EVALUATING THE ROLE OF AUDITING IN FACILITATING THE SURVIVAL AND GROWTH OF SMALL AND MEDIUM ENTERPRISES IN CAMEROON

CHAPTER ONE

INTRODUCTION

Background of the Study

Worldwide, Small and medium companies (SMEs) have a substantial impact on global economic development and are widely recognised as the primary drivers of economic growth in many nations, as they play a crucial role in fostering innovation, creating jobs, and cultivating entrepreneurial abilities. According to Aminu & Shariff, (2018) small and medium firms constitute 95 percent of all enterprises globally, contributing to 55 percent of total production and 66 percent of total employment. Thus, the presence of a thriving and robust small and medium-sized enterprise (SME) sector is seen essential for fostering economic growth and achieving a sustained competitive edge at the local, regional, and global levels hence requiring cooperate accountability which is linked to the importance of effective risk management and both internal and external auditing .

Cowling & Liu, (2018) rightly averred that audits play a vital role in the economy and are necessary for ensuring accountability and building trust and confidence in financial reporting, which serves the public interest. Audits enhance economic success by augmenting the diversity, quantity, and worth of transactions that individuals are willing to participate in. Moreover, as the goals of the audit function coincide with the audit committee's duties in overseeing financial reporting, internal audit (IA) facilitates the effective functioning and activities of the audit committee (Fatimah & Ainulyaqin, 2022; Joshi, 2021). The primary objective of auditing is to verify the precision, dependability, and impartiality of presenting the financial accounts of companies and subsequently provide the information to the stakeholders.

 According to Collis (2018), in order for small and medium-sized enterprises (SMEs) to succeed, they need to utilise fundamental financial management abilities while handling cash flow, obtaining financing and credit, and adhering to tax laws. Management qualities include requirement for information in decision making and improvement of financial information quality. Additional research has identified various elements that impact the acceptance of voluntary audits by small enterprises. Ojala, Collis, and Troberg (2018) conducted a study in Finland and identified several key factors that motivate micro-companies to undergo voluntary audits. These factors include company growth, the need for credible tax reporting, ownership structure, ensuring a secure supply from trade creditors, and maintaining financial stability of the microenterprise. Ojala, Niskanen, and Pajunen (2018) found that the reliability of creditors and the presence of electronic systems influenced the adoption and perceived benefits of audits by small and medium firms. More so, the need for audit extends to the fact that commercial banks and microfinance institutions extend loans to small and medium-sized enterprises (SMEs) that possess trustworthy and dependable financial statements. Financial organisations favour audited financial accounts when providing credit facilities to borrowers, since these statements serve as reliable indicators of both secure and high-risk borrowers.

Put together, Japhet (2023) argued that in order for small and medium-sized enterprises (SMEs) to fulfil these requirements, it is imperative that they undergo an audit of their financial statements. An audit promotes financial accountability and adherence to financial regulations within an organisation. Additionally, it is widely regarded as a significant impediment to the commission of money laundering, fraud, and other illicit actions. While auditing is not primarily intended to uncover fraud, its absence increases the likelihood of errors and fraudulent activities going unnoticed and undetected. Small and medium firms experience enhanced financial performance as a result of audits. Collis (2018) states that auditing in small and medium firms provides senior management with reliable and precise information, which enhances decision-making and ultimately improves the firm's financial condition. 

Gahman and Ali (2020) suggest that implementing a voluntary audit might enhance creditors' trust in the financial reporting and governance of small and medium-sized enterprises (SMEs). Small and medium firms provide proper monitoring and efficiency in financial performance, which are the key performance indicators, through voluntary audits. Gahman and Ali (2020) suggest that conducting an external audit enhances the reliability of the financial statements of small and medium enterprises, hence improving their ability to get credit facilities from banks and other financial organisations. Therefore, this study aims to  evaluate the role of auditing in facilitating the survival and growth of small and medium enterprises in Cameroon.

Statement of the Problem

In recent times, modern business, precise and reliable information is crucial and any inaccuracies or misleading information might result in erroneous decision-making. Hence, auditing facilitates decision-making in small and medium firms by providing the management with reliable and precise information, thereby enhancing the quality of decision-making. In a research by Kaji, Shrestha & Wai, (2021) he demonstrated that a robust audit function has a beneficial effect on a company's operational performance, financial performance, and corporate governance, the majority of small and medium-sized firms globally do not routinely engage in voluntary audits. In the United Kingdom, Collis (2020) reported that 22 per cent of micro-companies were doing voluntary audits, 45 per cent believed the advantages of audits to outweigh the costs and 33 per cent were not undertaking audits at all. Conversely, Kipsang (2022) discovered that the small and medium-sized enterprise (SME) sector in developing countries exhibits a notable deficiency in adhering to accounting regulations. The primary determinants identified as contributing to the adoption of financial audits include insufficient accounting expertise, company size, and limited financial resources all which facilitate the survival and growth of  businesses.

