IJECM
International Journal of Economics, Commerce and Management
United Kingdom Vol. IV, Issue 4, April 2016
Licensed under Creative Common Page 783
http://ijecm.co.uk/ ISSN 2348 0386
INFLUENCE OF INTERNAL CONTROL SYSTEMS
ON FINANCIAL PERFORMANCE OF KENYA
FARMERS’ ASSOCIATION LIMITED
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]
Abstract
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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INTRODUCTION
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.
THEORETICAL FRAMEWORK
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
earnings.
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 REVIEW
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
METHODOLOGY
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 + ?
Where:
?1, and ?2, are the regression co-efficients
Y = Financial Performance
?0 = Constant
X1 = Control environment
X2 = Control activities
? = Error or Residual term
EMPIRICAL FINDINGS AND DISCUSSIONS
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 Std.dev.
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.
Dev
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.
System
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
Ltd.
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
Unstandardized
Coefficients
Standardized
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.
SUMMARY
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.
CONCLUSIONS
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
study.
International Journal of Economics, Commerce and Management, United Kingdom
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RECOMMENDATIONS
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.
LIMITATIONS AND FURTHER STUDIES
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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