The Impact Of Corruption and Unethical Behaviour On SMMEs

The key drivers of economic growth and job creation for a number countries is small, medium and micro enterprises (SMMEs).  The government’s solutions in addressing the problems confronting South Africa’s economy and reversing the high unemployment rate require a fundamental change in the intervention that recognises the urgent need to grow and invest in SMMEs.

SMMEs are the strength of our ailing economy and are the key driver of economic growth. Research by the Global Entrepreneurship Monitor shows that small businesses are significant contributors to job creation, creating more than 50 percent of all employment opportunities in South Africa. Currently, the SMME sector contributes more than 45 percent of the country’s gross domestic product. SMMEs have the potential to create and expand employment opportunities, develop entrepreneurial skills and enhance market opportunities. Despite their important contribution to the socio-economic development of South Africa, many SMMEs are exposed to the overwhelmingly high cost of fraud and corruption currently facing corporate South Africa.

Statistics tells us that SMMEs have only a 37 percent chance of surviving for four years and a 9 percent chance of surviving for 10 years; 70 to 80 percent of small businesses fail in their first year, and only about half of those remain in business for the next five years. The study commissioned by the Small Enterprise Development Agency (SEDA), conducted by the Bureau for Economic Research (BER) on the SMME sector in South Africa in 2016 revealed that, one of the major contributing factors to the failure of SMMEs is crime. It further states that high crime (including corruption) levels are forcing businesses to increase their security spending, which has a ripple effect on the overall cost of doing business.

THE EFFECT OF CORRUPTION ON SMMEs

Transparency International’s 2013 global Corruption Perception Index (CPI) shows that South Africa has dropped 34 places since 2001, with half the decline of 17 places occurring since 2009, and in 2016 we were ranked at number 64 out of 176 countries. The looting of state resources is rife in South Africa and public funds get diverted from the public good (supporting up and coming entrepreneurs) towards the private interests of the corrupt. José Ugaz, Chair of Transparency International said “In too many countries, people are deprived of their most basic needs and go to bed hungry every night because of corruption, while the powerful and corrupt enjoy lavish lifestyles with impunity.”

Fraud and Corruption are serious crimes and they are an increasing problem in corporate South Africa.  SMMEs are particularly vulnerable to corruption as they do not have adequate strategies or budgets to combat it. The prevention of fraud and corruption is often viewed by SMMEs as a costly and unnecessary exercise, which in turn leads to many SMMEs believing that their businesses are insusceptible to corruption.

Anti-Corruption strategies 

The common measures to identify fraudulent activities often include access controls, security equipment, internal and external audits and whistle-blowing mechanisms. Unfortunately many SMMEs view such measures as costly and unnecessary expenses. As such, many do not employ any measures to detect fraudulent and corrupt activities in their businesses.

Fraud and Corruption prevention measures

Over and above having anti-corruption measures in place, SMME leaders must lead by example, by operating ethically. The tone at the top is critical for an organization because it influences employees’ attitudes toward economic crimes. You can have good policies and procedures as guidelines for employees to combat fraud and corruption, however it is useless if the leadership is unethical. The development of an anti-corruption strategy as part of a wide-ranging ethics program is also essential to effectively combating and managing the incidence of fraud and corruption in SMMEs. Struggling SMMEs also perceive such activities as an expensive exercise.  Somewhat understandably, SMMEs would rather invest in the primary objective of their business.

The Ethical Dilemma facing businesses in South Africa

The Business dictionary defines an ethical (moral) dilemma as “a situation in which there is a choice to be made between two options, neither of which resolves the situation in an ethically acceptable fashion.  In such cases, societal and personal ethical guidelines can provide no satisfactory outcome for the chooser.”  Most SMMEs depend on government contracts for their survival. The ethical dilemma facing business, most especially SMMEs is the cost of securing work or tenders in South Africa.  They can see that those (unethical peers) that bribe officials are securing business as compared to their ethical peers.  The temptation of bribing and colluding with officials to secure work is always high, this also touches on the need for checks and balances as well as good governance practices in both the public and private sector. As Mr. Sandile Nyaba of The Corruption Hotline said “institutions should always strive to provide relevant platforms that allow employees, stakeholders and clients to be educated on how to deal with, handle or repot unethical behavior”.

The impact and dangers of engaging in corrupt activities and other unethical behavior for businesses. 

Management must subscribe to good corporate governance and good corporate practices for their business. Desperation and the use of unethical and immoral ways of securing business might prove to be fatal to an organisation. Businesses do not only need to make profits in the short-term, but they also need to survive for many years and create wealth for their owners.  Safe guarding a businesses’ reputation is as important as securing business. Unethical behavior such as bribing of officials in exchange for business favors might lead to many things, such as reputational damage, being black listed as an organisation, jail time, liquidation of the company, etc.  Business owners should then reflect on whether it is worth it to engage in corrupt and unethical activities.

In closing, despite the consequences of fraud and corruption in the local SMME sector, the worrying factor is the lack of an adequate understanding of the causes, impact and dangers of engaging in corrupt and unethical activities and transactions of that nature which have far-reaching consequences.  It is hard to recover from reputational damage, businesses need to take measures to safe guard themselves against the possibility of fraud and corruption.  Business owners need to educate themselves on cheaper and yet still effective ways of fighting corruption e.g. rotation of employees and performing random/surprise inspections on various divisions.

 

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