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Vol. 11, Iss. 1, June 2011

Internal Control Practices of Readymade Garments (RMG) Sector in Bangladesh Anup Kumar Saha Jagannath University

ABSTRACT: Internal control has a pivotal role in ensuring sustenance of any industry. This study has found many variables for internal control practices in Readymade Garments (RMG) sector of Bangladesh. These vary from maintenance of employees’ job description to bonding employees with special access. For many variables these companies are practicing an acceptable level of internal control, while in some they are not doing so well and have ample scope for improvement. The RMG sector is mainly populated with sole proprietorship firms and are normally careless of such practice. Even then the concern for internal control has to be implemented to ensure a long lasting role in the economy. Keywords: Readymade Garments (RMG), internal control (IC), grievance procedure, corporate code of conduct, cost-benefit analysis. Manuscript Received: July 6, 2011

______________________________________________________________________________ I. INTRODUCTION Readymade garments (RMG) play an important role in the economy of Bangladesh. The RMG sector has the biggest contribution to the growing economy of the country. The industry has contributed to export earnings, foreign exchange earnings, employment creation, poverty alleviation and the empowerment of women (Haider, 2007). Thus, its sustainability is of much importance for the development of this economy. Internal control is one of the main components to ensure long term sustainability of any institution. Thus the internal control practices is a key factor deciding the sustainability of this sector. This study tested the internal control practices in this sector which is one of the deciding factors for its survival. II. STATEMENT OF THE PROBLEM Bangladesh depends is very dependent on its RMG sector for it’s export income and development. This is why the sustainability of this highly valuable sector is of much concern. On

this ground, this study has attempted to find the vigilance of internal control systems and policies of the RMG sector. The objective of this paper was to find the internal control (IC) practices in the RMG sector in Bangladesh. Both strengths and weaknesses have been focused on. III. LITERATURE REVIEW The ready-made garment (RMG) industry of Bangladesh started in the late 1970s and become a prominent player in the economy within a short period of time (Haider, 2007). It was found that the RMG sector needs to improve the factory working environment and various social issues. Delahanty (1999) found that the average garment manufacturing labor cost in Bangladesh is $0.16 per hour in 1993, while the corresponding figures for India and China were $0.27 and 0.25 respectively in the same year. But the recent raise in RMG minimum wage has created a concern for this sector, which calls for greater control over cost minimization.

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Moreover, according to Paul-Majumdar (2001) rented factory premises, narrow staircases, low roofs, closed environments, absence of lunch rooms, unavailability of clean drinking water and no separate toilets or common rooms for female workers are other concerns in the garment factories. These shortcomings threaten the development of this sector. Feng et al (2009) found a positive association between internal control and management forecast accuracy. They also found a positive relationship between management ability and implementation of strong internal controls. There is no study focusing on the RMG sector, neither internationally nor locally, to review the internal control practices, so important for sustainability. Though there are some studies of physical problems in RMGs, the lack of study on system practices and development calls for pioneering research in this field. IV. RATIONALE FOR THE STUDY The readymade garments industry is a success story and important for Bangladesh and its development (Robbani, 2000). Recently, the pressure for increasing labor wages both from labor unions and regulatory bodies has had negative influence on this sector. The costs involved are getting higher and putting sustainability at stake. The recent unrest for increasing labor wages has turned the situation more vulnerable with some political influences. All these risk- factors call for a pioneering study on the control system of this sector, so that it may be able to manage and control any likely adverse situation in future. V.

METHODOLOGY

1. 2. 3. 4. 5.