Although auditing offers numerous advantages, small and medium firms in Cameroon exhibit limited acceptance and utilisation. Kipsang (2022) discovered that a mere 14 percent of the small and medium-sized enterprises (SMEs) examined were engaging in financial audits. Kamarudin, Abidin, and Smith (2022) indicate that inadequate and negligent financial management is a primary factor contributing to the demise of small firms. Ojala, Collis, and Troberg (2018) discovered that small businesses who utilised the expertise of certified accountants to do financial audits saw much lower rates of illiquidity, failure, business stagnation, and limited loan availability compared to those that did not. Ronkko, Paananen, and Vakkuri (2018) conducted a study in Malaysia and identified several factors that influence the decision to conduct voluntary internal audits. These factors include ownership structure, firm size, risk management committees, financial industry requirements, risk managers, audit committees, board composition, profitability, organisational growth, and organisational complexity. Kaji, Shrestha, and Wai (2021) discovered that audit-exempted small and medium-sized enterprises (SMEs) in Sweden were willingly doing financial statement audits in order to facilitate loan acquisition, ensure accurate tax payments, and foster improved relationships with creditors, suppliers, and investors. Small and medium firms typically have a scarcity of both non-financial and financial resources. Small firms have limited access to credit in comparison to large organisations

Furthermore, Oaya and Mambula (2019) suggest that small and medium firms experience a notable prevalence of illiquidity and limited access to loans. Given the significance of small and medium-sized enterprises (SMEs) in fostering economic development, it is crucial to prioritise their expansion and enhanced efficiency. Multiple worldwide and local studies have been conducted on the role and usage of auditing and accounting services. Hence, it is in the light of these that the study seeks to evaluate the role of auditing in facilitating the survival and growth of small and medium enterprises in Cameroon.

 1.3  Objectives of the Study

The main purpose of this study is to evaluate the role of auditing in facilitating the survival and growth of small and medium enterprises in Cameroon. Specifically, the study will;

Assess the role of auditors in Small and Medium Scale businesses in Cameroon.

Assess the influence of firm characteristics that affect the adoption of audits for SMEs in Cameroon.

Determine the extent auditing impact the financial stability and growth of SMEs in Cameroon.

1.4  Research Questions

The following questions have been prepared for the study:

What are the role of auditors in Small and Medium Scale businesses in Cameroon?

What is the influence of firm characteristics that affect the adoption of audits for SMEs in Cameroon?

What is the extent auditing impact the financial stability and growth of SMEs in Cameroon?

1.5 Research Hypotheses

H0:Auditing practices do not significantly contribute to the survival and growth of small and medium enterprises in Cameroon.

Ha: Auditing practices significantly contribute to the survival and growth of small and medium enterprises in Cameroon.

1.6 Significance of the Study

This study will provide essential insights into how auditing may help SMEs in Cameroon survive and develop. Business owners and managers will be able to understand the need for accurate financial reporting, effective financial management, and regulatory compliance. The findings will also assist SMEs in understanding the benefits of having a transparent and well-documented financial system, which will improve access to loans and investment opportunities. Furthermore, by showing how audits  uncover and prevent fraud, mismanagement, and inefficiencies, the study will motivate SMEs to improve their financial procedures, resulting in increased business stability and growth.Nevertheless, subsequent researchers will use it as a literature review. This means that other students who may decide to conduct studies in this area will have the opportunity to use this study as available literature that can be subjected to critical review.

1.7 Scope of the study   

The scope of this study is boarded on the role of auditing in facilitating the survival and growth of small and medium enterprises in Cameroon. Empirically, the study will determine the extent auditing impact the financial stability and growth of SMEs, assess the influence of firm characteristics, credit access requirement and   ownership control on the adoption of  audits for SMEs.

Geographically, the study will be delimited to business owners in Douala, Cameroon.

1.8 Limitation of the study

In the course of carrying out this study, the researcher experienced some constraints, which included time constraints, financial constraints, language barriers, and the attitude of the respondents. In addition, there was the element of researcher bias. Here, the researcher possessed some biases that may have been reflected in the way the data was collected, the type of people interviewed or sampled, and how the data gathered was interpreted thereafter. The potential for all this to influence the findings and conclusions could not be downplayed. More so, the findings of this study are limited to the sample population in the study area, hence they may not be suitable for use in comparison to other schools, local governments, states, and other countries in the world.

 1.9 Definition of Terms

Auditing:The systematic examination and evaluation of financial records and transactions of an organization to ensure accuracy, reliability, and compliance with established accounting standards and regulations.

SMEs: also known as small and medium enterprise, defined as businesses with a limited number of employees and annual revenues, often operate with less formalized structures compared to larger corporations (OECD, 2020).

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