Influence of Internal Control Systems: Financial Performance of Kenya


International Journal of Economics, Commerce and Management
United Kingdom Vol. IV, Issue 4, April 2016

Licensed under Creative Common Page 783 ISSN 2348 0386




J. K. Magu

School of Business, Jomo Kenyatta University of Agriculture and Technology, Kenya

[email protected]

P. Kibati

School of Business, Jomo Kenyatta University of Agriculture and Technology, Kenya

[email protected]


Internal control systems are put in place to ensure safe custody of all assets, detect and

safeguard against probable frauds. Kenya Farmers Association (KFA) Limited is struggling with

liquidity problems, untimely financial reports, and inefficient accountability for the firm’s financial

resources. Objective of this research was to establish the influence of internal control system on

the financial performance of KFA Ltd. In this study, internal control systems were reflected by

two variables; control environment and control activities. Target population was 78 managers in

this explanatory research. Census design was adopted. Data were analyzed using inferential

and descriptive statistics. The results revealed that the staffs were not trained to implement the

accounting and financial management systems; and that the security systems do not identify

and safeguard organizational assets. The results further showed that there is a positive

relationship between internal control systems and financial performance of KFA Ltd. The control

environment and control activities contributed to 61.3% of the variation in financial performance.

Study found that management of KFA Ltd is not committed to the internal control systems

actively. The study recommends more commitment by management in monitoring internal

control systems, and employment of more graduates.

Keywords: Control activities, control environment, financial performance, internal control

systems, Kenya Farmers Association Limited

IJECM, United Kingdom

IJECM, United Kingdom

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Firms are always keen on their financial performance and they usually engage in activities to

appraise their financial performance and thus, make changes in their operations (Visser, Matten

& Pohl., 2010). However, it is evident that there are some firms that are considered more

successful than others. Similarly, there are firms that have traditionally adopted different

methods to improve their financial performance, and these have made them more successful

than other firms.

Recent research on internal controls in Belgium illustrated the importance of the control

environment when studying internal control systems. Research has found that certain control

environment characteristics like tone-at-the-top, level of risk and control awareness, clearly

defined and communicated are significantly related to the role of the internal control system and

fraud detection within an organization( Sarens & De Beelde, 2006)

If an organization pursues integrity and clear ethical values reflected in a formal code of

conduct, the internal control will take a greater importance (Saren & Beelde, 2008). A study was

done to establish the impact of internal control design on banks’ ability to staff fraud and staff life

style and fraud detection in Nigeria. Data were collected from 13 Nigerian banks using a four

point like Scale questionnaire and analyzed using percentages and ratios. The study found that

Internal control design influences staff attitude towards fraud such that a strong internal control

mechanism is deterrence to staff fraud while a weak one exposes the system to fraud and

creates opportunity for staff to commit fraud (Ewa & Udoayang, 2012)

A research was conducted by Mawanda (2008) on influence of internal control systems

on financial performance of an institution of higher learning in Uganda. Internal controls were

looked at from the perspective of control environment, risk assessment, Control Activities,

information and communication and monitoring process whereas financial performance focused

on liquidity, accountability and reporting as the measures of financial performance. The

researcher set out to establish the causes of persistent poor financial performance from the

perspective of internal controls. The study established a significant relationship between internal

control system and financial performance. The study recommended competence profiling in the

Internal Audit department which should be based on what the firm expects the internal control

system to do. The study therefore acknowledged the role of internal audit department to

establish internal controls which have an effect on the financial performance of organizations.

Olumbe (2012) conducted a study to establish the relationship between internal controls

and corporate governance in commercial banks in Kenya. The researcher conducted a survey

of all the 45 commercial banks in Kenya. It was concluded that most of the banks had

incorporated the various parameters which were used for gauging internal controls and

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corporate governance. This was indicated by the means which were obtained enquiring on the

same and this showed that the respondents agreed that their banks with high financial

performance had instituted good corporate governance with a strong system of internal controls

and that there was great improvement of their financial performance.

Kenya Farmers Association (KFA) Limited was established in 1923 as a limited liability

company. The objective of the association was to empower its members through affordable

farm inputs and assisting in the development of agriculture and related sectors. In 1932 the

Company was further registered as a co-operative society and enjoyed a dual registration both

as a limited liability company under the Companies Act as well as a co-operative society under

Co-operative Society Act. This status continued up to 1984 when it was merged with KGGCU to

form KGGCU Ltd and registered under Co-operative Societies Act. Its core activities comprised

of selling farm inputs using its countrywide network and marketing of farm products. For value

addition to its members KFA also handled wool, agricultural machines, engaged in clearing and

forwarding business and was the main Government’s agent for distribution of fertilizer and

handling of Cereals.

