The Relationship Between Internal Controls and the Financial Performance of Cement Manufacturing Companies in Kenya

Abstract

Large and small organizations have in place systems of controls for efficient and effective running of their businesses to achieve their goals. Internal control systems are becoming indispensable in both private and public sectors in modern world because of evolving complex methods of doing business involving technology, and increased size of business units. The study sought to determine if a relation between components of internal controls performance in terms of ROCE of Kenyan cement manufacturing companies exist. The research employed descriptive survey design. Four companies were selected out of 7 registered cement manufacturing companies. Data for the study was gathered using a questionnaire. The study also used published financial statements as a source of secondary data. An oral interview was used to obtain information that was not obtained through questionnaires. Regression analysis was used to find if a relationship between internal controls and financial performance as measured by ROCE exists. Statistical package for social sciences analyzed the data gathered through questionnaires. The results revealed that a positive relation exists between control environment, risk assessment, control activities, information and communication and monitoring with financial performance (ROCE) of cement companies incorporated in Kenya. The five components of internal control (control activities, risk assessment, control environment, monitoring, information and communication) were significant with values of less than 5% implying that all variables were statistically significant. Further the coefficient of determination indicated the independent variables contributed to 51.6% of the variation in financial performance as was explained by of 0.516 implying the model was a good predictor. The study concluded that a positive relationship exists between internal controls and financial performance of cement producing companies incorporated in Kenya. Companies that had effective internal controls experienced improved financial results.