Evaluation of the contribution of organizational factors on fraud risk at FMCG SMEs in Nairobi County

Abstract

Kenya, like many other developing economies, relies on the ingenuity and perseverance of entrepreneurs to identify and exploit economic opportunities. These entrepreneurs set up and operate business ventures in the form of Small and Medium Enterprises (SMEs) and some of these end up being successful, providing a direct and indirect source of income to many households. Many local economies are driven by the abundance of SMEs in all sectors, and more so in retail trade. Separately, and according to several independent studies, Kenya is mentioned as one of the countries in the region and globally that is greatly affected by fraud. The complexity of fraud has a negative effect on business performance and fraud acts as a hidden cost of doing business and saps entrepreneurs’ energy thus limiting overall economic potential. This study sought to evaluate the contribution of organizational factors on fraud risk at SMEs in Nairobi County, specifically those trading in Fast Moving Consumer Goods (FMCG). The specific objectives included; To examine the extent of fraud risk in SMEs; To examine selected organizational factors that affect fraud risk at FMCG-trading SMEs in Nairobi County and To identify counter-fraud measures put in place by FMCG-trading SMEs in Nairobi County. This study adopted a descriptive research design and the target population of the study was FMCG trading SMEs in Nairobi County from whom respondents were selected using purposive stratified random sampling. This study used primary data collected using structured questionnaires. Descriptive statistics and inferential statistics like correlation coefficients, coefficients of determination and p values. The study found a significant relationship between the variables measured and the extent of fraud risk. The variables were (in order of significance) having a risk management framework, appropriate technology adoption and having a suitable management structure. Capacity building was also found to be a good multiplier in reducing fraud risk. The study found that the key fraud risks faced by SMEs were loss of cash, misuse of assets, bribery and corruption. The mitigation measures considered to be most effective were limiting access to key transaction documents, minimizing usage of cash in operations and training of employees. The study recommends that SMEs should focus on having the extent of control over operations, invest more in technology such as mobile money systems, and focus on fostering communication on fraud risk throughout the organization.