During its hay days in 1980’s, KFA enjoyed almost total monopoly on its distribution field.

It operated 67 branches and Selling centers throughout the country. KFA’s downfall started in

1984 due to political interference coupled with other factors. It is currently insolvent and

operates only 35 branches and selling centers. The current turnover is just a small fraction of its

capacity. K.F.A’s good old days, was the leading fertilizer dealer and accounted for about 40%

of the country’s fertilizer importation and handling, contributing to 60% of the Association’s

business turnover. The Association has, in the last few years, been distributing locally available

fertilizers in limited quantities, due to lack of funds to finance direct imports.

KFA is still a leading distributor of Certified Seeds throughout the country. The largest

grower and processor of certified seeds in the country (approximately 90%) is Kenya Seed

Company Ltd (KSC), in which KFA is a shareholder. The Association also distributes seed from

other suppliers. Traditionally, KFA was leading distributor of agro-chemicals in the country which

included herbicides and insecticides .Limited relationships still exist with all the large suppliers

who are keen to resume full use of KFA’s countrywide distribution network and goodwill of

farmers in animal healthcare products and feeds. The Scenario here is very much like in the

agro chemicals whereby KFA was traditionally the leading distributor.

Statement of the Problem

Internal control systems in a firm should evolve over time and all the departments should

undergo positive transformations. The firm should also employ qualified professionals to fill all

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the key departments. A firm should always have an ICT department to help capture business

transactions and classify, measure, records and report on timely basis and in this process can

help determine the financial performance of an organization. However, despite the above, KFA

Ltd which has been in existence since 1923 still struggles with liquidity problems, untimely

financial reports, inefficient accountability for the firm’s financial resources, frauds and misuse of

the firm’s resources as well as a number of decisions made not yielding the expected results.

Furthermore, business transactions are not carried out according to the Generally Accepted

Accounting Principles (GAAPs). This leaves the assets of the firm being improperly

safeguarded, incomplete and inaccurate information.

The financial statements of KFA Ltd have shown huge financial losses. This financial

position has negatively affected the growth of the firm thus raising major concern among its

stakeholders and the public at large. It has been unable to meet its financial obligations thus

increasing its indebtedness. This research, therefore, attempted to assess the influence of

internal control systems on financial performance of KFA Ltd from the perspective of internal

control systems.

Research Objectives

General Objective

To establish the influence of internal control systems on the financial performance of Kenya

Farmers’ Association Limited.

Specific Objectives

i. To examine the effect of control environment on the financial performance of Kenya

Farmers’ Association Ltd

ii. To evaluate the effect of control activities on the financial performance of Kenya

Farmers’ Association Ltd

Research Hypotheses

H01: Control environment of KFA Ltd does not significantly affect its financial performance.

H02: Control activities by KFA Ltd do not significantly affect its financial performance.


Agency Theory

Agency theory emerged with theorists Stephen Ross and Barry (1970) and authored by Adams

(1994). The most cited reference to the theory comes from Michael Jensen and William

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Meckling. Agency theory describes firms as necessary structures through which, it is possible to

exercise internal control which minimizes opportunistic behavior of agents. This relationship

between the agent and principal is strengthened by the principal employing an expert to monitor

the agent (Barlie & Means, (1932).

This position was supported by Coarse (1937) who maintained that the controls provide

for conflict resolution between the agent and principal and that moral hazard and adverse

selection affects the output of the agent. Studies have shown that internal control system

reduces agency costs (Abdel-khalik & Barefield, 1993). Firms have an economic incentive to

report on internal control (Deumes & Knechel, 2008). Weaknesses in internal controls are

associated with increased levels of earnings management (Chan & Ashbaugh, 2008). Morris

(2011) in support believed that management should create an environment of control to manage


Gupta (2001) acknowledged that internal controls can provide reasonable assurance to

management objectives. Internal control systems have been incorporated into policies, rules

and regulations of organizations to achieve their established objectives. This theory is important

in the current study as it will shed light on how the principal and agency interact for the benefit of

the organization. It will also help in the evaluation of the organization on internal controls. The

fact that the principal delegates his power to the agent also creates an oversight role by the

principal to the agent.

