Context of study
This study was a case study of SACCOs in Kenya, in Murang’a County. In Kenya, although assets of SACCOs have grown overtime, financial performance in terms of profitability remains weak. The financial performance of SACCOs is indicated by net surplus which is revenues less costs. The report by SASRA evaluated the performance of the SACCO sub-sector based on the financial data and information extracted from audited financial statements and reports for the period 2006 to 2012. It is a legal requirement that the audited accounts of a SACCO be registered with the Commissioner for Cooperatives Development before presentation to members at the annual general meeting. However, not all active SACCO societies comply with this requirement (SASRA Report, 2012).
1.2 Problem Statement
Most of the registered SACCOs in Kenya have functional internal audit departments with well qualified staff charged with responsibilities of re-assuring that internal control systems are adequate and quality processes and systems are in place (Olando, Jagongo and Mbewa, 2013). However, there is continued poor financial performance, incidences of fraud, incidences of budgets not being followed and cases of non-conformance to rules and regulations on usage of finance. This has put member savings at risk despite investing in the internal audit department (Olando et al, 2013).
There have been several studies carried out which demonstrate the importance of internal audit reporting on the effectiveness of the organization. Hutchinson and Zain (2009) studied the role of internal audit quality and the independence of the audit committee on firm performance and growth opportunities in UK companies. The study established that report should be in a format that is prescribed by the organization and meet completeness standards as per the organization’s guidelines. Sparks (2011) assessed the value of timely internal audit reporting to SACCOs in Canada. According to Sparks the audit report should have insight into the changes that are taking place and the effect these changes can have on the organization. This then should be timely communicated to the management for action to be taken. Clikeman (2003) studied the role of internal auditors in educating management on finance and corporate governance in Brazil. He observed that for an audit report to comprehensively and completely provide insight to management about the internal controls in operation, it has to reasonably cover all areas of operations and be reasonably complete. Further, Stewart and Subramaniam (2010) studied the role played by internal audit independence and objectivity on firm effectiveness in India. They observed that objectivity in the audit function is critical in all the functions including in reporting. Johnson (2006) examined the role played by internal audit reporting channels on internal audit effectiveness. He observed that having proper reporting channels is important in ensuring independence of the audit departments and at the same ensuring that the internal audit reporting is not influenced by management. Few studies have been done on the role of internal audit in SACCOs in Kenya. A study by Olando et al. (2013) assessed the contribution of SACCO financial stewardship to growth of SACCOs in Kenya. In this study, internal audit was just a variable among various other variables. This study sought to explain how internal audit reporting quality affects SACCO’s financial performance.
The internal audit department is mandated to provide reports on the processes and systems in the organization to ensure that SACCO objectives are followed, financial reporting is reliable, and the operations are effective and efficient. The internal audit department is also expected to report on whether the SACCO complies with the different rules and regulations. However, in Kenya, the internal audit function in the SACCO sub-sector has not been fully taped. This could be seen in the numerous cases of poor management, fraud and poor governance reported by SACCOs (Olando et al., 2013).
Though having an internal audit function is important, the quality of the reports from the internal audit is of utmost importance. The completeness of the report, the objectivity of the advice, the timeliness of the report and the clarity of where the report is directed to are important characteristics that quality reporting should have. It is important to ensure that internal audit reports are quality and the reporting is made to the right people in the organization. As SACCO’s continue to be affected by poor governance and poor performance, a question arises as to what effect the internal audit reporting quality may have on their financial performance. As observed from previous empirical studies, there are few studies that focus on internal audit reporting quality. It is against this background that this study sought to evaluate the role of internal audit reporting on financial performance of SACCO’s in Kenya.
1.3 Objectives of the Study
1.3.1 General objective
The general objective of the study was to determine the effect of internal audit reporting quality on financial performance of SACCOs.
1.3.1 Specific objectives
The specific objectives of the study were to;
i) Determine the effect of objectivity of internal audit reports on financial performance of SACCOs in Kenya
ii) Establish the effect of internal audit reporting channels on financial performance of SACCOs in Kenya.
iii) Examine how completeness of internal audit report affects financial performance of SACCOs in Kenya
iv) Establish the effect of internal audit report timeliness on the financial performance of SACCOs in Kenya
The study sought to test the following hypothesis;
i) There is no significant effect of objectivity of internal audit reports on financial performance of SACCOs in Kenya.
ii) There is no significant effect of internal audit reporting channel on financial performance of SACCOs in Kenya.
iii) There is no significant effect of completeness of internal audit reports on financial performance of SACCOs in Kenya.
iv) There is no significant effect of timeliness of internal audit reports on financial performance of SACCOs in Kenya.
1.5 Justification of the Study
The study findings will be of immense importance in the sense that they will assist management of SACCO’s to realize how audit reporting can affect its operations and financial performance. The study established how objectivity of reports, the reporting channels,
completeness of audit reports and timeliness of internal audit reporting are related to financial performance of the SACCO. This will be able to inform management of these SACCOs on the way forward in relation to internal audit reporting.
The study findings will also be of importance to government in that it will give regulatory agencies of the government like SASRA deeper insight on the role of internal audit reporting on financial performance. This will go a long way in informing policy and regulations on internal audit reporting of SACCO operations. SACCOs have been established as one of the most important financial institutions towards financial deepening and their financial performance is important for the growth and advancement thus steering economic growth. The findings therefore will affect policies on how internal audit reporting in these institutions is performed.
Members of a SACCO are the ones who are directly affected if the financial performance of a SACCO is poor. The findings from this study will inform SACCO members on the role played by internal audit reporting in influencing financial performance of these SACCOs. Members therefore can use their voting rights to ensure that top management of their SACCOs who are elected ensure that internal audit reporting plays its rightful role and it has the desired effect on financial performance.
Finally, the current research study will be important to researchers for theoretical purposes in that it will add to the empirical and theoretical literature available in the field of internal audit reporting and financial performance of SACCOs. This can be used by scholars and students interested in the area of study. The limitations and gaps in the study and suggestions for further research that will be provided by this study can be used by future researchers.