IMPACT OF INTERNAL CONTROL ON THE BUSINESS SURVIVAL OF SMALL-

MEDIUM ENTERPRISES IN THE CITY OF DASMARIÑAS, CAVITE

Undergraduate Thesis
Submitted to the Faculty of the
College of Economics, Management, and Development Studies
Cavite State University
Indang, Cavite

In partial fulfillment
of the requirements for the degree
Bachelor of Science in Accountancy

ALYANNA GRACE S. BERNARDO

JHON KENNETH D. JABON
KLARYZ D. MIRANDILLA
RJ M. PEREGRINO
SHELLY MAE ESTACION
June 2022
 THE IMPACT OF INTERNAL CONTROL ON THE BUSINESS SURVIVAL OF
SELECTED SMALL-MEDIUM ENTERPRISES IN THE CITY OF DASMARIÑAS,
CAVITE

Alyanna Grace S. Bernardo

Jhon Kenneth D. Jabon
Klaryz D. Mirandilla
Rj M. Peregrino
Shelly Mae Estacion

An undergraduate thesis manuscript presented to the faculty of Department of Accountancy,

College of Economics, Management and Development Studies, Cavite State University - Indang
Cavite in partial fulfillment of requirements for the degree Bachelor of Science in Accountancy
with contribution no.________. Prepared under the supervision of __________________

INTRODUCTION

The business sector of SMEs in the Philippines are undoubtedly characterized as the

backbone of the economy due to the fact that these entities are widely acknowledged to perform

an integral role in sustainable economic progress and inclusive industrial growth in the country.

At the same time, SMEs provided millions of citizens the possibility of generating income and

employment opportunities which in return would reduce the poverty while also provides a hope

for achieving the vision for all Filipinos to have lives that are comfortable and secure. Given the

developing trend of globalization and economic integration in South East Asia, SMEs in the

Philippines might potentially act as prospective providers of outsourced ingenious products and

services notably through manufacturing operations that utilize locally accessible inputs, therefore

boosting the country's economic value (Francisco et al. 2018).

 In the recent data statistics from Department of Trade and Industry (2019) small

enterprises comprises of 10.25% (98,126) out of the total establishments while medium

enterprises constitute 0.49% (4,716) of overall enterprises. It is also reiterated on their data that

small and medium enterprises in the Philippines are operationally defines in terms of

employment-based and asset-based definition. A business enterprise is considered to be small if

it employs 10 to 99 employees with assets that range from P3 million to P15 million. While a

business can be categorized as medium sized if it consists of 100 to 199 employees with an asset-

size ranging from P15 million to P100 million.

Despite the fact that Small-medium enterprises are termed as the critical engine of

national economy, nonetheless they are still vulnerable to several inevitable hindrances due to

dynamic economic environment that is brought by pandemic which threaten their financial

performance and operational sustainability. Moreover, they frequently encounter efficiency and

productivity issues due to a variety of causes. Some of these catalyst behind the slow growth and

instability include capacity constraints relating to lack of resources, that may refer to financial or

information aspects, lack of access to technology and markets, deficiency in the capacity to

compete, regulatory inefficiencies and lack of entrepreneurial abilities and human capital. SMEs

in Philippine are also overruled by the high cost of doing business, poor business environment,

inadequate knowledge on finance, outdated systems more specifically, the inadequacy of control

policy. (Yoshino and Hesary 2018)

Although the government administration had made an initiative in lending hands through

several support programs, however SMEs still struggle to survive and find it difficult to thrive in

a volatile environment. Particularly at this period of global economic recession, increasing

uncertainty introduces challenges and risks to small and medium-sized firms seeking long-term
growth (Najib et al. 2021). That is why it is important for SMEs to develop a well-structured

policy and procedure that will greatly contribute to the attainment of an entity's objective, which

is to generate greater earnings, business survival and sustainable growth. (Wang et al. 2019)

According to an article from Forbes (2018) they estimated that 80% of SMEs are able to

survive the first year. However, only approximately half of SMEs’ survive within five years,

with the percentage ranging from 45.4 percent to 51 percent. Aside from that, just around one in

every three small firms survives for ten years. Furthermore, the fundamental aim of an enterprise

is sustainability and if the firm's goal is to achieve business survival, the internal control should

be defined to ensure the firm's goal is met. As a result, a dependable internal control system is

advantageous in minimizing organizations' long-term operational issues in a dynamic and

continuously changing environment. Internal control may also prevent and reduce firm risks by

implementing effective organizational systems such as risk assessment and response procedures,

control activities including authorization approval and cash handling management (Miniano and

Conception, 2018).