Vol. 11, Iss. 1, June 2011

Management philosophy and operating style Organization structure Assignment of Authority and responsibility Human resource policies and practices Cost Benefit Analysis

Under all the perspectives there are separate question(s) for the respondents. Respondents are the members of top management of the chosen companies. These companies have been chosen on a convenient basis. VII. ANALYSIS OF FINDINGS The internal control structure of the companies has been analyzed from five different perspectives. All these perspective appear to have very dynamic characteristics. 1. Management philosophy and operating style 75 % of the respondents said they emphasize short term profits and operating goals even to the detriment of long term goals. Only the remaining 25 % emphasized on long term goals. This was quite a disturbing finding of the research. Half of the companies are dominated by only one or a few individuals, limiting greater participation in decision making. On the other hand, thirty seven percent of the companies have quite healthy practices and have greater participation in their management. The remaining 13% preferred not to answer this question. Of the companies studied, 44% are conservative toward selecting accounting policies. The same proportion of the respondents (44%) said they are aggressive in selecting from available alternative accounting policies, thinking that aggressiveness is necessary for profitability. The remaining 12 % did not respond to this question.

The study was based on questionnaire survey, where a separate questionnaire was prepared. The questionnaire consisted of about 18 mostly closeended questions with ample scope to explain in a separate space. About 52 respondents were interviewed from 21 organizations or garments factories. The questions have been categorized under five broad categories as follows:

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Table 1. Management Philosophy Management philosophy and YES NO PNA operating style Does management emphasize short term profits and operating 75% 25% 0% goals to detriment of long term goals? Is the management group dominated by 50% 37% 13% one or a few individuals? Is the management conservative toward selecting from 44% 44% 12% available alternative accounting policies?

Total

100%

100%

100%

* PNA = Prefer not to answer

2. Organization structure The majority of the organizations (83%) have an up to date organogram showing the names of the key personnel. The other firms do not have any such organization chart showing key personnel in the company. 60 % of the RMG companies have separate and distinct internal audit function from the accounting works. In 38 % of those companies, internal audit and accounting activities are done by the same person. This indicates that these companies do not have any segregation of duties and the work done are not cross-checked, which increases the likelihood of fraudulent activities. The other 2% opted not to answer this question. In half of the companies surveyed, subordinate managers report to more than one superior. In 44 % of such cases, subordinates have only one superior for reporting purposes. The remaining 6 % percent respondents did not answer this question.

Vol. 11, Iss. 1, June 2011

Table 2. Organizational Structure Organization structure YES NO PNA Is the up to date organization chart prepared, showing the 83% 17% 0% names of key personnel? Is the internal audit function separate and 60% 38% 2% distinct from accounting? Do subordinate managers report to 50% 44% 6% more than one superior?

Total

100%

100%

100%

* PNA = Prefer not to answer

3. Assignment of authority and responsibility A big portion (92%) of the companies surveyed, have written job descriptions for their employees, defining specific duties and reporting relationships. Only a small portion (6%) do not have such job descriptions. Without definite job description, employees may lack direction, goals and enthusiasm. The remaining 2 % of respondents remained did not answer this question. 69 % respondents said there is a requirement for written approval before any changes can be made to present information systems. A quarter of the respondents denied having any such existing requirements in their company. The rest 6 % did not respond to this query. 74 % of the companies clearly delineate the boundaries of authority and responsibility relationship of employees and managers. Half of the rest 26 % do not have delineation of authority and responsibility to employees and managers and the other half (13%) did not respond to the question. In 62 % of the companies, there is a system of proper delegation of authority to employees and departments. On the other hand, twenty three percent of the companies do not have such systematic delegation system of authority. Here, 15% respondents decided not to answer.

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regarding this matter.

Table 3. Authority and Responsibility Assignment of Authority and responsibility Does the company prepare written employee job descriptions defining specific duties and reporting relationships? Is written approval required for changes made to information systems? Does the company clearly delineate to employees and managers the boundaries of authorityresponsibility relationships? Does the company properly delegate authority to employees and departments?

