Effect of Internal Control Systems on Financial Performance of Public Universities in Kenya

Abstract

Most private universities in the world have reported better financial performance results than public Universities across the world. Majority of the public universities struggle financially and depend on government funding. The dismal financial performance in public universities can be ascribed to poor financial management practices. Ideal financial management approaches require organizations to have a strong and robust internal control systems. Though financial management and internal control systems are essential, there exists only a few studies and empirical evidence on the relationship between financial performance and internal control systems in public universities in Kenya The aim of the study was to investigate the effect of internal control systems on financial performance of public universities in Kenya. Explicitly, the research investigated the effect of budgetary controls, corrective controls, preventive controls, and detective controls on the financial performance of public universities in Kenya. Besides, the research examined the moderating effect of regulations and policies on the relationship between internal control systems on the financial performance of public universities in Kenya. The research was informed by the systems theory, agency theory, attribution theory, and stewardship theory. The research adopted a causal research design, and targeted 160 respondents from 32 public universities. Census sampling technique was applied. Semi-structured questionnaires and secondary sources were used to collect primary and secondary data respectively. The secondary data was obtained on the financial performance of public universities for five years. The study respondents were the Deputy Vice chancellors (finance), Registrars, In-charge ICT, Finance Officers and Internal Auditors. A total of 142 questionnaires were returned duly filled which was 88.75%. Descriptive and inferential analysis was done on the data collected. A pilot study was conducted to examine the reliability and validity of the research instruments. The instrument was adjusted accordingly. Diagnostic tests were carried out and the data was found to be normally distributed and did not suffer from multicollinearity. The data did not also suffer from heteroscedasticity. Regression analysis was done to determine the effect of the independent variables on the dependent variable. The findings revealed that budgetary controls, corrective controls, preventive controls, and detective controls regressed individually against the dependent variable were statistically significant. However, when jointly regressed, corrective controls variable was insignificant. The study also found that regulations and policies did not have moderating effect on the relationship between internal control system and financial performance in public universities in Kenya. The research concluded that, to a large extent, internal control system had an effect on financial performance of public higher learning institutions. The research recommends that University management in public universities strengthen their internal control systems and that policy makers, regulatory authorities, the ministry concerned should formulate sound policies that strengthen internal controls of state corporations. By strengthening the internal controls of state corporations, their financial performance would improve and thus overall growth of the economy as a whole