Among several challenges that SMEs confront, internal control serves as one of the

necessary factor on the attainment of long-term survival and financial success of a company.

This assertion is anchored by the empirical study of Kiabel (2012), which states that an effective

internal control process is a crucial component of management and a cornerstone to secure a

stable operation of an organization. Moreover, he also added that the adequate internal control

system and company's operating standing are important to management interested in economic

growth and organizational continuity since internal control systems plays a significant

mechanism to business success and survival. Hence, in order to improve the financial
performance and to accomplish objectives, the implementation of a robust internal control

system has always been a prerequisite for business economic entities (Zhu & Song, 2021).

An effective internal control system is said to be one of the appropriate defenses against

business failure and a key driver of organizations' performance (Shanmugam et al. 2012). But the

issue here is that most business owners are too focused on making a profit and business

expansion that they neglect one of the most crucial risk management tools, which is the internal

control that indeed has a contribution to the continuity of SMEs. And in reality, it is clearly

undeniable that some of the small entities do not have internal controls in place because it is

costly to develop. Based on the study of Rossin (2019) he argues that small business owners are

aware that adopting properly designed controls with limited resources might be challenging.

However, failure to address deficiencies can expose their business to operational losses and

financial risks. Hence, small businesses that lack internal control end up failing.

There are few existing studies that tried to explore the aspect of internal control and its

influence on financial performance of the organization. Prior studies have also investigated its

role on organizational effectiveness and employee performance. But the researchers believed that

there are only a limited research findings particularly in the study of its impact on business

survival of small and medium sized enterprises. As a result of the current condition of SMEs

mentioned in the foregoing studies, this motivates the researchers to help small business owners

to be able to withstand challenges in the future by meeting the need to develop and contribute

further information. Therefore, the main objective of this study is to investigate the

interrelationship of internal control system and business survival of SMEs. The result of this

study will serve as a guideline for the managers of SMEs in managing the organization to

achieve their desired results. At the same time, this research is also intended to help business
owners in contemplating their strategies for implementing necessary steps to improve their

organization.

Statement of the Problem

This study will be conducted to investigate the impact of internal control business

survival of SMEs in Dasmarinas City, Cavite. Specifically, this study will seek to answers the

following questions:

1.What is the socio-demographic profile of the respondent?

1.1. age

1.2 educational attainment

1.3. company position

2. What is the organization profile of SMEs in terms of:

2.1 years of existence

2.2 business activity

2.3 capitalization

2.4 number of employees

3. What level of internal control structure effectiveness has been implemented by the

SMEs in terms:

3.1 control environment

3.2 control activities

3.3 risk assessment

3.4 information and communication

3.5 monitoring
 4. What is the perceived level of business survival in terms of:

4.1 current financial condition

4.2 retention of employees

4.3 continuous operation

4.4 attainment of objectives

5. What is the extent of benefits does internal control provide to the principle of going

concern despite risks and threats?

6. Is there a significant relationship between Internal control and Business survival of

SMEs?

7. Is there a significant difference in the relation of internal control to business survival

when grouped according to organization profile?

Objective of the Study

The primary objective of this study is to examine the interrelation of internal control to

business survival of the business.

Specifically, this study aims to:

1. identify socio-demographic profile of the respondent

1.1. age

1.2 educational attainment

1.3. company position

2. determine the organization profile of SMEs in terms of:

2.1 years of existence

2.2 business activity

2.3 capitalization
 2.a number of employees

3. determine the level of internal control structure effectiveness has been implemented by

the SMEs in terms:

3.1 control environment

3.2 control activities

3.3 risk assessment

3.4 information and communication

3.5 monitoring

4. evaluate the perceived level of business survival in terms of:

4.1 current financial condition

4.2 retention of employees

4.3 continuous operation

4.4 attainment of objectives

5. evaluate the extent of benefits does internal control provide to the principle of going

concern despite risks and threats?