Vol. 11, Iss. 1, June 2011

YES

NO

PNA

Total

92%

6%

2%

100%

69%

25%

6%

100%

74%

13%

13%

100%

62%

23%

15%

100%

* PNA = Prefer not to answer

4. Human resource policies and practices 85 % of companies train new employees about internal controls, ethical policies, and corporate code of conduct. Whereas, in 8% of companies such training is absent. The absence of such an induction program to new employees may have an adverse effect in terms of control and achievement of intended goals. In this case 7% decided not to respond. A grievance procedure should be in place to maintain a healthy environment within any organization. In this study, it was found that 56 % companies have this practice in some form. 33 % of companies have not implemented any such facility for their employees. The remaining 11% of respondents preferred did not comment on this issue.

The respondents said that in 85 % of cases employees work in a safe and healthy environment. It should be remembered that all respondents are from management group. So, the responses from them show that their organizations are maintaining safe and healthy environment in workplaces. Though, the recent unrest in the garments sector for upgradation of minimum wages unveils some other facts as well. One of these is the lack of safety in the workplace. Many cases of fire had occurred. These events indicate there is still a long way to go to maintain a safe and healthy work environment. Of the remaining 15% of the respondents, 13% admitted that safety and healthiness in workplace has not been implemented in their organizations. Only 2 % decided to forgo this question. In 62% of cases, a counseling program is said to be available. One fourth of the respondents said that counseling program is not still in place for the employees, while the remaining 13% were silent on the issue. Employees who leave the institution for a number of reasons should be separated in a planned and organized manner. Reasons for separation included personal reasons, better opportunity, change of career, grievance from present job etc. All the employees who leave should be properly separated through a well managed program. This would ensure the confidentiality of information and goodwill of the company. It is essential to maintain a good control over information resources. Less than half of the respondents said that they have such separation programs in force for employees who leave the firm. Around 38% answered the other way and 15% were unaware of such program.

A sound employee relations program is maintained by 90% of the companies, which show their serious consideration regarding healthy employee relations. Only 6 % of the companies do not have any program in action for maintaining healthy relationship among its employees. The other 4 % of the respondents remained silent

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Table 4. Human Resources Practices Human resource policies and practices Are new personnel indoctrinated with respect to internal controls, ethics policies, and corporate code of conduct? Are grievance procedures to manage conflict in force? Does the company maintain a sound employee relations program? Do employees work in safe, healthy environments? Are counseling programs available? Are proper separation programs in force for employees who leave the firm? Are employees who have access to cash and other negotiable instruments bonded?

YES

85%

NO

8%

PNA

Total

8%

100%

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Table 5. Cost-Benefit Analysis Cost-Benefit YES NO PNA Analysis Are the internal control practices in your organization 76% 8% 16% offering any benefit to your organization at all? If yes, how?

Total

100%

* PNA = Prefer not to answer

56%

33%

12%

100%

90%

6%

4%

100%

85%

13%

2%

100%

62%

25%

13%

100%

46%

38%

15%

100%

37%

38%

25%

100%

* PNA = Prefer not to answer

Employees who have access to cash and other negotiable instruments are bonded in 37 % of the cases. On the other hand, 38 % of the companies do not have any such policy to bond employees having access to cash and negotiable instruments. The remaining one fourth of the respondents did not answer this question. This may be due to skepticism against bonds. 5. Cost Benefit Analysis Overall, 76 % of respondents think that internal control practices offer benefit greater than the cost involved to the organization. While 8 % think otherwise. Here, about 16 % of respondents are unsure of the effect of internal control system on the organization.

From the benefits derived from superior internal control policy in the organization several viewpoints have come up. It helps in decision making, increases efficiency of internal operations, identifies and reduces risks regarding financial, human resources, technological, political etc. It increases financial security and excellence, helps to focus on the future rather than the past, ensures control over the organization and resources, maximization of profit, minimizes cost from savings, time savings, helps proper evaluation of performances, managing large employee groups. It maintains discipline and ensures safety of employees and resources, helps to deal with operations related to supply chain and ensures good corporate governance. VIII. CONCLUSIONS AND FURTHER RESEARCH This study aims at obtaining a concrete idea on the efficiency and effectiveness of internal control practices in the readymade garments sector in Bangladesh. The developing process of Bangladesh is mainly owed to its RMG sector. The majority of foreign export income comes from this sector. Thus it has an enormous role on our economy. But the recent unrest in this sector triggers some conscious evaluation it’s sustainability. The unrest for minimum wage increment, undesired fire breakouts and political interventions are some of the examples of recent tensions. To fight against this and to ensure the long lasting presence of this promising sector, internal control systems should be strengthened. This study tries to find the present situation in this respect. Among the eighteen questions asked the respondents, most were found to be quite satisfactory. But there were some alarming

