Abstract

The effect of internal audit on the financial performances  of micro finance institution in southwest region of Cameroon. Internal audit has been recognized as an elementary administrative scheme comprising principally of examining documents, reviewing operations and presenting to the panel of executives, board or external auditors since history. A descriptive research design was adopted. The study’s population constituted of 59 microfinance institutions in which 52 where return. Data was collected via primary sources. Questionnaires were administered to collect primary data  also From the questionnaires distributed, there was a response rate of           83.64%.

Statistical Package for Social Sciences (SPSS), was used to analyze the data gathered. Mean and standard deviation were the descriptive statistics used to analyze the data. Regression analysis and correlational analysis were the inferential statistics utilized to establish the relationships between the dependent and the independent variables. The research findings showed that professional competence had a positive relationship with MFI’s financial performance.

It was established that internal audit accounted for 28.4% of the financial performance of MFIs. At 0.05 significance level, only independence of internal audit was statistically significant. The study therefore concluded that internal audit had an effect on MFI’s financial performance as supported by a significance value of 0.007. The study recommends that a similar study be carried out in commercial banks offering microfinance services so that there can be comparison and generalization of the findings in this study.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The role of internal audit in enhancing financial performance has garnered significant attention worldwide. Internal audit functions are crucial for organizations, as they provide independent assurance that risk management, governance, and internal control processes are operating effectively (Institute of Internal Auditors [IIA], 2020). According to a study by (KPMG 2022), organizations that maintain robust internal audit functions report a 30% higher return on equity compared to those with weaker audit practices. This statistic highlights the critical influence of internal auditing on financial outcomes and underscores the necessity for organizations across various sectors to prioritize their internal audit functions.

Moreover, the International Federation of Accountants (IFAC, 2021) emphasizes that effective internal auditing contributes to enhanced transparency and accountability in financial reporting. As businesses increasingly face complex regulatory environments, the demand for effective internal audit practices has escalated, facilitating better risk management and strategic decision-making. The global average for organizations employing internal auditing has risen to approximately 65%, reflecting the growing recognition of its importance (Deloitte, 2023). This trend indicates that organizations worldwide are increasingly acknowledging the value of internal audit in driving financial performance and organizational success.

In Africa, the significance of internal audit in improving financial performance is increasingly recognized as countries strive to enhance their economic stability and growth. The African Union (2022) reports that effective internal audit practices can reduce financial mismanagement and corruption, which are critical issues facing many African nations. A survey conducted by PwC (2021) found that 70% of African businesses believe that strengthening their internal audit functions will improve their financial results and operational efficiency. This acknowledgment is particularly relevant in sectors such as banking and microfinance, where transparency and accountability are paramount.

Statistics from the African Development Bank (AfDB, 2021) indicate that the financial sector in Africa is projected to grow by 8% annually, driven by increased investment and the expansion of microfinance institutions (MFIs). However, this growth comes with challenges, including the necessity for robust internal controls to mitigate risks associated with financial transactions. Research indicates that organizations with strong internal audit functions in Africa experience lower rates of fraud and financial loss, reinforcing the need for effective auditing in promoting financial sustainability (Nguyen & Hwang, 2023).

Cameroon, as part of the African continent, has witnessed a growing recognition of the importance of internal auditing in enhancing financial performance. The country’s financial sector, including microfinance institutions, plays a vital role in promoting economic development by providing financial services to underserved populations. According to the World Bank (2022), microfinance contributes approximately 6% to Cameroon’s GDP and is crucial for poverty alleviation and economic empowerment Despite the potential of MFIs, the sector faces significant challenges, including inadequate governance and oversight mechanisms.

The National Financial Inclusion Strategy (2021) highlights that over 60% of MFIs in Cameroon lack effective internal audit functions, which can lead to financial mismanagement and operational inefficiencies. A study by Nguimkeu (2023) found that MFIs with established internal audit functions reported 40% fewer incidents of financial irregularities compared to those without such functions. This statistic underscores the critical need for enhancing internal audit practices within the microfinance sector to safeguard financial performance.

Furthermore, the regulatory framework governing MFIs in Cameroon has evolved, with the government implementing policies aimed at strengthening oversight and improving financial transparency. The Ministry of Finance’s (2022|) report indicates that the government is actively promoting the establishment of internal audit functions within MFIs as part of its broader strategy to enhance financial stability and protect depositors’ interests. However, the effectiveness of these efforts remains contingent upon the commitment of MFIs to adhere to best practices in internal auditing (Mokogwu, 2023).

Focusing on the South West region of Cameroon, the microfinance sector is characterized by a growing number of institutions aimed at improving financial access for local populations. According to the Cameroon Central Bank (Banque des États de l’Afrique Centrale [BEAC], 2023), the number of microfinance institutions in the South West region has increased by 25% over the past five years, reflecting the rising demand for financial services among smallholder farmers and entrepreneurs. However, this rapid growth poses risks related to governance and financial management, particularly in the absence of effective internal audit practices.

A recent study conducted in the South West region revealed that 55% of microfinance institutions do not have a dedicated internal audit function (Tchouassi et al., 2023). This lack of internal audit capability has significant implications for financial performance, as it increases the risk of fraud and mismanagement. The same study indicated that MFIs with established internal audit functions reported a 30% higher profitability compared to those without, emphasizing the critical role of internal auditing in ensuring financial sustainability.