Theory of the Firm

The proponent of the theory was Coarse (1937), making it one of the first attempts to define the

firm theoretically in relation to the market. The theory of the firm consists of a number of

economic theories that describe, explain and predict the nature of the firm, company, or

corporation, including its existence, behavior, structure, and relationship to the market. This

theory affirms that a firm is a “black box” operated so as to meet the relevant marginal

conditions with respect to inputs and outputs, thereby maximizing profits, or more accurately,

present value. The theory helped to explain why an entrepreneur or manager in a firm which

has a mixed financial structure containing both debt and equity claims will choose a set of

activities for the firm such that the total value of the firm is less than it would be if he were the

sole owner and why this result is independent of whether the firm operates in monopolistic or

competitive product or factor markets (Kantarelis, 2007).

The theory of the firm aims to answer these questions: Existence, Boundaries,

Organization, why are firms structured in such a specific way, for example as to hierarchy or

decentralization?, heterogeneity of firm actions and performances, what drives different actions

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and performance of firms, the evidence, what tests are there for the respective theory of the firm

(Thomas, 2008).

De Paula (1990) in support stated that risk assessment is important for the existence of

the firm. Millichamp (1999) in support stated that monitoring of firm’s activities reduces risk of

intentional manipulation of accounts and increases element of checking. This makes fraud more

difficult to be committed and maximizes profits of the firm. Batra (1992) stated that control of

documents is a driver to firm’s performance. This theory is important in the current research

project as it helped in shedding light on how wealth maximization can be achieved through the

interaction with internal controls. It also helped in the understanding of the controls activities that

are supposed to be put in place to enhance wealth creation.


Empirical studies so far carried out in respect of control environment, control activities and

financial performance are reviewed in this section.

Control Environment and Financial Performance

It simply means controlled environment of the entity in which operations of the business are

carried out that generate financial performance. It is this control environment that keeps anyone

in the entity from committing any wrong doing. For example, if management is honest and

encourages honesty and is strict towards falsehood then employees would expect

harsh consequences and only this will keep away the employees to commit any fraud

individually or in collusion with others.

Whittington and Pany (2001) noted that the control environment sets the tone of the

organization by influencing the control consciousness of people. They further assert that control

environment is viewed as the foundation for all the other components of internal control. Control

environment factors include; integrity and ethical values of personnel responsible for creating,

administering, and monitoring the controls, commitment and competence of persons performing

assigned duties, board of directors or audit committees management philosophy and operating

style. Whittington and Pany (2001) also believed that these factors set a basis upon which the

other internal control components can be built. They also provide a framework within which the

other components operate.

Internal control systems not only contribute to managerial effectiveness but are also

important duties of corporate boards of directors. Accounting literature likewise emphasizes the

importance of an organization’s integrity and ethical values in maintaining an effective control

system (Verschoor, 1999). A focus on integrity and ethical values was the principal contribution

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of Internal Control-Integrated Framework published by the Committee of Sponsoring

Organizations of the Treadway Commission.

Financial performance refers to the ability to operate efficiently, profitability, survive,

grow and react to the environmental opportunities and threats (Mawanda, 2008). They assert

that, performance is measured by how efficient the enterprise is in use of resources in achieving

its objectives. It is the measure of attainment achieved by an individual, team, organization or

process. Another thing to understand is that controlled environment supplements the other

functions of internal control systems. It is the foundation for all the other components of internal

control. It comprises of factors like integrity and ethical values of personnel tasked with creating,

administering and monitoring the controls, commitment and competence of persons performing

assigned duties, board of directors or audit committees, management philosophy and operating

style and organizational structure.

Control Activities and Financial Performance

Control activities refer to policies, procedures, and mechanisms put in place to ensure directives

of the management are properly carried out. Appropriate and accurate documentation of

policies and procedural guidelines helps to determine how the control activities are to be

executed (Woolf, 1997) . He stated that control activities are put in place by the management to

make financial information authentic and reliable. For example, debtors cannot be written off

without permission of finance director or any other person given authority to write off debts.

Similarly, credit sales cannot be made unless recommendation is sought from credit control

department. Such control activities do not necessarily be in the nature of authorization.