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situations as well. Less than 50 % of respondents think that  the institution is actually not maintaining conservatism while choosing from alternative accounting policies,  there is no proper separation programs for employees who leave the firm and  employees are not bonded who have access to cash and negotiable instruments. This study includes respondents from management only. No relationship has been developed between the benefits derived from the internal control practices and the costs involved. This raises a further study covering respondents from representatives of management, labor and regulatory groups. A cost benefit analysis can be shown as well. Another research area can be the relationship between organizational profitability & efficiency of internal controls, so as to verify the contribution of internal control on profitability. REFERENCES Ashbaugh-Skaife, H., Collins, D., Kinney, W., LaFond, R., 2008. Internal control deficiencies, remediation and accrual quality. The Accounting Review 83 (1), 217–250. Beneish, D., Billings, M., Hodder, L., 2008. Internal control weaknesses and information uncertainty. The Accounting Review 83, 665–703. Birnberg, J.B., Shields, M.D. and Young, S.M. 1990. The case for multiple methods in empirical management accounting research (with an illustration of budget setting). Journal of Management Accounting Research, Fall, 33-66. Delahanty, Julie, 1999. A Common Thread: Issues for Women Workers in the Garment Sector, report prepared for the Global Markets Programme of Women in Informal Employment: Globalizing and Organizing. Ottawa, North-South Institute. DeFond, M., Raghunandan, K., Subramanyam, K.R., 2002. Do nonaudit service fees impair auditor independence? Evidence from going concern audit opinions. Journal of Accounting Research 40, 1247–

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1274. Doyle, J., Ge, W., McVay, S., 2007b. Determinants of weaknesses in internal control over financial reporting. Journal of Accounting and Economics 44, 193–223. Feng, Mei; Li, Chan and McVay, Sarah, 2009. Internal Control and Management Guidance. Journal of Accounting and Economics, pp 1-50. Haider, Mohammed Z., 2007. Competitiveness of the Bangladesh Ready-made Garment Industry in Major International Markets, Asia Pacific Trade and Investment Review, Vol 3 No 1, June. Pp3-26. Lang, M., Lundholm, R., 1996. Corporate disclosure policy and analyst behavior. The Accounting Review 71 (4), 467–492. Neimark, M. & Tinker, A.M. 1986. The Social Construction of Management Control Systems. Accounting, Organisations & Society, 11, 4-5: 369395. Paul-Majumdar, Pratima, 2001. ‘Occupational Hazards and Health Consequences of the growth of garment industry in Bangladesh’, in Pratima Paul-Majumdar and Binayak Sen, eds., Growth of Garment Industry in Bangladesh: Economic and Social Dimensions (Dhaka, Bangladesh Institute of Development Studies and Oxfam GB, Bangladesh). Robbani, M Golam, 2000. World Trade Organization and The Readymade Garment Industry of Bangladesh: A critical Analysis, Journal of Bangladesh Studies, University of Pennsylvania, USA, pp 16 - 27. Rogers, J., Stocken, P., 2005. Credibility of management forecasts. The Accounting Review 80, 1125–1162. Wilkinson, Joseph W. and Cerullo, Michael J., Accounting Information Systems, Fourth edition, John Wiley & Sons, Inc. pp 247-364. Willis David M. and Lightle Susan S., 2000. Management Reports on Internal Controls- What do they say about your company? Journal of Accountancy, AICPA.

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