMEs should maintain and leverage the positive impact of the control environment and control activities to boost their operating performance, However, issues surrounding risk assessment, information and communication as well as monitoring activities should be addressed systematically based on the reality of the operational structure of each enterprise.