Requirement to enter password to access certain modules of information system is an example

of information system. Similarly a validation check in the database system to make sure that

contact number of supplier can only be in numbers or email address has been entered in a

particular format. All such checks will ensure that information is accurate (Batra, 1992).

It is further note that “Internal control also includes the program for preparing, verifying

and distributing to the various levels of management those current reports and analysis that

enable executives to maintain control over the variety of activities and functions that are

performed in a large organization”. They mentioned internal control devices to include; use of

budgetary techniques, production standards, inspection laboratories, employee training, and

time studies among others. Corporate law requires a divorce between ownership and

management of an entity. Owners normally entrust their resources in the hands of managers.

Managers normally report to the owners on the results of their stewardship for the

resources entrusted to them through a medium called financial statements. It is these financial

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statements that reveal the financial performance of an entity. Morris (2011) believed that

Enterprise Resource Planning systems provide a mechanism to deliver fast, accurate financial

reporting with built-in control activities that are designed to ensure the accuracy and reliability of

the financial information being reported to shareholders.

Ray and Pany (2001) also mentioned Control activities as another component of internal

controls. They noted that control activities are policies and procedures that help ensure that

management directives are carried out. Controls activities in an organization basically comprise;

performance reviews (comparing actual performance with budgets, forecasts and prior period

performance), information processing (necessary to check accuracy, completeness and

authorization of transactions), physical controls (necessary to provide security over both records

and other assets), and segregation of duties (where no one person should handle all aspects of

a transaction from the beginning to the end).

Figure 1. Conceptual Framework


Research Design

A research design is a framework that guides a researcher in studying a research problem

(Mugenda, 1999). It guides a researcher to know what to do in the whole of research process.

This study used explanatory research design. Explanatory research is research conducted in

order to explain any behaviour in the market (Bisbe & Otley, 2004). This type of research design

was selected after considering the type of population and its nature, the objectives of the study,

and the design standard of accuracy. The creation of a sound internal control system in a firm

greatly influences the area of study.

Dependent Variable Independent Variables

Control Environment

Control Activities

Financial Performance

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Target Population

The target population in statistics is the specific population about which information is desired.

According to Ngechu (2004), a population is a well-defined or set of people, services, elements,

and events, group of things or households that are being investigated. A target population is one

that the researcher wants to generalize the result of the study. The target population for this

study was 78 managers of Kenya Farmers’ Association Limited (HRM, 2015). The target

population was distributed as shown below.

Table 1: Target Population

Departments Population

General Administration 4

Human Resources 5

Finance 5

Marketing 5

Secretarial 4

Branches 45

Total 78

Census Design

The relatively small number of 78 comprising of the target population eliminated the rationale of

sampling. In this regard, all members of the target population were included in the study. The

census method was adopted. Besides being necessitated by the relatively small population of

the study, it also eliminated the sampling bias and sampling error. This enhanced the

generalization ability of the study findings.

Research Instrument

A set of questionnaires were used to collect data from respondents participating in the study.

The questionnaires were self-designed by the researcher.

Pilot Testing

The pilot test enabled the researcher to find out the flow of documents and modify the same to

validate it. The reliability tested the use of instruments for the reliability of values (Alpha Values)

as recommended by Cronbach (1946). According to Saunders (2003), the purpose of the pilot

test was to refine the instruments so that the respondents would find it easy in answering the

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questions and provide for easy recording and analysis of data. The researcher administered 7

questionnaires for pilot study according to the rule of thumb (Mugenda & Mugenda, 2003). This

also helped to assess the content validity of the instruments and the reliability of the data that

was collected.

Reliability was concerned with the degree to which an instrument was free from error,

hence, yielding consistent results, and validity was the extent to which research findings

accurately represented reality and yielded the same results every time it was administered

(Collis & Hussey, 2003). Reliability was calculated with the help of Statistical Package for Social

Sciences (SPSS). A correlation coefficient greater or equal to 0.6 was accepted (George &

Mallery, 2003). The sample was chosen on the basis that the managers operate in different

environments. The sample size for the pilot test was justified because Mugenda and Mugenda

(2003) suggested that 10 to 30 participants were sufficient for pilot test study. According to

Sekaran (2001) Alpha values for each variable under study should not be less than 0.6 for the

statements in the instruments to be deemed reliable. Consequently, all the statements under

each variable were subjected to this test and were proven to be above 0.6. The content validity

of the data collection instruments was done with the help of an expert (the Researcher’s

Supervisor) to edit the questionnaire .The researcher forwarded the structured questionnaire to

the supervisor who is an expert in the area covered by the research for editing and reviewing.

