Effect of Internal Control Systems on Financial Performance of Commercial Bank Branches in Bomet and Kericho Counties, Kenya

Abstract

Internal control systems in every organization are paramount. Either in profit making organizations or not for profit organizations including churches, schools and nongovernmental organizations, charitable organizations not excluded. In the recent past there has been failure of some of the largest commercial banks in Kenya to prevent loss of funds. This trend puts into question the ability of the internal control systems to steer the commercial banks stability and performance. The recent failures to detect and prevent loss of funds have put pressure on the industry regulators and players to rethink how best the institutions can align their internal control systems and compliance as tools of ensuring stability and positive performance. This study seeks to assess the effect of internal control systems on financial performance of selected commercial banks in selected counties in Kenya. The researcher reviewed related literature which is the work of other scholars who have undertaken the study on the same topic. The main objective was to ascertain the effect of internal control systems on financial performance of selected commercial banks in selected counties in Kenya. The researcher adopted both causal and correlation research designs. The population of 86 staff working in branches of commercial banks in Bomet and Kericho Counties was targeted. 19 Branch managers, 13 Assistant managers, 9 credit managers and 45 tellers working in the branches of commercial banks constituted the respondents for the study. The researcher used data from primary sources of information to aid in the research study. Data collection instrument that the researcher used was the questionnaire. The study used non- probability sampling technique (convenience sampling) to select the counties and branches of commercial banks. Census method was preferred by the researcher to select staffs as the population was small. Therefore, there was no sampling of the staffs. Data was analyzed by use of correlation and descriptive statistics with aid of SPSS. The findings were presented in form of tables, pie charts, bar graphs and percentages. Validity of the instruments was undertaken through a review of the instrument by an expert. Reliability of the instrument was tested by Pearson coefficient of correlation. The results of the reliability test showed correlation coefficients r above 0.70, indicating that the instrument was reliable. The study findings showed that the predictor variables explained 54% of the variability in financial performance as illustrated by coefficient of determination (R Square). The findings also indicated that control environment has a negative and insignificant effect on financial performance t (72) = -1.874, P=0.065; financial performance positively and significantly relate with risk assessment t (72) = 2.608, P<0.05; information and communication systems positively and insignificantly affect financial performance t (72) = 1.034, P=0.305; control activities positively and significantly affect financial performance t (72) = 3.462, P<0.05 while monitoring negatively and significantly affect financial performance of branches of commercial banks t (72) = -6.440, P<0.05. The study concluded that all the components of internal control systems affect financial performance either positively or negatively as showed by beta coefficients. The study further concluded that control environment has negative and insignificant effect on financial performance; information and communication systems positively and insignificantly affect financial performance; risk assessment and control activities positively and significantly influence financial performance while monitoring influence financial performance negatively and significantly. The study recommends that components of internal control systems which positively and significantly affect financial performance should be implemented and strengthened by the management. Those components of internal control systems which have positive effect but not significant should be reviewed and those aspects which cause insignificant effect within such components be replaced by alternative and related aspects which are deemed to address such insignificance. Further, those components which affect financial performance negatively and significantly like control environment should be addressed by the management through incorporating aspects which will bring the positive influence on financial performance. The findings of the study were deemed to benefit branches of commercial banks from where the data was collected, as various important recommendations touching on internal control systems would be offered to them.