The Impact of Internal Controls on Fraud Prevention Among Tour Operating Companies in Kenya

Abstract

A 2020 survey by PwC Kenya revealed that at least 44% of Kenyan businesses had reported cases of economic crimes in the previous 24 months. The survey results showed that the top 5most common types of fraud in Kenya are procurement fraud, customer fraud, asset misappropriation, bribery and corruption. Fraud incidents have increasingly become a major concern among tour operating companies in Kenya over the recent years as per media reports and the Tourism Regulatory Authority Annual Report (2021). Tour operating companies have formulated and implemented various strategic intervention measures in a bid to detect and prevent fraud. One of the main objectives of these interventions has been the improvement of existing fraud prevention mechanisms through enhancement of their effectiveness. Internal controls have been touted as the core fraud detection and prevention tool among tour operating companies in Kenya. However, the number of fraud cases reported remains relatively high. The objective of this study was to determine how internal controls impact fraud prevention among tour operating companies in Kenya. The study is supported by the Fraud Diamond Theory, Systems Theory of Management and the Agency Theory. The study adopted the explanatory research design. This study population was263 Kenyan tour operating companies that were licensed by TRA and full members of KATO as of December 2023. Out of a population of 263 firms, 79, representing 30%of the study population, were selected using stratified sampling method. Respondents from the accounting & finance departments of the sampled companies filled out the questionnaires sent via email. The researcher also collected secondary data from KATO. The data collected from the respondents was numerically coded into measurable attributes of the variables and uploaded to SPSS for analysis. Descriptive statistics was applied to describe the dependent and independent variables. The results of the data analysis were visually presented using tables, charts and figures. The study used multiple regression function to establish the significance of the impact of the independent variables on the dependent variable. The response rate of the study was 91.14% which was sufficient for statistical analysis. The inferential results indicated that internal controls have a positive and strong influence on fraud prevention. Regression analysis showed that internal controls significantly impact fraud prevention. Internal controls, audit services, corporate ethics, board oversight and compliance explain the 63.6% of the variation in fraud prevention. The descriptive results revealed that majority of the firms embraced corporate ethics such as honesty, trust, sense of responsibility, due diligence and time consciousness. Internal auditing was found to be an essential component of fraud detection and prevention. Board oversight was also embraced and it entailed regular meetings, delegation of duties to management, risk evaluation, upholding of financial reporting integrity and ensuring diligent resource utilization. The study concluded that auditing is a significant predictor of fraud prevention. Corporate ethics was found to be instrumental in cultivating values and virtues which impede fraud incidents in an organization. The study found out that board oversight is a critical pillar in enhancing fraud prevention in tour operating companies. The study recommended strengthening of integrity framework, operational P&Ps in tour operating companies. It also found it appropriate to have frequent timely audit of financial records, procedures and policies of a company. The study recommended more frequent board meetings for progressive review of the policies and strategies.