The Effect of Internal Control on the Financial Performance of micro finance institutions in Buea
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This study examined effects of internal auditing on financial performance OF MFIs in Buea. A descriptive research design was adopted in the study.
Population of this study comprised of all MFIs in Buea. Using simple random sampling technique, a sample of 36 questionnaires was administered to the MFIs located within Molyko, Muea and Class quarter.
Primary data were utilized in the study, which was collected using self-administered questionnaires.
The results established that the environment control, control activities, risk assessment, information and communication and monitoring had a positive relationship with financial performance of small and medium enterprises.
The study concluded that there is a direct relationship between environment control, control activities, risk assessment, information and communication, monitoring and the financial performance of MFIs.
study recommended that MFIs should ensure that they have a good environment control, effective assessment of risk and control activities proper monitoring strategies, information and communication.
1.1 BACKGROUND TO THE STUDY
Micro Finance institutes (MFIs) constitute majority of organisations in the world and account for a great portion of total employment and total production (Hussain, Millman&Matlay, 2006).
MFIs play a great role in an economy in terms of national output. MFIs are income generating entities to their owners, sources of national outputs as well as acting as feedstock for large entities or firms (Olatunji, 2013. Due to the increase rate both unemployment all over the globe.
Thus, internal control is a vital part of management process by which entities manage their activities and operations so as to accomplish their missions and objectives in an effective and efficient manner (IFAC, 2012).
Internal controls have the potential of providing a reasonable assurance and not an absolute assurance in regard to achieving the entity set goals and objectives.
Implementation of a proper internal control system will enable an entity to operate in more effective and efficient manner (Sulaiman, Siraj& Mohamed, 2008).
It is difficult for entities to know if they have complete and accurate information if they lack proper internal (Long, 2009).
The adoption of a sound and effective internal control system in an entity is crucial for a safe and sound management of an entity.
An entity is always vulnerable to many risks if it lacks adequate internal controls. The risks that may be caused by improper records of accounting transactions and making unauthorized transactions may significantly affect the entity’s performance more especially in financial perspective (Dumitrascu& Savulescu,2012).
An entity can benefit more if it has an effective internal control. With a proper internal control system, an entity can be in a position to comply with laws and regulations in a smooth way as compared to an entity that doesn’t have a proper system of internal control (Shanmugam, Haat s& Ali, 2012).
Internal control practices aimed at complying with internal control standards which were developed by a central authority.
Internal control is only effective if the following components are well incorporated; environment control, assessment of risk, monitoring, communication and information and control activities (Sampson, 1999).
The overall success and performance of a system of internal control depends on how well each component of internal control are functioning as well as how they are coordinated with each other (Oseifuah&Gyekye, 2013).
Environment control is concern with the factors which have the potential of determining the effectiveness of policies, procedures, and methods specific to the process.
Moreover, the environment control also refers to a value, which a firm’s management attaches to the importance of audit (Boame, Solace &Issaka, 2014).
Environment control is a main aspect of entity management since it reflects the attitude and management policies regarding the importance of internal audit in the fixing of a business (Theofanis, Drogalas&Giovanis, 2011).
Assessment of risk is about identification of relevant risks and the analysis of such risks to achieve the objective of forming a better basis on how to well manage such risks.
Assessment of risk is a process of integrating a professional judgment about the potential of adverse events or conditions, and assessment of the likelihood of a possible loss (Ndamenenu, 2011).
The main aim of carrying out assessment of risk is to determine any situations which may pose a legal or financial risk to a firm (Boame, Solace &Issaka, 2014).
In such case or situation, the firm’s management must be able to determine an acceptable level of risk carefully, and try to maintain the risk within determined levels (Badara&Saidin, 2013).
Control activities which ensure that the management directives are carried out to the later.
They ensure that necessary actions for addressing risks are taken so as to achieve the entity’s set goals and objectives (Mwakimasinde, Odhiambo&Byaruhanga, 2014).
Components of control activities describes every policy, procedure and the best practice a firm especially small ones can put in place so as to minimize risk (Boame, Solace &Issaka, 2014). Example of control activities may consist of; segregation of duties, daily, bank reconciliations and so on (Badara&Saidin, 2013).
Communication and Information -systems or processes which support identification, capture, and information exchange in a form and period which enables people in carrying out their responsibilities (Ndamenenu, 2011).
Information is usually seen as a vehicle in which control procedures, policies are presented, and reinforced.
On the other hand, communication is a mean by which employees are made aware of management’s commitment to internal controls (Oseifuah&Gyekye, 2013).
Information must be conveyed throughout entire entity so as to permit personnel to effectively and efficiently carry out their responsibilities with an aim of achieving the entity’s set goals and objectives (Badara&Saidin, 2013).
Monitoring deals with assessment of the performance of internal control in an organization or SMEs.
It is usually done by ongoing monitoring activities and by evaluations of internal control like self-assessments (Ndamenenu, 2011).
Monitoring aim at determination of whether internals control within an entity are adequate, properly executed, and effective (Sampson, 199.
Financial performance is a firm’s ability to generate new resources, from its daily procedures, for a certain time of period. Financial performance may also refer to the firm’s ability to make good use their resources in an effective and efficient manner for achievement of the firm’s objectives and goals (Stoner, 2003).
