Effect of Internal Control Mechanism on Fraud Prevention of Deposit-taking Savings and Credit Cooperative Societies in Kenya

Abstract

Fraudulent activities in deposit-taking Savings and Credit Cooperative Societies (SACCOs) undermine financial stability and erode stakeholder trust. Effective internal control mechanisms are pivotal in mitigating fraud risks in these financial institutions. This study aimed to determine the effect of internal control mechanisms on fraud prevention in deposit-taking SACCOs in Kenya. The study was grounded in Agency Theory and supported by the Fraud Triangle Theory and Institutional Theory, emphasizing the importance of rigorous internal controls to mitigate opportunistic behaviors and align interests. The study's predictor variables included segregation of duties, robustness of authorization protocols, and the frequency and thoroughness of internal audits. Regulatory compliance was considered as a control variable. The response variable was fraud prevention. A descriptive research design was employed. The target population comprised 176 licensed deposit-taking SACCOs in Kenya. Data was collected through a structured questionnaire aimed at the heads of internal audit or their equivalents, utilizing Google Forms for efficiency in survey administration. Data was analyzed using SPSS software version 27. The analysis included descriptive statistics, correlation analysis, and multiple regression analysis. The study found that all predictor variables significantly impacted fraud prevention. Regulatory compliance had the strongest influence (β=0.708, p<0.05), followed by segregation of duties (β=0.418, p<0.05), authorization protocols (β=0.231, p<0.05), and internal control audits (β=0.218, p=0.05). The model explained 92.8% of the variance in fraud prevention measures. The results underscore the critical role of comprehensive internal controls and stringent regulatory compliance in preventing fraud within SACCOs. The study recommends that SACCOs enhance their internal control systems and maintain rigorous compliance with regulatory standards to effectively deter fraud. Policymakers should consider strengthening regulatory frameworks to support robust fraud prevention mechanisms within the financial sector. Future research should explore the long-term impact of technological advancements on internal control systems within SACCOs, particularly how emerging technologies like blockchain and artificial intelligence can further enhance fraud prevention strategies.

Fraudulent activities in deposit-taking Savings and Credit Cooperative Societies (SACCOs) undermine financial stability and erode stakeholder trust. Effective internal control mechanisms are pivotal in mitigating fraud risks in these financial institutions. This study aimed to determine the effect of internal control mechanisms on fraud prevention in deposit-taking SACCOs in Kenya. The study was grounded in Agency Theory and supported by the Fraud Triangle Theory and Institutional Theory, emphasizing the importance of rigorous internal controls to mitigate opportunistic behaviors and align interests. The study's predictor variables included segregation of duties, robustness of authorization protocols, and the frequency and thoroughness of internal audits. Regulatory compliance was considered as a control variable. The response variable was fraud prevention. A descriptive research design was employed. The target population comprised 176 licensed deposit-taking SACCOs in Kenya. Data was collected through a structured questionnaire aimed at the heads of internal audit or their equivalents, utilizing Google Forms for efficiency in survey administration. Data was analyzed using SPSS software version 27. The analysis included descriptive statistics, correlation analysis, and multiple regression analysis. The study found that all predictor variables significantly impacted fraud prevention. Regulatory compliance had the strongest influence (β=0.708, p<0.05), followed by segregation of duties (β=0.418, p<0.05), authorization protocols (β=0.231, p<0.05), and internal control audits (β=0.218, p=0.05). The model explained 92.8% of the variance in fraud prevention measures. The results underscore the critical role of comprehensive internal controls and stringent regulatory compliance in preventing fraud within SACCOs. The study recommends that SACCOs enhance their internal control systems and maintain rigorous compliance with regulatory standards to effectively deter fraud. Policymakers should consider strengthening regulatory frameworks to support robust fraud prevention mechanisms within the financial sector. Future research should explore the long-term impact of technological advancements on internal control systems within SACCOs, particularly how emerging technologies like blockchain and artificial intelligence can further enhance fraud prevention strategies.