6. identify whether there is a significant relationship between Internal control and

Business survival of SMEs

7. determine if there is a significant difference in the relation of internal control to

business survival when grouped according to organization profile

Hypothesis

The study adopted the following research hypothesis;

H01: There is no significant correlation between the internal control structure of SMEs to its

business survival.
H02: There is no significant difference in the relation of internal control and business survival

when grouped according to organization profile.

Significance of the Study

The researchers firmly believe that the findings and recommendations of this study will

be beneficial to the following individuals and institution:

To the SMEs Owners. The research findings from this study will greatly help the

business owners to make improvements on their internal controls that will eventually lead to

enhance the probability of achieving their ultimate longterm goal which is to attain business

continuity of the firm. Thus, through this study, the owners will understand the implication of

internal control system that serve as a risk management tool which could be utilize in order for

the business to flourish in a volatile environment.

To the SMEs Manager. The result of this research would significantly contribute in

analyzing the adequacy and effectiveness of the internal control implementation that will shed

light for them to establish a plan or strategy for rapid response in managing financial risk that is

bought by unanticipated crisis. Furthermore, this study will also provide enlightenment to

business managers on approaches for ensuring that controls are in place, which can minimize

asset loss, promote efficient and effective conduct of operation while increasing profitability and

organizational sustainability.

To the Accounting Students. This study may facilitate the students on having a thorough

understanding and appreciation on the real life application of the internal control and will be able

to aid the learners grasp concepts related several policies and procedures required to manage

internal controls in order to avoid fraud, wastage, and abuse.

 To the Future Researchers. This study will be a useful reference for the researchers who

would like to carry out more studies on internal Controls and financial performance in small and

medium sized entities that they may find the study beneficial. This study may also motivate them

to conduct their own similar researches.

Time and Place of the Study

This study tackles the impact of internal control to Small-Medium Enterprises when it

comes to business survival hence, the researchers will be conducting the data gathering at

Dasmariñas city, Cavite considering that it has the highest number of SMEs within Cavite.

However, the analysis of data that will be gathered and the finalization of the paper will take

place at the Cavite State University, Main campus. The data gathering up to the finalization of

the paper will be carried out during the second semester of the AY. 2021-2022 ranging from

February-June 2022.

Scope and Limitation of the Study

This study deals mainly on the impact of internal control to the probability and business

survival of Small-Medium Enterprises. It seeks to know the influence of internal control to the

businesses. The researchers focus on the impact of internal control to the business survival of

Small-Medium Enterprises within the locality of Dasmariñas, Cavite. Furthermore, the

researchers will also choose 357 managers of Small-Medium Enterprises within Dasmariñas,

Cavite as participants to answer the survey questionnaires. This is computed using the Slovin’s

Formula having 3,289 as the total population. Afterwards, the researchers will be having an

assessment procedure where the information gathered will be analyzed and evaluated.
Theoretical Framework

This study is primarily based on the Ross and Mitnick’s Agency theory and Bertalanffy’s

Systems theory.

The Agency theory was first proposed by Stephen Ross and Barry Mitnick in 1973.

According to Ross and Mitnick as cited by Gottschalk (2013) the Agency theory highlighted the

fundamental problems that might occur in the firms due to the separation of the role of owners

which is the principal and managers that represent as an agent. The proponents argued that the

agency problem emerges when there is a contradicting interest between the desire and objective

of the principal and agent at the same time it becomes onerous for the principal to confirm

whether the agent behavior is in accordance with agents’ fiduciary duties. Another problem that

was reiterated by the author is that the agency problem arises when the principal and agent have

different attitudes towards their risk taking preferences which will result in a different approach

on decision making and performance on how they will address those inevitable risks. In other

words, problems related to principal-agent relationships arise when parties within an economic

entity have divergent functions and goals.

