Effect of Internal Control on Financial Performance of Commercial Banks Listed in Nairobi Securities Exchange in Nairobi County Kenya

Abstract

The latest collapse of some of the largest commercial banks in Kenya such as Imperial and Chase bank that are under receivership has cast doubt on the effectiveness of the current audit practices of these banks to steer them into stability and improved financial performance. The recent failures have put pressure on the commercial banks to rethink how best they can align their internal audit processes to ensure stability and improvement in financial performance. This study therefore sought to assess the effect of internal control on financial performance of commercial banks listed on NSE. The theory that guided this study was reliability theory. This study adopted a descriptive survey design with the target population comprising of 10 commercial banks listed on NSE while the unit of observation was 50 respondents from the following category: senior finance manager, credit manager, operations manager, risk manager and internal auditor. The study made use of primary and secondary data. A semistructured questionnaire of Likert-type was used to collect primary data on internal audit while secondary data collection sheer was used to collect data on financial performance of the commercial banks from their audited financial reports. Data gathered from the questionnaires were analyzed quantitatively using SPSS computer software. The study used both descriptive (mean and standard deviation) and inferential statistics for analysis. Inferential statistics; regression coefficient and bivariate correlation were used to analyze the relationship between the dependent variable and the independent variables. The study found that there was effect between internal control, asset safeguarding, risk management, compliance with laws and the dependent variables; return on assets, net income and liquidity as was indicated in the regression analysis. The study concludes that internal audit systems have an effect on financial performance of commercial banks however, internal control do not have a significant effect on financial performance of commercial banks and attention should be paid on them. This study recommends that commercial banks listed at the Nairobi Securities Exchange should re-evaluate their internal controls systems and strengthen their weak areas so as to improve their financial performance. The study suggests that researchers may consider undertaking research on the effect of new banking regulations such as Basel Accord III on financial performance of commercial banks