The relationship between effectiveness of internal audit function and financial performance of companies listed in Nairobi Securities Exchange

Abstract

Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. The internal audit department is regarded as the key element in the application of accounting systems which in turn, helps in evaluating the work of the department. The internal audit is considered as the backbone of the business accounting as it is the section that records all businesses related to the sector. The efficiency of internal audit helps develop the work of the company because the financial reports reflect the internal audit department‟s quality. The study sought to establish the relationship between effectiveness of internal audit function and financial performance of companies listed in NSE. The research design employed in this study was descriptive design. The population of the study comprised of all 61 publicly listed companies in the Nairobi Stock exchange. The study was a census survey. The source of data was both primary and secondary data. The main instrument for data collection was a semi-structured questionnaire. Data on financial performance was extracted from the audited financial statements of the listed companies at the NSE. Data was analyzed through the use of descriptive statistics and multiple linear regression analysis. The multiple linear regression models was used to estimate the causal relationship between ROA and the independent variables. SPSS Version 21 was used for analysis of the different variables in this study. The six independent variables that were studied (professional proficiency of internal auditors, quality of audit work of internal audit department, organizational independence of the internal audit department, career development of internal audit personnel, top management support to the internal audit department and size) explain a substantial 78.4% of financial performance among companies listed at the NSE as represented by adjusted R2 (0.784). It was established that there was a positive relationship between effectiveness of internal audit function and financial performance. The study found out that the intercept was 2.397 for all years. The study therefore concludes that effective internal audit function has a positive influence on financial performance of companies listed at the NSE. The study recommends that companies should employ skilled and competent professional internal auditors to strengthen the internal controls and minimize on fraud .With efficient internal controls, cases of fraud, embezzlement and cash mismanagement will be controlled hence supplementing on the level of profits in the company