Harnessing the Benefits of Corporate Governance and Internal Audit: Advice to SME

Abstract

Small Medium Enterprises (SME) are vital to economic growth in Malaysia and many emerging economies as they are major contributors to the gross domestic product. It is therefore imperative for SME to strengthen its governance, risk and control (GRC) system that is recommended by Corporate Governance (CG) code to support strong business performance. Internal auditor is the right party to provide assurance and consultancy on GRC for a firm to stay competitive. There is generally a lack of awareness among these enterprises regarding significance of internal audit and if there is awareness, there is a general aversion to adopting these practices because of the cost of implementation. This paper was carried out solely through analysis of extant literatures. We identified from reports and previous studies that SME failures are contributed by several factors including low productivity, lack of financing as well as inadequate skills and capabilities. The corporate governance literature posits that companies may achieve strategic, tactical and operational efficiency by embracing good CG principles which include risk management and controls mechanism. Further, internal audit enhance CG through assurance and consultancy work on GRC. Based on the findings from the review of extant literatures, it was found that current status of CG in SMEs are not impressive at all, mainly because of lack of awareness as well as high cost of implementation involved. However, good governance is still deemed important; hence we may argue that a separate set of corporate governance framework may work better for SMEs, similar to the adoption of a separate set of IFRS for SMEs.