Additionally, the socioeconomic context of the South West region presents unique challenges and opportunities for microfinance institutions. The region is marked by a high level of economic activity in agriculture and small-scale enterprises, which are vital for local livelihoods. However, the prevalence of informal financial practices and a lack of financial literacy among the population can exacerbate the risks faced by MFIs. Strengthening internal audit functions in this context is essential for promoting sound financial management and enhancing the overall performance of microfinance institutions (Nkamleu, 2022).

Financial performance: Microfinance institutions’ performance in the market can be scrutinized at both micro and macro levels (Muga, 2012). Profit generation is the crucial prerequisite of an aggressive microfinance association and the nominal source of finance at the micro level. However, it is not simply a consequence, it is an essential for thriving microfinance institutions in the face of emerging rivalry in the financial market. At the macro level, a cost-effective microfinance section is superiorly able to endure pessimistic shocks and accord firmness to the financial structure.

High profits may possibly endorse financial stability of microfinance institutions and its security as it provides an essential foundation of equity particularly if re-invested into the company Return on assets (ROA), the return on equity (ROE) and Return on Investment (ROI) are the three mentioned accounting –based performance models (Schiuma, 2003). These are extensively used to appraise the performance of industries as well as microfinance institutions. The directors of the microfinance institutions and analysts adopt ROA and ROE to evaluate firm’s performance and anticipate trends in the industry. They will input financial data in numerical schemes to forecast the institution’s deficiencies and an array of supplementary purposes where a computation of prosperity is preferred. The key aim of  this research was to evaluate if internal audit can essentially improve microfinance institution’s financial performance.

1.2 Statement of the Problem

In recent years, corporate audit scandals coupled by an outcry for transparency and integrity in financial reporting have given rise to two logical outcomes. Internal audit skills are now critical in resolving the complicated accounting manipulation which have muddled financial statements. In addition, public outcry for change and regulatory action has modified the face of corporate governance.

As a result, the bar of ethical and legal scrutiny has been raised for agents of companies working for the principals. These outcomes are jointly responsible for addressing investors’ anxieties about the financial reporting system. However, laxity still exists in implementing these internal audit findings and recommendations. (Kinyua et al., 2015). Audit  was measured by (Geiger , Rghunandan (2002) to check whether going concern had been issued in the previous year for clients that went bankrupt

They discovered that a going concern judgement was likely to be presented by auditors in the later years but less likely in the initial years, which is contradictory to the concern that audit  is affected adversely by a long client-auditor relationship. (Matoke and Omwenga , 2016) also distributed a journal on audit and financial execution of state recorded organizations. None of these examinations have taken a look at the impacts of internal review  on financial performance of micro finances . With this, there exists a gap that should have been filled by this investigation on the impacts of internal audit on the financial performance of micro fiances organizations.

The microfinance sector in Cameroon plays a pivotal role in promoting financial inclusion and stimulating economic development, particularly in underserved communities. This study aims to investigate the effect of internal audit on the financial performance of microfinance institutions (MFIs) in the Southwest region of Cameroon, where rapid growth and increasing demand for financial services coalesce with weaknesses in governance and oversight. Internal auditing is an essential component of effective corporate governance, serving as a mechanism for ensuring accuracy, transparency, and accountability in financial reporting.

It provides organizations with an independent assessment of their risk management, internal controls, and governance processes (Institute of Internal Auditors [IIA], 2020). The absence of a strong internal audit function has lead to financial mismanagement, increased risk of fraud, and ultimately, poor financial performance. Given that microfinance institutions often operate in high-risk environments, the need for effective internal auditing becomes even more pronounced also One significant challenge is the lack of effective governance structures within many MFIs.

The National Financial Inclusion Strategy (2021) revealed that over 60% of MFIs in Cameroon lack robust internal audit functions, which can lead to inadequate oversight and increased vulnerability to financial irregularities. The absence of internal audit mechanisms compromises the ability of MFIs to detect and mitigate risks, ultimately affecting their operational efficiency and financial outcomes.

The consequences of inadequate internal audit functions can be dire for microfinance institutions. Financial mismanagement not only affects the bottom line but also erodes stakeholder trust and confidence. The lack of transparency and accountability can deter potential investors and clients, leading to reduced capital inflows and limiting the growth potential of these institutions (Mokogwu, 2023)

Moreover, the economic implications of weak internal audit functions extend beyond individual institutions. The microfinance sector as a whole relies on the trust and confidence of the communities it serves. When MFIs fail to demonstrate sound financial practices, it undermines the entire sector, hindering efforts to promote financial inclusion and economic development in the region. Given the critical role of internal audit in enhancing financial performance and the specific challenges faced by microfinance institutions in the South West region of Cameroon, there is a pressing need for empirical research to explore this relationship.

This study aims to fill the gap in the existing literature by examining the effect of internal audit on the financial performance of MFIs in the South West region. By investigating the current state of internal audit practices and their relationship with financial outcomes, this research will contribute to the development of strategies aimed at strengthening governance and improving financial management in the sector. As the microfinance sector continues to grow, it is imperative to address the gaps in governance and oversight that hinder operational efficiency.

1.3 Research Questions

1.3.1 Research Questions

The Effect of Internal Audit on Financial Performance of Microfinance Institutions in Southwest region of Cameroon

1.3.2 Specific Research Questions

1. How does professional competence affect the financial performance of MFIs in the Southwest region of Cameroon?
2. To what extern do independence audits affect the financial performance of MFIs in the Southwest region of Cameroon?
3. To what extent does Audit quality affect the financial performance of MFIs in the Southwest region of Cameroon?

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