In relation to the study of Ndungu (2013) claimed that the principal-agent relationship is

enhanced even more if the principal utilizes a control system to monitor the agent. Furthermore,

the results of their study support the theory that recognizing the circumstance where incomplete

information about the relationship, interests, or work performance of the agent described can

lead to moral hazard and adverse selection, both of which have an implications on the agent's

performance duty because the agent lacks adequate understanding or does not do exactly what is

needed to accomplish. Likewise, Leepsa and Panda (2017) further elaborates the theory of

agency postulating that agents have more information than principals necessitating the need of
the businesses to develop structures and to implement control in order to reduce agents'

opportunistic conduct. Stated otherwise, the theory emphasizes that there is a possibility of

asymmetric information where the principal and agent have access to contrasting quality of

information.

Based on the aforementioned, the researchers believed that theory can be applied to the

purpose of study for the reason that the said internal control is one of various mechanisms used

in business to alleviate the agency problem that will lead to the efficiency and effectiveness of

the operation including performance, survivability goals and safeguarding resources against

loss. On top of that, Internal control improves the transmission of information regarding

management activity to the owners which in return will reduce information asymmetry at the

same time will minimize capital venturers’ risk and low revenue.

On the other hand, Von Bertalanffy introduced the Systems theory in 1950. As cited by

the study of Keraro, (2014) he described the theory in a sense that an organization which

consists of several elements if combined together makes a whole. Moreover, the theory firmly

states that the key variables in an organization are the people, structures, processes, resources,

systems in which all these are viewed as the parts that, if coordinated strategically, will lead to an

effective management of the firm. Additionally, the theory upholds the idea that the different

parts of an institution should not be managed in isolation rather an organization should be

regarded as systems composed of regularly interacting or interrelating groups of activities or

people performing activities. He argued that rather than reducing an entity or organization to the

properties of its parts or elements, systems theory focused on the arrangement of and the

interrelations between the parts which connect them into a whole. According to Hanson (2014)

he noted that with the recognition of systems theory, all organizations composed of processing
 inputs and outputs with internal and external systems and subsystems are helpful in providing a

functional overview of any organization.

Based on the foregoing theory, the researchers decided to adopt system theory since it

indicates and explains how an internal control works as subsystems that function

interdependently with other basic management processes to achieve a common objective of

organization. As a component of a risk management system, it is important for an organization to

implement an adequate and effective internal control so that they will be able to control

operational risk which in return can enhance the operational and financial performance of the

business. Due to several issues related to instability that small firms encounter, their survival will

depend on how well the firm assesses and adapts to its internal environment through an internal

control system which is geared toward achievement of management objectives.

Conceptual Framework

INPUT PROCESS OUTPUT

Organization’s Profile of SMEs in Administering of the Impact of Internal

terms of: questionnaires. Control to the
Years of existence Gathering data. Profitability and
Type of business operation Tabulation of SMEs Business Survival of
Annual sales owners/managers Small-and-Medium
Productivity rate responses. sized Enterprises in
Statistical analysis of The Municipality of
Internal Control Structure data and interpretation. Dasmarinas, Cavite
Effectivity:
Control Environment
Risk Assessment
Control Activities
Monitoring

Profitability, in terms of:

Return on Assets Figure 1 shows the Conceptual Framework of the study.
Return on Equity
Net Profit Margin
The inputs are the organization’s profile in terms of its years of existence, type of business

operation, annual sales, and productivity rate, the effectiveness of internal control structure to the

organization, and the profitability in terms of its return on assets, return on equity and net profit

margin. The research procedure includes administering the questionnaires, gathering data,

tabulation of the responses, and statistical analysis of the data and interpretation. The output is

the impact of the internal control to the profitability and business survival of small-and-medium

enterprises in the City of Dasmariñas, Cavite.

Definition of Terms

Economy – a system of making and trading things of value, usually divided into goods and

services.

Control Environment - an overall attitude, awareness and actions of the higher ups regarding

the internal control system.

Internal Control - a system within the organization comprising all the methods and measures

necessary for safeguarding its assets, accounting policies and procedures, and policing

previously adopted rules.

Monitoring - process of observing such activities to determine the rate of progress toward the

achievement of goal, and following the policies.

Net Profit Margin - a ratio that measures the amount of money remained from the sales after

deducting production costs.

Productivity - measure of the efficiency of an organization’s production process.

Profitability - ability of an organization to use its resources to generate revenues in excess of

expenses.
Return on Assets - a measure of how efficiently an organization uses its assets to generate

profit.

Return on Equity - measures how an organization generates profit for its owners.

