SOUTHWEST REVIEW OFINTERNATIONAT

BUSINESS RESEARCHVol.22, No, 7, March 201 I

AIBSW Conference Proceedings of the annualmeeting held in Houston, Texas, March 9-72, 2t011

Go-Edited by:

Dr. Faiza Khoja, U. of Houston-Do,wntownDK. Anisul M. lslam, U. of Houston-Downtown

.d' .-.:..q.-

SOUTHWEST REVIEW OFINTERNATIONAL BUSINESS

RESEARCHVol. 22rNo. lrMarch 201 1

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Yll

INTERNAL CONTROL PRACTICES OF RMG SECTOR IN BANGLADESII

Anup Kumar SahaEast West University

ABSTRACT

Internal control has a pivot role in ensuring sustenance of any industry. Readymade gaments (RMG)

*" tfr" rcVrontributois in the economy of-Bangladesh and thus its long term sustainability is of much

interest to our economy. This study has found many variables for internal control practices in this

sector. These vary from maintenance of employees' job descriptions to bonding of employees with

special access. hmany variables these comfanies are practicing acceptable level of internal control,

while in some others i*y u." not doing so good and have ample scope to improve' RMG sector is

mainly populated with soie proprietorship firms and they are normally careless of such practice. Even

then the .orr""* for internal control is to be implemented in all phases to ensure long lasting role in

the economy of Bangladesh.

INTRODUCTION

The role readymade garments (RMG) in the economy of Bangladesh can not be denied. RMG sector has the

biggest contribution behind the growing economy of this country. The industry has contributed to export ea1nings,

foiJign exchange earnings, "*pi=oy-"nt

creation, poverty alleviation and empowerment of women (Haider, 2007)'

rhui lts sustai-nability is of much importance for-the development of this economy. Internal control is one of the

main ingredients to ensure the long term sustainability of any institution. It helps to ensure the attainment of the goal

and strive towards the goal. Thus the internal controi practice pursued by the RMG sector is one of the key players

r*,hich decide the sustainability of this sector. This study is to test the internal control practice in this sector which is

one of the deciding factors for its surviving.

STATEMENT OF THE PROBLEM

Bangladesh depends a lot on its RMG sector for the export income. The main player behind its continual strive

for develo-pment is mainly the RMG sector, if not solely. This is why the sustainability of this highly valuable sector

is of much concern. Orritris ground, this study has put forth its efforts to fnd out the vigilance of internal control

system and policy of the RMG sector.

OBJECTTVE OF TIIE PAPER

The objective of this paper is to find out the dynamism of the internal control (IC) practice in the RMG sector

rn Bangladesh. In this stuiv, both strengths and wlaknesses have been focused on to get a clear view of the IC

practice.

LITERATURE REVIEW

The ready-made garment (RMG) industry of Bangladesh started in the late 1970s and become a prominent

player in the economy tiritttfu, u rilort period of time (Haider, 2007). He also found that Bangladesh needs to improve

rhe factory working environment and various social issues related to RMG sector'

Delahanty (1999) said found that 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 in this sector'

Moreover, according to Paul-Majumdar (2001) rented factory premises, naffow staircases, low roofs, closed

environments, absence oilunch rooms, unavailability of clean drinking water andng sgpalate toilets or cofilmon

ro,oms for female workers are other conaerns in the garment factories of Bangladesh. These ate all physical

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Southwest Review of International Business Research. Vol. 22. No. 7, March 2011

shortcomings that threatens 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.

Saying it all, there is no such study focusing on the RMG sector, neither intemationally nor locally, to reviewthe internal control practices which go a long way to ensure the sustainability of the sector. Though there are somestudies of physical problems in RMGs, lack of study on the system practices and development calls for a pioneeringresearch in this arena.

RATIONALE OF THE STT]DY

Readymade garments industry is very important for Bangladesh and its development. RMG is a success storyso far for Bangladesh (Robbani, 2000). Recently, the pressure for increasing labor wages both from labors andregulatory body has skeptic influence over this sector. The costs involved getting higher and taking the sustainabilityat stake. The recent unrest for increasing labor wages has turned the situation more vulnerable with some politicalbackups. All these risk- factors call for a pioneering study on the control system of this sector, so that it may be ableto manage and control any likely adverse situation in future.

