Effect of Internal Control Systems on Financial Performance of Companies Quoted in the Nairobi Securities Exchange

Abstract

Internal Control Systems play an important role in every organization as it assist in realization of their financial performance goals. The main objective of the study was to determine the effect of internal control systems and financial performance of companies quoted in Nairobi securities exchange. Specifically the study was guided by the following objectives; to investigate the relationship between internal control environment, internal audit function, risk management, internal control activities, and financial performance. Most firms quoted in the Nairobi Securities exchange have registered declining performance in recent years due weakened internal control systems. Researches done relating to internal control systems and financial performance do not show directly the effect of corporate governance and regulatory systems on financial performance. The study adopted descriptive research design using both quantitative and qualitative approach. The target population was 372 senior managers in 62 companies quoted in Nairobi Securities exchange. Multi-level random sampling of 144 senior managers in various categories returned 115 (79.8%) valid responses. Survey data was collected by use of a structured questionnaire. The data obtained was analysed using both qualitative and quantitative analysis. Multiple regression models were used to test whether internal control environment, internal audit function, risk management, internal control activity and corporate governance have any influence on financial performance. It was found that internal control systems had a significant relationship with financial performance. Based on the research findings it can be concluded that internal control system is a positive significant predictor of financial performance. The findings of the study suggested that internal control systems especially risk management, corporate governance, control activity, internal control environment and control internal audit function are significant areas, management of quoted companies should give great attention to in order to improve financial performance of quoted companies. The findings are expected to be of value to the investors in NSE and form a basis for improving financial performance of companies quoted in NSE.