Risk Assessment - identification of risks or hazards that could impact an organization’s ability

in conducting business.

SME - Small and mid-size enterprises (SMEs) are businesses that maintain revenues, assets, or

several employees below a certain threshold.

 REVIEW OF RELATED LITERATURE

This chapter reviews related foreign and local literature and studies which serves as a

reference for this study. This also presents the synthesis for better comprehension of the research.

Internal Control and its Component

According to the Committee of Sponsoring Organizations of the Treadway Commission

(COSO, 2019), the internal control - integrated framework provides effective implementation

guidance to help strengthen and enhance overall governance of internal control structures in an

organization. Internal control is a process that is integrated in the system of management with the

goal of providing reasonable assurance about achievement of the objectives related to efficiency

and effectiveness of operating activities, accounting information reliability, and compliance with

applicable laws.

Based on the literature of Ireneo et al. (2018) they mentioned that there are five

interrelated components of internal control. First is the Control environment which sets the tone

of an organization that guides the attitude and behavior of personnel to strive to have competent

people and engrave integrity and accountability. Next is the Risk assessment process that is

established to identify and analyze relevant risk to achievement of the objectives and serve as a

basis for determining the approach on how the organization should manage risk. Then, the

Information and communication system consists of an integrated set of resources that make

extensive use of information technology. Another is the Control activities which are a set of

policies laid down to assure that management directives are carried out. Lastly, Monitoring
which refers to as a process of evaluating the quality of internal control overtime. Thus the

component of internal control will provide a reasonable assurance in assessing effectiveness and

efficiency of business operations.

Based on the empirical study of Ershaid et al. (2017) they further emphasized that

regardless of whether a company is a large or small sized, internal control system is applicable to

all economic entities which facilitate in achieving desirable performance, that is basically the

primary goal of most businesses, prevent loss of resources, enable provision of credible reports

and ensure that the business is operated in an orderly and efficient manner. Additionally, they

also mentioned that its function is to ensure that any economic transactions will undergo

authorization in order to prevent unproductive use and misappropriation of business resources.

Thus, effective internal control generally contributes to the realization of management

objectives.

Bett and Memba (2017) further claims that internal control is vital to the existence of

every organization. However, they also added that internal control has certain limits that is

because it could only yield a reasonable assurance and can never provide an absolute assurance.

At the same time, it is delineated as a management tool that enhances the chance of an

organization to achieve its goal but does not in any way guarantee success. Due to a variety of

reasons that hinder its effective implementation including the cost-benefit constraint, connivance

scheme of employees, and other external factors that are beyond the organizations’ control.

Business Survival of SMEs’

Mekoulou (2019) defines business survival as the capacity of the business to continue in

sustaining their economic activity even if there are several difficulties that a business encounters

in their daily operation. It is said to be a common objective especially for small firms to continue
to keep their operation on a going concern basis and overcome the threat of business failures in

which a business declares bankruptcy or ceases to operate, resulting in losses and failure to meet

its various financial obligations. They also added that to be able to a business to attain

sustainability, they should initiate oversight on business processes that will virtually lead to their

continuity

Based on the International Trade Centre (2020) research, which provides empirical

evidence on the strengths and weaknesses of SMEs and identifies opportunities to increase the

competitiveness and resilience of small businesses across the country. Approximately half of the

Filipino workforce is employed by small and medium-sized firms (SMEs). These businesses are

critical to the realization of AmBisyon Natin 2040, the national goal for a deeply grounded,

prosperous, and secure living for all Filipinos. This sector provides significant contributions to

the national economy, adding value worth around 36% of GDP and registering abroad sales that

account for a quarter of export income. Additionally, they also describe that Small and medium-

sized companies (SMEs) are considered as the Philippines' economic lifeblood.

Amidst the crisis, SMEs suffered from difficulties in their operations, rescinding financial

conditions and have been exposed to extreme financial risk that caused many to undergo

bankruptcy or restructuring. A survey conducted in the Philippines by World Bank (2020) tested

13,878 firms on November 26 to December 10, showed that only a small proportion can operate

at full capacity, some voluntarily closed their businesses and about 7 percent of firms reported to

have closed permanently despite easing community quarantine.