Table 2: Reliability Results

Constructs No. of items Alpha Values

Control Environment 9 .692

Control Activities 9 .739

Financial Performance 4 .719

Table 2 reveals that all the variables returned alpha values greater than 0.6 which is the

recommended threshold by (Sekaran, 2001). Therefore, all the variables in the instrument were

deemed reliable.

Data Collection Procedure

The researcher used the managers to fill in the questionnaire at their own time. A structured

questionnaire was administered on the target population. The target was to get opinions that

were based on structured questionnaires. This method was considered to be more suitable with

this kind of research design. The sources of data were also reviewed. The researcher sort out

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journals, magazines, and used internet in collection of data (Royal Roads University, 2013).

Data collected was analyzed using both descriptive and inferential statistics. Different

components of internal control systems that is, control environment, risk assessment, control

activities, ICT adoption, and monitoring process were identified by explaining their influence to

the financial performance of KFA Ltd.

Data Processing and Analysis

After the data was collected, questionnaires were checked and coded. Percentages and

frequencies were used in interpretation of data. Correlation was used to portray the influence of

internal control components on financial performance of the firm. The outcome of the analysis

was presented using summary tables. This tool ensured that information was understood and

interpreted as it should be, and further, that this was done at a glance (Saunders, Lewis, &

Thornhill, 2012). Data analysis refers to a technique used to make inferences from data

collected by means of a systematic and objective identification of specific characteristics

(Bryman & Bell, 2003). Once data was collected, it had to be edited to verify the completeness

of data, coded in order to assign numbers or symbols to the various answers for effective

categorization/classification, entered in order to convert the information gathered to a medium

for viewing and manipulation and finally displayed through the use of frequency tables. Case

summaries were generated to check for any errors in data entry as well as to determine missing

responses. Descriptive statistics were used to obtain useful summaries of responses. To

determine relationships between the variables the following regression model was used:

Y = ?0 + ?1X1 + ?2X2 + ?


?1, and ?2, are the regression co-efficients

Y = Financial Performance

?0 = Constant

X1 = Control environment

X2 = Control activities

? = Error or Residual term


This section illustrates the response rate and study findings alongside discussions of the data

output. It presents analysis and findings of the study as set out in the research objectives and

research methodology. The findings are in form of both descriptive and inferential statistics and

are shown in form of tables and statements. The data collected was on a five point Likert scale

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where integers 1, 2, 3, 4, and 5 represented ‘strongly disagree, disagree, not sure, agree, and

strongly agree’ respectively.

Response Rate

There were 78 questionnaires that were administered on the respondents and 71 of them were

appropriately filled and returned. This represents 91 % response rate which was sufficient for

the study.

Descriptive Analysis and Discussions

Control Environment

The study sought to determine the extent to which the functionality of control environment

influence the financial performance of KFA Ltd. Table 3 shows the opinions of the respondents.

Table 3: Descriptive Statistics for Control Environment

Statement N Min. Max. Mean

KFA has accounting and financial ICS 71 2 5 4.22 .57

Management is committed to ICS 71 2 5 3.72 .831

Management closely monitors ICS 71 1 5 2.56 1.065

Management provides feedback 71 1 5 2.31 1.022

Appropriate measures to correct errors 71 1 5 2.46 .998

Management acts with degree of integrity 71 1 5 2.80 1.14

Ethical values are upheld by mgt. 71 1 5 2.79 1.01

KFA has an independent audit office 71 1 5 2.10 1.24

Board of Directors are independent 71 1 5 2.48 1.16

Table 3 show details of the measures of influence of control environment obtained from the

respondents. The statements have been ranked in terms of their, means and standard

deviations so as to deduce meaning out of the results. From the above findings, it was clear

that the respondents agreed that KFA Ltd has an accounting and financial ICS (M=4.22, S.D =

.57), the respondents also agreed that the management was committed to the operation of the

internal control systems (M=3.72, S.D.=.831), however, they disagreed that the management

closely monitor implementation of I.C.S (M=2.56,S.D= 1.065), they disagreed that the

management provides feedback to the junior officers about the operation of the system (M=

