Effect of Internal Control Practices on Financial Performance of Commercial State Corporations in Kenya

Abstract

As a corporate governance mechanism, the function of internal control practice is becoming more important due to the change in technology, increasing business risks and the complexity of business transactions. The agency theory supports the existence of an internal control mechanism to improve an institution's financial performance. The contingency theory, however, maintains that the success of an organization, since no comparable organizational structure applies to other organizations, depends on an efficient internal control mechanism. This demonstrates that institutions should concentrate heavily on internal issues by improving their internal control mechanisms in order to improve their financial performance. This study sought to establish the effect of internal control practices on financial performance among commercial state corporations in Kenya. The study was guided by three theories namely; agency theory, accountability theory and attribution theory. A descriptive research design was adopted. The population of the study was the 54 commercial state corporations in Kenya. The study collected both primary and secondary data. The unit of analysis was the head of internal audit in each commercial state corporation. Data analysis involved descriptive, correlation as well as regression analysis. The independent variables for this study were control environment, control activities, monitoring, risk assessment and information and communication systems while the dependent variable was financial performance. The regression results revealed that 63.8% of the variation in financial performance can be attributed to the 5 selected variables in this study. It was evident from the Anova table that the degree of significance was 0.000. This value was less than the p value of 0.05. Consequently, the model was therefore statistically significant for predicting financial performance based on internal control practices. Individually, control environment, control activities, monitoring and risk assessment were found to be significant determiners of financial performance while information and communication system did not have a significant effect. The study recommends the need for policy makers to come with guidelines and policies guiding commercial state corporations on internal control practices. The management of commercial state corporations should hire qualified and competent employees who will be able to successfully implement the formulated risk assessment strategies as this will be a sure way of enhancing financial performance.