Effect of internal control practices on the financial Performance of agro-processing firms in Kisumu county,Kenya

Abstract

Internal controls are processes planned and implemented by management in order to give rational assurance concerning the financial performance of a firm based on its objectives in respect to operational efficiency and compliance of existing rules and regulations. The main objective of the study is to determine the effect of internal control practices on the financial performance of agro-processing firms in Kisumu, Kenya. The specific objectives are based on these perspectives; control environment, risk management, internal control activities, information and communication and monitoring on financial performance of agro - processing firms in Kisumu, Kenya; whereas financial performance focused on profitability. However, there are limited empirical research findings regarding the relationship between the internal control system and financial performance. In agro-processing firms in Kisumu, Kenya, there have been many weaknesses in regards to; safe guarding of the firm’s assets, accuracy and reliability of accounting records and information, promotion of efficiency of the firm’s operations as well as staff compliance with management prescribed policies and procedures. Most agro-processing firms have therefore registered declining financial performance due to weakened internal control practices which emphasis the fact that internal controls have a significant impact on financial performance. The study will contribute to the present body of knowledge on internal control practices and financial performance of agro-processing firms in Kenya. The study adopts correlation research design, which states that there is relationship between variables. The target population for the study was comprised of employees in the agro-processing firms, which total 66 operating within Kisumu County. The study was guided by agency theory, stewardship theory and positive accounting theory; Data was collected from secondary and primary sources thus from relevant documents, such as county government reports, publications and the journals using structured questionnaires. The researcher used stratified sampling method, which ensured that all the strata present in the total population was represented and simple random sampling given that no complexities will be involved. Validity and reliability of questionnaire were tested on pilot data targeting 7 respondents. Regression and descriptive analysis were used to establish the effect thereby addressing all the objectives and hypothesis. The finding indicated that regression model show that there is a positive relationship between internal controls environment, risk assessment, monitoring, information and communication, control activities and financial performance of agro processing firms; as indicated by the variables internal control environment (β=0.993, P<0.00) risk assessment, (β=0.92 P<0.00), control activities, (β=0.867, P< 0.00) information and communication (β=0.897, P<0.00) Monitoring (0.719, P<0.00). The study recommends that internal and external auditors should be constantly updated and well conversant in international financial reporting standards (IFRS) and principles, in order to enhance their knowledge and skills in application of accounting practices and to keep them updated on the contemporary issues. The audit committee in support from top management should ensure that internal control practices in the firms should be adequately improved, monitored periodically and evaluated to foster the efficiency of the firm’s operations, transparency and accountability that will in turn lead to improved financial performance.