Several months passed, SMEs showed an improvement in light of the challenges they

were facing. A study by Adam & Alarifi (2021) provided empirical evidence of the importance
of external support (whether governmental or nongovernmental) for the survival of SMEs in

times of crisis. This study also shows that innovative practices used by SMEs such as utilization

of technology to market their products during COVID-19 crisis significantly affect the entity's

future survival. SMEs have been developing new coping practices and this results in a positive

impact on business performance. Correspondingly, Ching & Ona (2021), concludes that new

normal trends such as adoption of digital technology and utilization of e-commerce have opened

new opportunities for MSMEs, thus making them more innovative and resilient.

Determinants of Business Survival

Based on the research study of Najib et al. (2017) business survival can be measured by

the following aspects: Maintaining a positive cash flow, Retention of certain number of

employees, Continuous operation. Furthermore, according to Amah (2017), Organizational

survival can also be pertinent to the firm’s ability to realize its outcome and expectations which

is parallel to its goals and objectives in spite of various challenges due to external factors.

According to Eton et al. (2017), sustaining a positive cash flow is essential for the sustainability

of SMEs, but also its inadequacy may result to an adverse effect in their the

organizational survival and performance. Meanwhile, Ogini et al. (2013) affirms that employee

retention strategies is an indispensable necessity in organizational survival. On the other hand,

Lum (2017) states that the bottom line of SMEs Continuous operation will boil down in their

need to adopt a resilient approach which signifies the ability to perform well, adapt and even

develop new capabilities within changing environments.

In the research study conducted by Eton et al. (2017) they attempt to evaluate the effect

of cashflow to operational resilience of SMEs located in Uganda. The results of their study
shows a significant interconnection between cash flow and survival of SMEs. They also

emphasized that the organizational stability would indeed be defines in terms of how the

management effectively handles the movement of cash in their current operation. Consequently,

proper management of cash and sufficiency of current asset virtually determines the going

concern principle of a business.

While retention of employees mainly refers to employee’s dedication and satisfaction on

investing their work to achieve company objective which is deeply ingrained to organizational

sustainability, that will ultimately lead to workers' decisions on whether to stay within the

company or leave the organization to pursue another opportunity. The management employ

retention strategy to obtain their employee’s satisfaction and commitment, influence the policies

and practices in the organization to minimize employee turnover rate. (Ogini et al. 2013)

Lum (2017) believed that the primary manifestation of a continuous operation represents

the adaptability of the firm in their response to either short term challenges or during economic

downturn. Developing a flexible firm necessitates strategic initiatives that modify a company's

strategic plan and improve its performance. Despite the difficulties that SMEs faced, there is also

hope for a potential opportunities that need to be discovered and seized by business companies.

Based on the study conducted by Amah (2017) he examined the ability of a entrepreneurs

in their strategy to adapt in an ever changing environment through calibrating the strategic goals

for the long term business continuity. It was also describe in his research some of the common

goals that SMEs wants to achieve, which are to increased profitability, sales increment,

economies of scale, customer retention etc. The researcher also found that business resilience
came from small business owners examining and understanding key factors, and managing the

specific factors that affecting the aspect of business life.

In a research by Aldaba, (2016) (as cited in Cao 2012). He mentioned that business size

and age are emphasized as significant aspects in exploring the drivers of survivability, with older

firms having a better survival rate than new enterprises. At the same time, his study also states

that firms must adjust their approaches based on increased competition in order to survive and

benefit from the opportunities provided by globalization. Additionally, the researcher’s study

also showed that small and medium firms are around 16% and 8% less likely to survive than

large firms. Business survival rate increases with firm size, performance, and operational

stability, which helps firms become more competitive and more likely to survive and prosper.

Therefore, smaller firms are more susceptible to shutting down of operation.

Role of Internal Control to Financial Performance

Based on the research study conducted by Channar et al. (2015) in which their research

attempts to investigate the functionality of each of the five Internal control components and its

relationship with financial performance. They surveyed 210 respondents composed of employees

from 6 commercial banks and the result of their study concluded that internal control

effectiveness positively influences the high level of financial performance of private commercial

banks in Pakistan. They also recommended that physical control in the commercial banks should

further be enhanced through reinforcement of the persisting control and incorporate an updated

version.

