The Effect of Internal Controls on the Performance of Water Companies in Kenya

Abstract

An entity should put in place its own system of controls in order to achieve its objectives. A system of effective internal controls is a critical component of company management and a foundation for the safe and sound operation of organizations. However, ineffective internal controls result in ineffective programs and eventually leading to losses. Recent incidence of corporate failures and accounting frauds are mostly preceded by failure in companies’ internal control structures. The water sector is facing an increasingly challenging future in terms of separation of supervision from regulation and policy making, separation of management of water resources from water supply and sanitation provision, decentralization, participation, autonomy, accountability, financial and ecological sustainability and efficiency. This study adapted a descriptive research design to allow the establishment of an understanding of internal controls and financial performance. The target population for this study was the 65 water companies in Kenya. The source of data was both primary and secondary data. The main instrument for data collection was a semi-structured questionnaire. Data was analyzed using Statistical Package for Social Sciences (SPSS Version 20.0) program. Both quantitative analysis and regression analysis was used as data analysis technique. The findings indicates that there is a well elaborate Organization Structure in the Company which adequately reflect chain of command and specific lines of authority and responsibility have been established to ensure compliance with the policies and procedures in the company practices on control environment. Findings indicates that variances between actual and projected financial performance is explained by management on a timely basis hence strong company practices on control activities. Findings indicates that most respondents agreed that the Company carry out internal audits and external audits on timely basis. Findings indicates that the majority of respondents agreed that Communication helps to evaluate how well guidelines and policies of the organization are working and being implemented. Findings indicate that majority of the respondents were in agreement that periodically, management carries out reviews of internal control systems are in place. Findings indicate that the Performance, Control Environment, Control Activities, Risk Assessment, Information and communication systems and Monitoring has a great effect on the performance of water companies in Kenya. The study found out that the more effective the control environment, the higher the higher the performance level of water companies. The findings indicates that there is a strong relationship between internal controls and the performance of water companies in Kenya having R square of 0.876. The study found out that when the level of internal controls to use water companies is known, it becomes easy to predict their performance