Effect of Internal Controls on Financial Performance of Commercial Banks in Kenya

Abstract

Internal controls remain a major factor even with the growth of Kenyan banking sector performance. Effective internal controls ensure disclosures are made by the business entities as desired by the stakeholders, shareholders’ rights are protected and monitoring of management decisions is effective. Internal controls enhance independent investigation on the level of performance by the management in performing the allocated roles aimed at improved financial performance of the firm This investigation tries to address the influence of internal controls on profitability of commercial banks in Kenya. CBK database and financial statements published between 2014 to 2018of the 40commercial banks were key information sources for the researcher with a focus on net profit, assets, deposits, liabilities, Equity among other pertinent information in the notes to the accounts and proportion of expenditure allocated to each internal control component. Descriptive statistics and correlations between the factors were done. ANOVA and F-Statistic at a significance of 5%level was utilized to decide the regression model significance while modified R-square, was utilized in establishing the extent of variability in financial performance showed by variables which are independent. The study results revealed that how commercial banks perform is contributed by internal controls. Therefore, the management should ensure effective and efficient internal systems are enacted including risk assessment and control activities and risk assessment in form of procedures and regulations are in place. Regular assessment of the two components that involves internal controls should be undertaken to ensure they are effective and adequate to maximize risk detection.