Internal controls and MSME survival: Reducing fraud, theft and financial leakages

By Dickson ASSAN

Employee dishonesty, particularly among young workers entrusted with critical operational responsibilities, has emerged as one of the most pressing concerns for owners of Micro, Small, and Medium Enterprises (MSMEs) in Ghana.  Across most MSMEs, business owners increasingly complain about employee theft. For many MSMEs, the financial losses associated with employee theft and operational leakages are often substantial enough to threaten business survival.

SMEs: The Backbone of Ghana’s Economy, Yet Highly Vulnerable

The issue is particularly significant because SMEs remain the backbone of Ghana’s economy constituting approximately 92% of businesses in Ghana and contributing about 70% to Gross Domestic Product (GDP). They also provide roughly 85% of manufacturing employment, making them central to job creation, local economic development, and poverty reduction.

Despite their enormous contribution to the economy, the survival rate of many SMEs remains deeply concerning. Studies estimate that approximately 74% of SMEs collapse within five years of operation and by tenth year, only one will still be functional.

While external challenges such as inflation, exchange rate volatility, taxation, rising utility costs, limited access to finance, and weak infrastructure often receive significant attention, internal operational weaknesses are increasingly becoming major contributors to business failure. In many cases, businesses do not collapse simply because they lack customers or market opportunities. They collapse because sales get eroded internally through weak controls, fraud, operational leakages, poor governance systems, and ineffective management oversight.

Many SMEs continue to operate with informal structures, weak governance systems, poor documentation practices, and inadequate internal controls. While such arrangements may appear manageable during the early stages of a business, they become increasingly dangerous as operations expand and employee responsibilities widen. Overreliance on trust-based systems, verbal approvals, undocumented transactions, and excessive concentration of responsibilities in one individual often creates fertile grounds for fraud and operational inefficiencies.

The implication is that improving MSME sustainability in Ghana cannot focus solely on access to capital or sales growth. It must also include strengthening governance systems, internal controls, accountability structures, financial discipline, and operational transparency. Without these foundations, even businesses with strong revenues and growing customer bases may struggle to survive long term.

Understanding Why Employee Fraud Happens

One of the most useful frameworks for understanding occupational fraud and employee theft is the Fraud Triangle, developed by criminologist Donald Cressey. The model explains that fraud typically occurs when three factors coexist simultaneously: pressure, opportunity, and rationalization.

Pressure

Pressure refers to the financial or emotional burdens employees may experience. In Ghana’s current economic environment, many workers face significant financial stress arising from high living costs, debt obligations, family responsibilities, school fees, medical expenses, and social pressures. While financial hardship does not justify dishonesty, it can create vulnerability, especially where organisational controls are weak.

Increasingly, gambling and sports betting addiction is also becoming an emerging source of financial pressure among some workers, particularly young employees with direct access to cash, mobile money wallets, inventory, or financial systems. In recent years, there have been several reported cases of employees being arrested or jailed for stealing company funds to finance gambling activities or repay betting-related debts. What often begins as an attempt to “recover losses” or “win back money” can quickly escalate into repeated fraudulent behaviour once individuals become trapped in cycles of addiction and financial desperation.

For example, an employee handling daily sales proceeds may divert small amounts of company funds with the intention of replacing the money after winning a bet. However, when the bets fail, the pressure intensifies, leading to larger diversions and more desperate attempts to conceal the fraud. In businesses where reconciliations are weak and supervision is limited, such behaviour may continue undetected for extended periods.

Opportunity

The second element, opportunity, is where many MSMEs unintentionally create fertile grounds for fraud. Fraud thrives in environments where employees perceive weak supervision and ineffective systems.

In many businesses, one employee may receive cash, record transactions, reconcile accounts, and prepare reports without independent oversight. Others may oversee procurement, inventory management, and supplier payments simultaneously. In such situations, the absence of segregation of duties significantly increases exposure to manipulation and abuse.

For example, a procurement officer may collude with suppliers to inflate invoice values, approve fictitious purchases, or divert goods for personal gain. Because many SMEs lack strong verification procedures and supplier review systems, these leakages may continue undetected for long periods. By the time the business identifies the problem, substantial financial damage may already have occurred.

Rationalization

The third factor, rationalization, explains how individuals internally justify unethical conduct. Employees involved in fraud often convince themselves that they are merely “borrowing temporarily,” compensating for perceived unfair treatment, or taking what they believe they deserve. Others rationalize theft by pointing to weak leadership, poor remuneration, lack of recognition, delayed salaries, or a workplace culture where unethical behaviour has become normalized.

In some MSMEs, employees genuinely feel underpaid, overworked, or unfairly treated compared to the value they contribute to the business. Over time, resentment may build quietly, especially where communication between management and staff is poor. Some employees then begin justifying fraudulent behaviour internally by telling themselves that management “owes” them or that they are only taking what they deserve. Others may rationalize theft by observing owners living lavish lifestyles while employees struggle financially.

Fraud rarely begins with large-scale theft. In many cases, it starts with seemingly minor infractions such as unapproved discounts, unauthorized fuel usage, manipulation of petty cash, or diversion of small sales proceeds. Once perpetrators gain confidence that they will not be detected, the misconduct gradually escalates into larger and more damaging schemes.