METHODOLOGY f,'OR THE STUDY

The study was based on questionnaire survey. In this pu{pose a separate questionnaire was prepared. Thisquestionnaire consists of about 18 separate questions. These questions were primarily close ended providing amplescope to explain as well in a separate space. With a view to getting an overview of the current situation about 52respondents were interviewed from 2l orgarizations or garments. The questions have been categorized under fivebroad categories. These are as follows:

l. Management philosophy and operating style2. Organization structure3. Assignment of Authority and responsibility4. Human resource policies and practices5. Cost Benefit Analysis

Under all the perspectives there are separate question(s) for the respondents. Respondents are the members oftop management ofthe chosen companies. These companies have been chosen on a convenient basis.

ANALYSIS OF THE STI]DY FINDINGS

The internal control structure of the companies has been analyzed from five different perspectives. All theseperspective seems to have very dynamic characteristics.

Management philosophy and operating styleSeventy five percent of the respondents said that they emphasize short term profits and operating goals

even to detriment long term goals and only the rest twenty five percent emphasizes long term goals. This is quite a

shocking finding ofthe research and this practice should be reconsidered.

Half of the companies are dominated by only one or few individuals, limiting greater participation rndecision making. On the other hand, thirty seven percent of the companies have quite healthy practice and havegreater participation in their management. While the rest l3oh preferred not to answer this question.

Of the studied companies, 44Yo are conservative toward selecting accounting policies. Same proportion ofthe respondents (44%) said they are aggressive in selecting from available alternative accounting policies. Theythink that aggressiveness is necessary for profitability. Rest twelve percent denied responding to this question.

Organization structureMajority of the organizations (83%) have an up to date organogram showing the names of the key

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$fuRab- orlatendbnol By4qi,,,xs R(r'e,,,ttl VoL 22. No. I. Ms,ch 20It

personnel' Rest of the firms does not have any such organization chart which shows the key personnel in thecompany.

Sixty percent of the RMG companies have separate and distinct intemal audit function from the accountingx'orks' In thirty eight percent of those companies, the internal audit and accounting activities are done by samepersons' This indicates that these companies do-nothave any segregation ofduties and the works done are not crosschecked, which increases the likelihood of any fraudulent aciivitlsln the company. The rest 2yo optednot to answerthis question.

In half of the companies surveyed, subordinate managers report to more than one superior. rn 44yoof suchcases' subordinates have only one superior for reporting prrpo.". Tire rest six percent respondents did not answerIhis question. ,

Assignment of authority and responsibilifyQuite a big portion (92%) of the companies surveyed, have written job descriptions for its employeesdefining specific duties and reporting relationships._only u r*utiportion (6%) ioes not hive such job description.without definite job description there may show up lack of direction, goal and enthusiasm. Rest tow percent of suchrespondents remained silent about this question.

Sixty nine percent respondents said that there is a requirement for written approval before any changes canbe made to present information systems. A quarter of the resplndents denied having any such existing requirementsin their company. Rest six percent did not respond to this query.

Seventy four percent of the companies clearly delineate the boundaries of authority and responsibilityrelationship to employees and managers. ualf of the_resltwenty six percent do not have delineation of authority andresponsibility to employees and managers and other half (13%) did not respond to the question.

In sixty two percent of the companies, there is a system of proper delegation of authority to employees anddepartneents' on the other hand, twenty three.percent olthe companies do not have such systematic delegationsystem of authority. Here, l5%o respondents decided not to answer.

Human resource policies and practicesEighty five percent of the companies indoctrinate their new employees with respect to internal controls,ethical policies, and corporate code of conduct, whereas, in 8% of companies such indoctrination is not present.Absence of such an induction program to new employees may have an adverse effect in terms of control andachievement of intended goal. In this case i% decideinot to respona.

Grievance procedure should be in action to_ maintain a healthy environment within any organization. In thisstudy, findings revealed that 56%o companies have this practice in ,ome i"; i;;; irrr"" p".t",,, of the companieshave not implemented any such facility for their employees. The remaining l l% of the respondents preferred not tostate anything regarding this issue.