2.31, S.D= 1.022), disagreed that appropriate measures are taken to correct errors in

operations of the accounting & finance I.C.S (M= 2.46,S.D=.998), disagreed that the

management act with a greater degree of integrity in execution of its actions (M=

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2.80,S.D=1.142), disagreed that ethical values are upheld in all management decisions (M=

2.79,S.D=1.013), others strongly disagreed that KFA Ltd has objective, independent and active

audit office (M= 2.10,S.D= 1.244), that the Board of directors are not independent of

Management (M=2.48, S.D= 1.157 ). From the above findings from the respondents, it is

evident that despite having ICS, the management have failed to observe control environment

measures as one of the functionality of internal control systems which greatly impacts on the

financial performance of KFA Ltd.

Control Activities

The study analyzed the perception of the respondents on control activities of KFA Ltd as shown

in Table 4.

Table 4: Descriptive Statistics for Control Activities

N Min Max Mean Std.


KFA Ltd has clear separation of roles every employee’s work

check on the others

71 1 5 3.68 .982

There is appropriate supervision by senior staff on the work of

their juniors

71 1 5 2.87 1.13

Corrective action is taken to address weaknesses 71 1 5 2.35 .943

Staff are trained to implement the accounting and financial I.C.


71 1 5 2.34 1.068

KFA Ltd has a well developed Chart of Accounts. 71 1 5 3.51 1.040

It is impossible for one staff to have access to all valuable

information without the consent of senior staff

71 1 5 3.58 1.01

Controls are in place to exclude incurring expenditure above

allocated in the Budget

71 1 5 3.21 1.16

Departments have budget reviews where actual are compared

with budgeted expenditure and explanations for variances given

71 1 5 3.69 .919

KFA Ltd security system identifies and safeguard Assets 71 1 5 2.20 1.13

The findings showed that the organization has a clear separation of roles (M=3.68, S.D= .982),

the respondents disagreed that there is appropriate supervision by senior staff on the work of

their juniors (M= 2.87,S.D=1.133), they disagreed that corrective actions are taken to address

weaknesses (M= 2.35, S.D= .943), disagreed that staff are trained to implement the accounting

and financial management system (M= 2.34, S.D= 1.068). KFA Ltd has a well developed Chart

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of Accounts (M= 3.51,S.D=1.040), and it is impossible for one staff to have access to all

valuable information without the consent of senior staff (M= 3.58,S.D= 1.009),the respondents

agreed that KFA Ltd has a budget office for controls to exclude incurring expenditure in excess

allocated in the budget (M= 3.21,S.D=1.158.), the departments have budget reviews where

actual expenditure is compared with budgeted expenditure and explanations for the variances

given (M=3.69,S.D= .919), others disagreed that the security system identify and safeguard

organizational assets (M= 2.20, S.D =1.129). It can therefore be concluded that KFA Ltd do not

carry out its policies and procedures (control activities) appropriately which are important for

financial performance.

Financial Performance

The respondents were asked to comment on the financial performance of KFA Ltd. Table 5

outlines the descriptive results.

Table 5: Descriptive Statistics for Financial Performance

Statement N Min. Max. Mean Std. Dev.

KFA has enough cash to meet its obligations

effectively (as and when they fall due)

71 1 4 1.59 .748

The profits made by branches is enough to

cover their cost of running their operations

71 1 5 1.87 .877

Creditors are paid in time to avoid legal

charges .

71 1 4 2.00 .845

Accounting system adequately identifies all the

receipts and expenditure of the organization

71 1 5 3.14 1.187

KFA Ltd assets base has greatly increased

over time

71 1 5 1.66 .940

From the information revealed by table 5, the respondents strongly disagreed that KFA Ltd have

enough cash to meet its obligations effectively as and when they fall due (M=1.59,SD=0.748). It

was revealed that the respondents disagreed that profits made by branches are enough to

cover the costs of running their operations (M=1.87, SD=0.877). This has implications on the

financial soundness of the organization because of its significance. The respondents disagreed

that creditors are paid in time to avoid legal charges (M=2.00, SD=0.845). The information

revealed could be an explanation as to the inadequacy of the cash position of the organization.