Effective internal control systems are believed to increase the profitability of

cooperatives, which directly lead to stability and growth. The findings on the study of Akimana
(2019) revealed that there is a positive and significant relationship between internal controls and

financial performance. In contrast, a study by Shabri et al. (2016) presented that the profitability

of one of the cooperatives in Malaysia has not improved although internal control systems

seemed intact and in operation. The participants acknowledged that the internal control systems

have effects on cooperative profitability albeit the researcher observations on the audited

financial statements have shown losses for the last three years.

The design and efficacy of the safeguard in place have a role in the institution's capacity

to maximize profit. As cited in the study of Dhaliwal et al. (2011) Effective internal control is

interrelated with lower capital cost. Through a variety of procedures and actions, effective

internal control may reduce corporate risk and safeguard the interests of capital providers, thus in

effect lowering a firm's cost of capital. Additionally, firms with low capital costs have a

comparative advantage in resource allocation to create value and viability, which facilitate in

promoting the firms' long-term growth. Cheng et al. (2013) also provided in their study that

effective internal control leads to efficiency of investment and operation. The ideal decisions in

relation to investment and operation is based on the quality of information presented and ensured

by internal control. By delivering high-quality information, effective internal control decreases

the firm's erroneous judgments and behaviors and, as a result, enhances the efficiency of

operation and investment.

Role of Internal Control to Operational Sustainability

Phornlaphatrachakorn & Kala Sindhu (2020), found out that internal control effectiveness

is a key determinant of explaining productivity improvement and business survival. The findings

of their study states that productivity improvement has an important positive influence on value
creation and business survival while value creation positively affects business survival. In other

words, only productivity improvement mediates the internal control effectiveness-business

survival relationship.

In addition, a study by Aladejebi (2011) (as cited in Soininen et al. 2012) states that

managers of SMEs have the ability to minimize risk through the adoption of measures for

developing internal control. Business failures increase demand for stronger internal controls

among organizations, which is evident by the failure of certain SMEs during the 2007–2008

financial crisis due to a lack of adequate internal control systems. They also argue that failure of

SMEs can be pointed out by the reason that most managers believed that setting up internal

control systems would increase expenses without yielding tangible benefits. Due to inadequate

human and financial resources, a substantial proportion of SMEs managers are hesitant to

establish internal control systems.

Based on the research conducted by Shanmugam et al. (2012) that investigates the

problems related to internal controls and fraud prevention measures on SMEs performance in

Malaysia. They mentioned that internal control is an aspect of an organization that is typically

neglected and is infrequently investigated by the manager of SMEs, which in turn has a potential

influence on the failure of SMEs. Furthermore, the researchers also state that once this issue is

disregarded, it can harm the performance of SMEs. Which means that the underestimation of the

managers on the value of internal control will cause undesirable consequences that would

definitely damage the development of SMEs .The result of their study serves as the basis for them

to formulate their claims that small enterprises that lack internal control, as a result, fail to

survive. Additionally, they also indicated that the principal cause of issue that aggravates the

bankruptcy of most SMEs would be difficult to identify because owners of the enterprise would
be oblivious to the fact that they improperly disregarded a significant element in effective

management.

Nevertheless, Dragnic (2014) contradicted the above discussion and emphasized that the

possibility of achieving operational and financial objectives relies on external factors such as

innovation, competition, customer preference, economic climate. For this reason, effective

internal control cannot absolutely guarantee the achievement of operational and financial

objectives but it merely enhances the attainment of the goal of the company.

Furthermore, lack of internal controls in small enterprises frequently results in loss of

revenue and assets, theft, resource mishandling, inefficiency, loss of customer assurance, and

inability to meet organizational objectives. Inadequate internal control has a detrimental impact

on business earnings and continuity while effective internal control fosters efficient

administration, coordination, and the capacity of a firm to produce value and maximize its

capital. (Stone, 2016). Thus, to retain the profitability of their company and prevent business

failure, SMEs' management must discover and apply optimal internal control system.

Synthesis:

According to the Committee of Sponsoring Organizations of the Treadway Commission

(COSO, 2019), the internal control- integrated framework provides effective implementation

guidance to help strengthen and enhance overall governance of internal control structures in an

organization. In addition to this, the study findings of Akimana (2019) revealed that there is a

positive and significant relationship between internal controls and financial performance.