According to Kagoyire and Shukla, (2016) financial performance is the firm’s ability to efficiently operate, be more profitable, to grow and survive for a long period of time.
All organizations strive to utilize it resources effectively to achieve a high performance level especially in financial terms.
Thus, financial performance is the outcome of any of many different activities undertaken by an organization (Han, 2014).
MFIs are defined as business entities with less than or equal to 50 staffs or those entities which have an annual revenue of less than 10 million European Commission (2011).
MFIs is one of the largest sector in the Cameroonian economy since it employs many Cameroon’s workforce as well as contributing up to 18.4% of Cameroon’s GDP.
In Cameroon, the number of MFIs has been rising at a very high rate in last two or so decades with many of them based in rural areas of Cameroon. MFIs sector has made an exceptional contribution to the Cameroonian economy (Oseh, 2013). As such, MFIs are a vast majority of business entities found in Cameroon and they have created employment for a large portion of the workforce in Cameroon.
Small businesses like enterprises are mostly likely to have some internal controls to help them in the protection of their assets as well as a reduction in risk of fraud (Jiang, 2010).
Thus, understanding of the internal controls system and how the system works by MFI owners can help protect their small enterprises against fraud and embezzlement. With a proper system of internal control, MFIs would be able to use their financial resources in a manner that will help in safeguarding owners’ interests.
Thus, internal control system is able to provide a reasonable assurance, but not an absolute assurance which MFIs objectives are likely to be met (Neneh&Zyl, 2012).
1.2. PROBLEM STATEMENT
Internal Audit is referred intention and self-governing appraisal benefits in an organisation that deals with risk management, control and governance by assessing and evaluating their viability in accomplishing the organisation set objectives. Amid the most recent two decades evaluating capacities have risen as key systems in fortifying corporate administration universally.
As of late various expert and administrative foundation in numerous nations have suggested the general utilization of inner practices and pushed for the extension of their part.
The occurrence of prominent corporate disappointments highlighted gave shortcomings in corporate administrative structure exemplified by misrepresentation poor booking and the disappointment if inner controls (Turner, 2007).
This gave episodic confirmation supporting the discrements on the insufficient evaluating hone in observing danger and controls in enterprises and their compelling commitment to administration.
Recent corporate bookkeeping embarrassments and the resultant objection for straightforward and genuiness in reporting have offered ascend to two divergent yet sensible results.
These call for investigation on the effect of internal audit practices on organisation performance.
Internal auditing abilities have ended up critical in unwinding the convoluted bookkeeping moves that muddled budgetary articulations.
Furthermore. the general population interest for change and resulting administrative activity has changed corporate administration progressively, organisation offers and executives are under moral and lawful examination.
Both patterns have the shared objectives of dependably tending to speculators worries about the money related reporting framework.
However, there has been laxity implementation of internal audit findings and recommendations.
Organisation should establish frameworks of internal control to help them accomplish execution and authoritative objectives, anticipate loss of assets, empower creation of dependable reports and guarantee consistence with laws and directions.
Risk management practices of internal auditors in banking sector in Cameroon and found that there are positive effects facilitated by the implantation of risk and compliance policies.
Herdman. (2002) also found out positive association while Davidson (2005) established a minimal effect. Mutua (2012) researched on relationship between risk based audit on financial performance of commercial banks in Kenya.
This means that audit committee should be informed of such irregularities through internal audit report their own studied an extent to which systems of internal control influence a firm’s performance and revealed a strong relation between systems of internal control and firm’s performance of Sri Lanka Telecom limited but the study did not focus on effect on internal control practices ON MFIs performance.
In Kenya, Kamau (2014) examined effect of systems of internal control on performance in financial perspective of manufacturing firms and established a positive relation between internal control and performance in financial perspective, however; the study was based on large manufacturing firms hence its findings may not be generalized to the MFI context.
Most of the reviewed empirical studies indicate that internal controls are vital to any business organization.
However, despite a fact that internal control is a vital factor affecting a firm regardless of its size, there is little evidence on the effect of internal control practices on performance of MFIs since most of studies on internal controls globally and in Cameroon focus more on large firms than MFIs.
Thus, a literature gap, which this study intends to determine by examining the effects of internal control practice in other words internal auditing on organisational performance of MFIs in the Cameroon with specialty case study Buea.
1.2.1 Main Question
What is the effect of internal control on the financial performance of Micro finance institutes?
1.2.2 Specific Question
What is the effect of Control Environment on the Financial performance of NFIs?
What is the effect of Risk Assessment on the Financial performance of MFIs?
What is the effect of Control Activity on the Financial performance of MFIs?
What is the effect of Information and Communication on the Financial?
Performance of MFI?
What is the effect of Monitoring on the Financial performance of MFIs?
1.3 Objective of Study
1.3.1 Main Objective
The aim of this study is to analyse the effect of Internal Control on the Financial performance on Micro Finance Institutes.
1.3.2 Specific Objective
To determine the effect of Control Environment on the financial performance of MFIs
To evaluate the effect of Risk Assessment on the financial performance of MFIs
To obtain the effect of Control Activity on the financial performance of MFIs
To analyse the effect of Information and Communication on the financial performance of MFIs
To determine the effect of Monitoring on the financial performance of MFIs