Why Internal Controls Matter

The growing concerns raised therefore, point to a deeper structural challenge confronting many SMEs: the absence of robust internal control systems.

The Turnbull Report defined internal control as the collection of policies, processes, behaviours, and systems that enable organisations to operate effectively, safeguard assets, ensure reliable reporting, and comply with applicable laws and regulations. Importantly, the report emphasized that internal controls are not merely restrictive procedures designed to police employees. Rather, when properly designed and implemented, internal controls improve operational efficiency, reduce disruptions, strengthen accountability, and ultimately create business value.

For MSMEs, internal controls should begin with safeguarding assets, particularly inventory and cash, which remain the most vulnerable areas for leakages.

Strengthening Inventory Controls

Inventory theft continues to be one of the most underestimated threats within Ghanaian businesses. Retailers, wholesalers, pharmacies, fuel stations, restaurants, and manufacturing firms frequently experience unexplained stock shortages that are often dismissed as operational errors or normal business losses. In reality, weak inventory management systems frequently create opportunities for pilferage and manipulation.

Businesses must therefore establish clear inventory control procedures. The custody of stock should be separated from record-keeping responsibilities. Employees responsible for physical inventory should not independently maintain inventory records or conduct reconciliations without oversight. Regular stock counts should be mandatory, and variances between physical stock and system records should be investigated promptly. Access to warehouses and storage facilities should also be restricted, with proper authorization procedures governing stock movement. Increasingly, affordable inventory management technologies now provide SMEs with opportunities to monitor inventory flows more accurately and transparently.

For example, a pharmacy that conducts weekly stock reconciliations and restricts access to high-value medications is far less vulnerable to inventory manipulation than one relying solely on verbal reporting and manual estimation.

Tightening Cash Management Systems

Because cash is liquid and easily transferable, weak cash controls create significant exposure to theft and manipulation. Many MSMEs continue to operate heavily on cash transactions, often with limited reconciliation procedures and poor documentation.

Strong cash controls require segregation of duties. Employees receiving cash should not also reconcile bank accounts or maintain accounting records independently. Daily cash reconciliations should compare physical cash balances with sales reports and system records. Businesses should also aggressively encourage digital payments through bank transfers, mobile money, and point-of-sale systems to reduce excessive cash handling. Approval limits for withdrawals, refunds, discounts, and petty cash expenses should be clearly defined and enforced consistently.

Improving Payroll and HR Controls

Payroll systems also require stronger controls. Payroll fraud, including ghost workers, inflated overtime claims, unauthorized allowances, and salary manipulation, remains more common than many MSMEs realize. In some cases, payroll leakages continue undetected for years because payroll preparation, approval, and payment functions are concentrated in the hands of one individual without independent review.

Human resource controls are therefore equally important. Businesses should conduct proper employee background checks, verify qualifications, and maintain accurate staff records. Mandatory leave policies and periodic rotation of responsibilities can also help uncover irregularities that may otherwise remain hidden. Increasingly, biometric attendance systems provide SMEs with affordable tools to strengthen payroll integrity and reduce attendance manipulation.

A common example involves businesses paying salaries to former employees who remain on payroll systems because no independent review exists between HR records and payroll processing.

Ethical Leadership and Organisational Culture

However, internal controls alone cannot solve the problem without the right organisational culture. The effectiveness of any control system depends heavily on leadership behaviour and the overall control environment within the business. Employees observe management conduct closely. Where owners themselves bypass procedures, approve undocumented transactions, operate informally, or selectively enforce discipline, internal controls quickly lose credibility.

This is why ethical leadership remains fundamental to sustainable business governance. Business owners cannot demand accountability from employees while simultaneously operating outside established systems. Controls must therefore be embedded not only within processes but also within organisational culture.

In many MSMEs, employees quickly notice when owners withdraw business funds without documentation, mix personal and business expenses, or ignore policies whenever convenient. Once leadership itself undermines controls, employees often begin rationalizing unethical behaviour internally.

Internal Controls Provide Reasonable Assurance, Not Perfection

Importantly, no internal control system can eliminate risk entirely. The Turnbull framework itself acknowledged that organisations operate in dynamic environments where new risks continuously emerge. Fraud methods evolve, economic pressures intensify, and operational complexities increase as businesses grow. The purpose of internal controls is therefore not to provide absolute assurance, but rather reasonable assurance that the organisation can achieve its objectives while minimizing exposure to significant risks.

The goal therefore is not to create an atmosphere of fear or excessive policing. Rather, it is to create systems that strengthen accountability, improve transparency, reduce operational leakages, and support sustainable growth.

Conclusion: SMEs must move beyond trust-based systems

For Ghanaian SMEs seeking long-term sustainability, the conversation around employee theft must therefore move beyond emotions and suspicion. It must evolve into a serious discussion about governance, internal controls, operational discipline, and leadership accountability. In today’s business environment, strong internal controls are no longer optional administrative tools reserved for large corporations. They are essential survival mechanisms for businesses determined to grow sustainably and protect the value they create.

The author is a Chartered Accountant, MSME Business Consultant, and Corporate Trainer. He writes on SME governance, taxation, internal controls, business strategy, finance, and economic policy issues affecting businesses in Ghana.

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