Effect of Internal Control Systems on Financial Performance of Distribution Companies in Kenya

Abstract

There is a general consensus that internal Control systems are important management tools in financial management. There has been controversy as to why there is a declining profitability trends among Small and Medium scale Enterprises despite government’s commitment to availability of funds. Economic Survey 2017 statistics indicate a tremendous growth in profitability of small and medium scale Enterprises in Kenya over the last ten years; constituting about 96 per cent of all business enterprises in the country; yet 71% of the business start-ups do not operate beyond their third anniversary. Empirical studies on internal control systems yielded mixed results and focused on different firms rather than SMEs. However, little is known on the effect of internal control systems on the financial performance of distribution companies. The main objective was to analyze the effects of internal control systems on financial performance of small and medium distribution companies. The specific objectives of the study were to: determine the effect of control activities; find out the effect of risk assessment; establish the effect of information and communication on financial performance Moonbluez Enterprises Limited. The study was anchored on Agency and Reliability theory, and a conceptual framework showing the interaction between internal control systems as the independent variable and financial performance as the dependent variable. Correlational and case study design was adopted targeting all the 38 employees while employing census survey technique. Primary data was collected using questionnaires and secondary data was collected from relevant books, journals and periodicals. Reliability and validity of the instrument was checked using test-retest technique and expert reviews and Pilot study was conducted of the 4 employees of Moonbluez enterprises. Descriptive statistics such as mean and standard deviation and inferential statistics such as Pearson’s correlation and multiple regression analysis was employed to analyze the data. Presentation was done by the use of tables and charts. The results of the study may help identify gaps within the systems of internal control at Moonbluez Enterprises Limited and in the distribution industry at large especially among small and medium sized entities. Further the study may also add to the existing knowledge bank regarding book keeping, internal controls and financial performance among small and medium sized enterprises in Kenya. Scholars and researchers who would like to carry out more studies on internal Controls and financial performance in small and medium sized entities may find the study beneficial.