Relationship between auditing practices and financial performance of star rated hotels in Kisumu, Kenya

Abstract

Auditing practices aim to minimize financial losses and pilferage through misstatement of financial records in a firm. The hotel industry has proved to be very competitive globally, with worrying declining trends being witnessed in some areas within Kenya. During 2019 – 2021, hotel enterprises in Kisumu County of Kenya have been facing annual declines in revenue of over 23%, more than national rate of 12%. During the same period, more than 20% of hotel firms which had been operating in the area (Kisumu) for the last 10 years closed down due to low revenue.Whereas increased competition, oversupply and security advisories have been documented to be factors affecting hotel industry, the contribution of auditing practices in enhancing financial management has been overlooked. Prior studies have focused on fraud detection, internal control mechanisms and segregation of duties among firms. The purpose of this study was to analyze the relationship between auditing practices and organizational performance among star rated hotels in Kisumu City, Kenya. The specific objectives were to assess the relationship between internal control monitoring and financial performance, establish the relationship between compliance with authorization monitoring and financial performance and determine the relationship between independence of the auditor and financial performance. The study was guided by agency and stewardship theories. A correlational research design was employed. The study target population was 144 sectional heads from 9 star rated hotels whereby,14 respondents were used for piloting and excluded for final data collection exercise. All the remaining 130 respondents were used as the sample size of study. Primary data was collected using structured questionnaires. Reliability of questionnaire was tested through Cronbach’s’s alpha using data gathered from pilot study, and a reliability coefficient of 0.81, 0.74, and 0.73 obtained respectively for internal control monitoring, compliance with authorization and approval, and independence of the auditor. Validity was enhanced through consultation with experts from accounting and finance department during questionnaire construction. Data was analyzed using descriptive and inferential statistics. The findings showed that 76.7% of the changes in finanancial performance is attributed to the auditing practices investigated by the study (R2 =0.767). The study additionally established internal control monitoring (β=0.936); compliance with authorization and compliance (β=1.188), and independence of the auditor (β=0.088) are significant predictors {F (1, 119) =105.295, P<0.05} of financial performance among the star rated hotels. This implies that unit improvements in these practices stand to cause significant improvement in financial performance in the hotels. The study concludes that while internal control monitoring and independence of the auditor influence financial performance of star rated hotels differently, compliance with authorization & approval procedures has universal influence on financial performance of the enterprises. It is recommended that star rated hotels should benchmark for best internal control practices in the sector, while more working autonomy should be accorded the auditor so as to enhance independence oversight of business activities. Further researcher should be done to investigate how benchmarking-based internal control practices influence financial performance of star rated hotels in the study area.