Effect Of Internal Control Practices On The Financial Performance Of Agroprocessing Firms In Kisumu County, Kenya

ABSTRACT

Internal controls are processes planned and implemented by management in order to give

rational assurance concerning the financial performance of a firm based on its objectives in

respect to operational efficiency and compliance of existing rules and regulations. The main

objective of the study is to determine the effect of internal control practices on the financial

performance of agro-processing firms in Kisumu, Kenya. The specific objectives are based on

these perspectives; control environment, risk management, internal control activities,

information and communication and monitoring on financial performance of agro - processing

firms in Kisumu, Kenya; whereas financial performance focused on profitability. However,

there are limited empirical research findings regarding the relationship between the internal

control system and financial performance. In agro-processing firms in Kisumu, Kenya, there

have been many weaknesses in regards to; safe guarding of the firm’s assets, accuracy and

reliability of accounting records and information, promotion of efficiency of the firm’s

operations as well as staff compliance with management prescribed policies and procedures.

Most agro-processing firms have therefore registered declining financial performance due to

weakened internal control practices which emphasis the fact that internal controls have a

significant impact on financial performance. The study will contribute to the present body of

knowledge on internal control practices and financial performance of agro-processing firms in

Kenya. The study adopts correlation research design, which states that there is relationship

between variables. The target population for the study was comprised of employees in the agroprocessing

firms, which total 66 operating within Kisumu County. The study was guided by

agency theory, stewardship theory and positive accounting theory; Data was collected from

secondary and primary sources thus from relevant documents, such as county government

reports, publications and the journals using structured questionnaires. The researcher used

stratified sampling method, which ensured that all the strata present in the total population was

represented and simple random sampling given that no complexities will be involved. Validity

and reliability of questionnaire were tested on pilot data targeting 7 respondents. Regression

and descriptive analysis were used to establish the effect thereby addressing all the objectives

and hypothesis. The finding indicated that regression model show that there is a positive

relationship between internal controls environment, risk assessment, monitoring, information

and communication, control activities and financial performance of agro processing firms; as

indicated by the variables internal control environment (β=0.993, P