The respondent agreed that KFA Ltd adequately identifies its receipts and expenditures

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(M=3.14, SD=1.187). The respondents disagreed that KFA Ltd assets base have increased over

time (M=1.66, SD=0.940) .This therefore casts high doubt on the financial soundness of KFA


Inferential Analysis and Discussions

This section outlines the results of analysis of variance (ANOVA), correlation, coefficient of

determination, and regression analyses. The study conducted ANOVA, in order to test the

impact of the relationship between internal control systems and financial performance of KFA

Ltd. The findings are as shown in Table 6.

Table 6: ANOVA

Model Sum of Squares Df Mean Square F Sig

1 Regression 2.620 1 2.620 7.751 .007a

Residual 23.324 69 0.866

Total 25.944 70

The results shown in Table 6 revealed that the level of significance was 0.007 which implied that

the regression model is significant in predicting the relationship between internal control system

and financial performance. By the help of an F-test table, the tabulated value for F (1%, 1, 69) is

6.85 which was less than 7.751 meaning that the model was statistically significant. Table 7

shows the results of regression analysis.

Table 7: Regression Coefficients





t p

Model B SE B

Constant .479 .411 1.166 0.543

Control Environment .664 .114 .081 .561 0.019

Control Activities .490 .143 .169 1.329 0.039

Dependent variable: Financial Performance

The influence of internal control systems on financial performance was expressed using the

following model.

Y= 0.479+ .664X1 + 0.490X3

Since all the p-values were less than 0.05, all the null hypotheses were rejected.

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From the regression model holding all the other factors constant, financial performance is

measured by the efficiency and effective implementation of internal control systems. The results

of the multiple regression model shows that there is a positive relationship between internal

control systems and financial performance of KFA Ltd. This implies that 0.664 unit increase in

control environment and 0.490 unit increase in control activities resulted in a unit increase in

financial performance of the organization.


The study found out that management of KFA Ltd is not committed to the internal control

systems of the organization and they don’t actively participate in monitoring and supervision of

the activities of KFA Ltd. The study also revealed that all the activities of KFA Ltd are initiated by

the senior managers. On the influence of control environment, the study found out that internal

audit office is not objective, independent and active, does not conduct regular audit activities

independently and effectively. Regarding control activities, the study found that, there is no clear

separation of roles from supervision of activities by senior staff, weaknesses that are realized

are not addressed, and there is no training program for capacity building in the organization.

However, the study also found out that there is lack of information sharing in the organization

and also no security measures put in place to safeguard the assets of the organization.

The study found out that KFA does not have enough cash to meet its intended goals,

and that the cash realized is not sufficient to run the operations of the branches. The study

further revealed that creditors are not paid in time to avoid legal charges. However, it was also

found that all revenues and expenditures are not properly classified, and that assets of the

organization have greatly reduced.


It was concluded that KFA Ltd has very weak, ineffective internal control systems as supported

by the study findings of no clear separation of roles, supervision, training, monitoring and

commitment of management. There are challenges in the implementation of the existing internal

control systems especially considering that the audit office is not objective, independent and

active to ensure that internal control systems are enhanced and well extended to the branches

which clearly has affected their efficiency and financial performance as revealed by this study.

On financial performance of KFA Ltd, the study concluded that the organization has a serious

liquidity problem and this is not appropriate for its survival, details of which are directly in the


International Journal of Economics, Commerce and Management, United Kingdom

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The organization should enhance audit office to make it objective, independent and active to

ensure that internal control systems are enhanced and well extended to the branches which

clearly has affected the efficiency and financial performance as revealed by this study. The

study also recommends that the organization establishes a strategy for improving the

generation of additional finances for the operations of KFA Ltd. This could be done through

diversification of the current business, other competitive endeavors which are directly aimed at

winning funds for the organization. Finally, the study recommends that there should be a

deliberate attempt to conduct a study which establishes the relationship of management’s

commitment based on factors that are external to the organization such as behavioral/ethical

issues of the employees, financial stress of employees, and modern information technology.


The major limitation of the study was on the skepticism of some respondents in participating in

the study. To counter this challenge the researcher explained to them the purposes of the study

and the likely benefits of their organization from the study. Another limitation was on the

research instrument which was found to be quite limiting in collecting data from the

respondents. In regard to the foregoing, the researcher ensured that the instrument was as

objective as possible in that it could be employed to collect as much data as possible relative to

the study objectives.

It is recommended that scholars and researchers can embark on empirical studies on

the influence of ICT on the effectiveness on internal control system; and also on the effects of

cultural and behavioral factors on the performance of Kenya Farmers’ Association Limited.


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