A sound employee relations program is maintained by 90% of the companies, which show their seriousconsideration regarding healthy employee relation within the orgarizatLon. only six percent of the companies do nothave any program in action for maintaining healthy relationshiiamong it employees. The other four percent of therespondent remain silent regarding this matter.

The respondents said that in eighty five percent of the cases employees work in safe and healthyenvironment' It should be remembered that all the respondents are from management group in this study of internalcontrol' So, the responses from them show that their organizations are maintaining safe and healthy environment inworkplaces' Though, the recent unrest in garments secior for up gradation of miiimum wages un reils some otherfacts as well' one of these is lack of safety in the workplaces. tvtariy fire breakouts were there. These events indicatethere is still a long way to go to maintain a safe and healthy work environment. of the remainin g l5%o of therespondents, l3o/o admits that safety and healthiness in rvorkplu"" has not been still implemented in theirorganizations. Only two percent decided to forgo this question.

ts5

In 62% of the cases, counseling program is said to be available and in action. One fourth of the respondentssaid that counseling program is not still in place for the employees, while the remaining l3%o were silent when askedabout this issue.

Employees who leave the institution for number of reasons should be separated in a planned and wellorganized way. The reasons include personal reasons, better opportunity, change ofcareer, grievance from presentjob etc. All those employees who leave should be properly separated through a well manag"td p.og.u-. This wouldensure the confidentiality of information and goodwill of the company. It is essential to maintain a good control overinformation resources. Less than half of the respondents said that they have such separation programs in force foremployees vdro leave the firm. Around 38olo answered the other way and l5Yo wereunaware of ro"t program.

Employees who have access to cash and other negotiable instruments are bonded in thirty seven percent ofthe cases. On the other hand, thirty eight percent of the companies do not have any such policy to bond

"-*ploy"",having such access to cash and negotiable instruments. Remaining one fourth of the respondents did not answer thisquestion. This may be due to the skepticism against bonds.

Cost Benefit AnalysisOverall, seventy six percent of the respondents think that internal control practices offer benefit greater

than the cost involved to the organization. While eight percent of the respondents think otherwise. Here,-aboutsixteen percent of the respondents are not sure of the effect of internal controi system on the organization.

Speaking of the benefits derived from superior internal control policy in the organization several viewpoints have come up, such as- it helps in decision making, increases efficiency of internal olerations, identifies andreduces risks regarding financial, human resources, technological, political etc, increases financial security andexcellence, helps to focus on future rather than past, ensures control over the organization and resources,maximization of profit, minimizes cost from savings, time savings, helps proper eviluation of performances,managing large employee groups, maintains discipline and ensures safety oi employees and ."ro.r.""r, helps to dealwith operations related to supply chain and ensures good corporate governance.

CONCLUSION AND SUGGESTIONS FIIRTHER RESEARCH

This study aims at obtaining a concrete idea on the efficiency and effectiveness ofinternal control practices inthe readymade garments sector in Bangladesh. The developing process of Bangladesh is mainly owed to its RMGsector. Majority of the foreign export income used to come from this sector. Thus it has an enoflnous role on oureconomy. But the recent unrest in this sector triggers some conscious evaluation of the sustainability of it. Theunrest for minimum wage increment, undesired fue breakouts and political interventions are some of the examplesof recent tensions. To fight against this and to ensure the long lasting presence of this promising sector, the controlsystem should be strengthened. The need for strong internal control is growing ever increasingiy. Thus, this studytries to find out the present situation in this respect.

Among the eighteen questions asked to the respondents, most of them were found quite satisfactory. But thereare presences of some alarming situations as well. Less than fifty percent of the respondents think that -

r the institution is actually not maintaining conservatism while choosing from alternative accountingpolicies,

o 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 respondent group from management only. No relationship has been developed between thebenefits derived from the internal control practices and the costs involved. This Lt ig.r", a furthei study coveringrespondents from representatives ofmanagement, labor and regulatory groups. A cost benefit analysis .u' b" shownas well. Another probable research area can be the relationship beiween organizational profitability andeffectiveness & effrciency of internal control put into place in that orginization to ,".i4, th" contribution of internalcontrol on the profitability.

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