The Effect of Internal Audit on Financial Performance of Microfinance Institutions in Kenya

Abstract

This current study's objective was to determine the effect that internal audit has on financial performance of microfinance institutions in Kenya. The study measured internal audit using internal audit standards, independence, professional competence and internal audit control. A descriptive research design was adopted. The study’s population constituted of 55 microfinance institutions and a census approach was adopted. Data was collected from both primary and secondary sources. Questionnaires were administered to collect primary data while secondary data was obtained from the annual financial statements of the microfinance institutions. From the questionnaires distributed, there was a response rate of 83.64%. Statistical Package for Social Sciences (SPSS), was used to analyze the data gathered. Mean and standard deviation were the descriptive statistics used to analyze the data. Regression analysis and correlational analysis were the inferential statistics utilized to establish the relationships between the dependent and the independent variables. Tables and graphs were used to present the findings. The research findings showed that independence of internal audit, internal audit standards, and professional competence had a positive relationship with MFI’s financial performance. It was established that internal audit accounted for 28.4% of the financial performance of MFIs. At 0.05 significance level, only independence of internal audit was statistically significant. The study therefore concluded that internal audit had an effect on MFI’s financial performance as supported by a significance value of 0.007. The study recommended that MFIs should be sensitized on the importance of internal audit independence in order to improve financial performance and to have reliable financial reports. MFIs should also employ competent internal auditors and remunerate them fairly to improve the quality of the internal audit reports. The study recommends that a similar study be carried out in commercial banks offering microfinance services so that there can be comparison and generalization of the findings in this study.