The Effect of Internal Controls on the Financial Performance of Commercial Banks in Kenya

Abstract

The objective of the research was to establish the Effect of Internal Controls on Financial Performance of Commercial Banks in Kenya. Internal Controls were measured using the five elements of internal control as stipulated by the Committee of Sponsoring organizations of Treadway Commission framework of internal controls while Financial Performance was measured using the historical average of Return on Equity. A descriptive research design was adopted due to its ability to describe the relationship between elements of Internal Controls and Financial Performance. The study used the 43 commercial banks in Kenya. Primary data was collected using a structured questionnaire. Descriptive statistics obtained from data analysis were presented using frequency tables, while inferential data findings were presented using correlation and regression tables. The study findings revealed that the banking sector enjoys a strong financial performance partly because of implementing and maintaining effective internal controls. The existence of effective internal control is attributed to the highly regulated and structured environment in the banking sector. The study recommends banks should effectively implement and maintain internal controls due to the nature of the riskiness of the banking sector and its impact on financial performance.