Internal Control System, Innovation, Tax Compliance And Performance Of Small And Medium Enterprise Projects In Machakos County, Kenya

Abstract

Small medium enterprise projects contribute a big percentage of gross domestic products through job creation to a large population leading to poverty reduction. They also act as a conduit in adopting of innovative technology characterized by new products in both developed and emerging economies. The purpose of this study was to; establish the extent to which the five constituents of internal control system, innovation and compliance to tax influence performance of SME projects in Machakos County, Kenya. Specifically this study sought to determine the extent to which control activities influence performance of SME projects in Machakos County; to establish the extent to which information system influence performance of SME projects in Machakos County; to determine the extent to which control environment influence performance of SME projects in Machakos County; to establish the extent to which risk assessment influence performance of SME projects in Machakos County; to assess the extent to which monitoring influence performance of SME projects in Machakos County; to examine the joint influence of internal control system on performance of SME projects in Machakos County; to examine the influence of innovation on the relationship between internal control system and performance of SME projects in Machakos County and to assess the influence of tax compliance on the relationship between internal control system and performance of SME projects in Machakos County. This study utilized both positivism philosophical point of view and descriptive survey research design respectively. The eight hypotheses were tested at 95% confidence level using multiple, stepwise and hierarchical regressions models. The sample size was 265 out of a population of 5311 small and medium enterprise projects located in Machakos County whereby both stratified and convenience sampling methodologies were used as per Yamane (1967) formula guideline. Data was collected using a structured questionnaire whereby drop and pick methodology was applied. The research outcome depicted that control activities, information system and monitoring had significant influence on financial performance perspective with β=-10.2%(p˂.05); β=19.6%(p˂.05); β=27.6%(p˂.05) respectively while control environment and risk assessment had insignificant straight influence of β=9.7%(p˃.05) and β=13.9%(p˃.05) in that order. For non-financial perspective, information system, control environment and monitoring had significant influence of β=15.1%(p˂.05);β=12.9%(p˂.05) and β=31.6%(p˂.05) correspondingly. Whereas, control activities and risk assessment were insignificant with β=-6.1%(p˃.05) and β=1.9%(p˃.05) respectively. The joint internal control system had statistically significant influence on SME project performance in Machakos County with both financial performance and non-financial F=7.084(P=.000) and F=5.666(p=.000). Innovation intervened the relationship for it explained more on variations of financial and non-financial performance by 0.209 and 0.133 than ICS. Tax compliance moderated the link between ICS and SME project performance in Machakos County. The utilization of the five components of ICS instead of some of the components resulted to significant influence to performance of SME projects in Machakos County. Management of SME projects should endeavor on improving the insignificant components of ICS so as to establish effective internal control system to enhance productivity. Further exploration is indispensable to interrogate what causes disparities in ICS constituents influence on both financial and non-financial performance.