Effects of Internal Audit System on Financial Performance of SACCOs in Meru County, Kenya

Abstract

In today’s business world, the major interest is to enhance accountability, profitability and enjoy competitive advantage. As a way of achieving this, SACCOs employ internal auditing, to enable them monitor the monetary activities to enhance financial performance. Despite the fact that the majority of SACCOs (around 70%) have implemented either an in-house or outsourced audit system, their financial performance remains below expectations, with instances of fraud, poor fund management, and inadequate budget development and utilization. Given these circumstances, the purpose of this research was to examine how the internal audit system affects the financial performance of SACCOs in Meru County. The study concentrated on four primary goals: evaluating the influence of compliance, risk assessment, control function, and monitoring on the financial performance of SACCOs in Meru County. The study's theoretical foundation was built on the agency, legitimacy, and capture theories. To accomplish the research objectives, a descriptive research design was employed, targeting 42 SACCOs that had operated in Meru County for a minimum of ten years. The study adopted a census approach, including all 42 eligible SACCOs in the study. The respondents consisted of the chief executive officers of the respective SACCOs, totaling 42 participants. Data collection involved the use of a structured questionnaire, which was pre-tested in four SACCOs from Tharaka-Nithi County, selected purposively. The collected data were accurately coded based on the responses to various items. In the analysis of data, this study employed SPSS (Version 24) and utilized descriptive and inferential statistics. Multiple linear regression models were used to investigate the connections between the dependent and independent variables. The study's findings uncovered a noteworthy correlation between compliance and the financial performance of SACCOs in Meru County, rejecting the hypothesis that the compliance slope is zero (b = 0). Similarly, a noteworthy relationship was observed between risk assessment and financial performance, rejecting the hypothesis that the risk assessment slope is zero (b = 0). However, no noteworthy impact on financial performance was found for control function and monitoring. The study concluded that compliance plays a vital role in ensuring SACCOs adhere to regulations and guidelines, thereby fostering transparency, accountability, and good governance. Furthermore, effective risk assessment can assist SACCOs in reducing operating costs, enhancing efficiency, and improving financial performance. The study recommends that SACCO management strive for full compliance with relevant regulations to enhance accountability and financial performance. Additionally, implementing robust risk assessment policies is advised to mitigate risks, reduce operational costs, and boost financial performance. Finally, the study suggests expanding the research to encompass other financial institutions to explore potential variations in the correlations between the internal audit system and financial performance.