Internal Control Systems and Financial Performance of Public Institutions of Higher Learining in Vihiga County, Kenya

Abstract

Most public institutions of higher learning across the world have reported suboptimal financial performance compared to private institutions of higher learning. The poor financial performance can be attributed to financial management practice. The sound financial management practices require the institutions of robust internal control systems. However, there are limited empirical research findings regarding the relationship between the internal control system and financial performance. The specific objectives of the study were: to determine the effect of control activities, risk assessment, control environment, information and communication and monitoring on financial performance of institutions of higher learning in Vihiga County, Kenya. The study was anchored on agency theory, stewardship theory, positive accounting theory and attribution theory. The study used a descriptive research design. The target population of respondents was 140 employees in the four institutions studied whereas the sample size was 96 employees. Primary data was collected from sample population using semi-structured questionnaires. Descriptive and multiple regression analysis were used to analyze data. The study found that the institutions had adequate and effective control activities which included regular internal audit reports, adequate segregation of duties in the finance and accounts departments and physical controls to prevent excess allocated funds. Control activities were found to have a positive significant effect on the financial performance of the institutions under study. The study found that the institutions under study had proper risk assessment tools and risk assessment management system because they carried out continuous financial assessment of their organizations coupled with regular, timely and profound audits. Risk assessment was found to have a positive significant effect on the financial performance of the institutions under study. The study established that the institutions had effective control environment. The number of staff in finance and audit departments was adequate and well trained on accounting and financial management system. Control environment was found to have a positive and significant effect on the financial performance of the institutions under study. The study found that the institutions had effective flow of information and communication channels. In addition, the study found that effective flow of information and communication enhanced financial accountability and financial performance of the institutions. The expenditure of the institutions was properly monitored and audit departments were independent. Financial monitoring was found to have a positive and significant effect on the financial performance of the institutions under study. To the management of the public institutions of higher learning, the study recommends regular and timely financial audit to help them identify any loop holes in their financial systems as well as financial performance