Ndungu (2013) also found out in her study that the Internal control system contributes to revenue

generation at the company. And based on the research conducted by Shanmugam et al. (2012),
they mentioned that internal control is an aspect of an organization that is typically neglected and

is infrequently investigated by the manager of SMEs which in turn has a potential influence on

the failure of SMEs. With this, researchers were able to presume that internal control plays a

vital role in the profitability and business survival of SMEs.

In a literature by Ireneo et al. (2018) they mentioned that there are five interrelated

components of internal control – Control environment, Risk assessment, Information and

communication system, Control activities, and Monitoring. Irineo’s (2018) findings indicate that

internal control will provide a reasonable assurance in assessing effectiveness and efficiency of

business operations.

However, a study by Adam & Alarifi (2021) provided empirical evidence of the

importance of external support (whether governmental or nongovernmental) for the survival of

SMEs in times of crisis which states that internal control alone is insufficient for the profitability

and business survival of the SMEs.

 METHODOLOGY

This chapter presents the methodology used by the researchers to arrive at the solution. It

includes research design, research locale, population and sampling techniques, research

instrument, validation of the questionnaire, data gathering procedures, and statistical treatment of

data collected.

Research design

To solve the stated problems, the researchers will use quantitative research design.

Watson (2015) described quantitative research that involves measurement and assumed that the

phenomena under study can be measured. In addition, Rasinger (2013) described quantitative

research as deductive for basing on the hypothesis made from an existing theory.

The researchers will be using quantitative design, whereas the data to be collected will

undergo statistical analysis for a reliable result and interpretation.

Participants of the study

The target population of this study comprises Small and Medium Enterprises operating

within the area of Municipality of Dasmarinas, Cavite. Since the behavior of the population is

unknown, Slovin’s formula will be applied in calculating the sample size with a margin of error

of 0.05. Slovin’s formula is written as:

N
n≥ 2
1+ N e
where: n = sample size

N = population size

e = margin of error or level of precision

Sampling technique

This study uses simple random sampling, in which the researchers develops an accurate

sampling frame, selects elements from the sampling frame according to a mathematically

random procedure, and then locates the exact element that was selected for inclusion in the

sample. To conduct this type of sampling, random number generators or other techniques that are

based entirely on chance could be utilized. Thus, using simple random sampling techniques

allow the sampling error to be calculated and reduces selection bias. A specific advantage is that

it is the most straightforward method of probability sampling.

Data to be gathered

After obtaining validation and approval for the formulated research instrument, the

researchers immediately went on to the Dean of the Department of Accountancy to have the

letter signed, asking permission to conduct the survey so that researchers could formally start

conducting a survey. To obtain the population of SMEs in the city of Dasmarinas, the researchers

made a letter of request to the Department of Trade and Industry to have a complete listed record

of registered SMEs within the locale that contains useful information necessary to randomly

select the participants. Then, the researchers distributed the structured survey-questionnaires

using google form which was sent to the email address of selected respondents.
 The data that was retrieved from respondents were tallied and tabulated. At the same

time, it was thoroughly analyzed and interpreted using a suitable statistical treatment in order to

construct a conclusion and recommendation for this study.

Statistical treatment

Statistical treatment is the application of certain statistical methods to the set of data

gathered to be able to extract meaning from it. This study requires inferential statistics wherein

the researches will have to test the hypothesis by means of making inferences from the data

gathered. With this, the Spearman’s Rank-Order Correlation will be used to analyze the data.

Spearman's correlation determines the strength and direction of the monotonic

relationship between your two variables. And a monotonic relationship is a relationship that does

one of the following: (1) as the value of one variable increases, so does the value of the other

variable; or (2) as the value of one variable increases, the other variable value decreases.

In this study, we are testing whether there is a significant correlation between internal

control of businesses to its profitability and business survival.

There are two methods to calculate Spearman's correlation depending on whether: (1)
your data does not have tied ranks or (2) your data has tied ranks.

The formula for when there are no tied ranks is:

where di = difference in paired ranks and n = number of cases.

The formula to use when there are tied ranks is:

 where i = paired score.

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