INTERNAL CONTROL SYSTEMS AND FINANCIAL PERFORMANCE OF MANUFACTURING FIRMS LISTED ON THE NAIROBI SECURITIES EXCHANGE, KENYA

Abstract

Effective internal control systems determine the firm's earnings, quality, and success. The last decades have witnessed a significant rise in the number of manufacturing firms listed on the Nairobi Securities Exchange failing or seeking bailouts from the government. The study pursued to assess the effect of internal control systems (ICS) and FP of manufacturing firms listed on the Nairobi Securities Exchange, Kenya. Explicitly, the study aimed to define the effect of risk evaluation controls on the FP of manufacturing firms listed on the Nairobi Securities Exchange, Kenya; assess the influence of information communication on the FP of manufacturing firms listed on the Nairobi Securities Exchange, Kenya; establish the outcome of monitoring activities on the FP of manufacturing firms listed on the Nairobi Securities Exchange, Kenya. Also, the moderating effect of firm size on the connection between internal control systems (ICS) and FP of manufacturing firms listed on NSE, Kenya was assessed and to assess the joint effect of internal control systems and firm size on the FP of manufacturing firms listed on the Nairobi securities exchange, Kenya. The research study was steered by Agency theory, system theory, institutional theory, in addition to efficient structure hypothesis theory. A descriptive study design was used. A population of 9 manufacturing firms listed on the Nairobi Securities Exchange as of April 2022 was applied in the study. A purposive sample of 7 firms listed on the Nairobi Securities Exchange and under normal operations during the study period was chosen. The study used a structured questionnaire to collect primary data using a 5-point Likert Scale, whereas secondary data was collected by means of a checklist. The study utilized a linear regression model to assess the connection between internal control systems (ICS) and FP, along with the firm size moderating effect of the listed manufacturing firms on the NSE. Analysis of Variance (ANOVA) and F-test statistics were used to test the overall significance of the regression model, respectively, at a 5% significance leval. Specifically, data was analysed with the aid of Statistical Package for the Social Sciences (SPSS) version 23.0. The findings revealed that risk assessment practices have a positive and statistically significant impact on the FP of the manufacturing firms listed on the Nairobi Securities Exchange (NSE). Additionally, the study found that information communication controls also have a positive and statistically significant effect on the FP of these firms. Monitoring activities were similarly shown to have a positive and statistically significant influence on the FP of the selected firms. Finally, the study examined the moderating effect of firm size on the relationship between internal control systems (ICS) and FP. It was found that firm size positively influenced the relationship between risk assessment and monitoring activities, but had a negative effect on the relationship between information communication and FP. It is recommended that manufacturing companies enhance their internal control systems (ICS) to boost their FP. Furthermore, additional research should be conducted in other sectors of the Nairobi Securities Exchange (NSE). A comparative study focusing on the moderating effect of firm size on the relationship between internal control systems (ICS) and FP in different industries would also be valuable.