INTERNAL ACCOUNTING CONTROL SYSTEMS, REGULATORY FRAMEWORK AND FINANCIAL PERFORMANCE OF DEPOSIT TAKING SACCOS IN KENYA

Abstract

The internal accounting control system is the foundation of an effective system of internal control. Most of the well-publicized failures including not only Enron and WorldCom, but also the governance failures that led to the 2008 financial crisis were, at least in part, the result of weak internal accounting control system. In the absence of a demonstrably effective internal accounting control system, no level of “design and operating” effectiveness of controls within business can provide meaningful assurance to stakeholders of the integrity of an organization’s internal accounting control structure. The main objective of the study was to determine the effects of internal accounting controls on financial performance of deposit taking Sacco’s in Kenya. Specifically, How; Risk assessment, Accounting information system, Monitoring and control activities, control environment, and the moderating effect of regulatory frame work affects the financial performance of Sacco’s in Kenya. The study employed mixed research design targeting 175 Sacco’s with 875 respondents. A purposive sampling technique was used The participants were chosen based on the purpose, hence the name CEO, Finance Managers, Risk Managers, ICT Managers and Internal Auditor. Data was collected by use of both Primary and secondary techniques. A pilot study was conducted to establish validity and reliability of research instruments. Primary data collection was by use of questionnaires while secondary data involved documentary analysis to capture information on financial performance. Pilot study was conducted in Nairobi County. Validity was achieved using content and construct validity where KMO value was 0.870 which signified factor analysis was appropriate. Cronbach Alpha was applied to establish reliability which had a range between 0.848 to 0.916 for each variable. Data was analyzed by use of descriptive and inferential statistics. Descriptive analysis included; frequencies, Mean, standard error, Standard deviation and percentage while inferential analysis involved regression analysis. Prior to conducting regressions, the study ensured that the assumptions of regression are met through normality test, auto correlation test, Multi Collinearity and Homoscedastic. From the results, the test criteria were to reject the null hypothesis if the value of beta is not equal to zero (β1 ≠0). From the results, the beta value for risk assessment control from the regression model was 0.323 at p< 0.05. Risk assessments explains 58.4% (R2 =0.584) of variance in financial performance of DTS in Kenya. Therefore the hypothesis was rejected; the beta value for Accounting Information System from the regression model was 0.126 at p< 0.05. Accounting Information System explains 43.7% (R2 =0.437) of variance in financial performance of DTS in Kenya. Therefore the hypothesis was rejected; the beta value for management and control activities from the regression model was 0.094 at p< 0.05. Management and control activities explains 43.0% (R2 =0.430) of variance in financial performance of DTS in Kenya. Therefore the hypothesis was rejected; the beta value for control environment from the regression model was 0.218 at p< 0.05. Control environment explains 53.4% (R2 =0.534) of variance in financial performance of DTS in Kenya. Therefore the hypothesis was rejected. The study established a statistically significant correlation between internal accounting control systems and financial performance of deposit taking Sacco’s in Kenya. The findings of the study forms basis for reference in future by interested parties.