Effect of Internal Controls on Financial Performance of Deposit Taking Savings and Credit Cooperative Societies in Kenya

Abstract

The purpose of this study was to find out the effect of internal controls on the financial performance of deposit taking Savings and Credit Cooperative Societies (SACCOs) in Kenya.

This study is significant because SACCOs make a critical contribution to the economic development of this nation through funds and savings mobilization. However, these SACCOs face a number of challenges, key among them being the issues of management which is largely occasioned by the existence of poor or weak internal controls. Financial performance of these institutions is thus seriously impacted as a result of the existence or lack thereof of the necessary internal controls that would lead to effective financial management within the SACCOs.

The findings of this study conducted on 122 deposit taking SACCOs in Kenya relied on both primary and secondary data which was obtained from the annual reports of the SACCOs. Regression analysis was mainly used to reveal that the financial performance of SACCOs in Kenya is largely influenced by the level of internal controls instituted by the management of these institutions. If the SACCOs improve the effectiveness of their internal controls, then the financial performance of these SACCOs improves drastically.

The regression analysis conducted established that the independent variables have a positive strong correlation with the dependent variable. Each of the independent variables namely, the control environment, risk assessment, control activities and monitoring mechanisms contribute positively to the financial performance of SACCOs in Kenya.

It is also evident from the study that without the presence of strong internal controls within these institutions, the SACCOs would be performing poorly with the risk of eventual collapse as a result of poor financial performance.