Abstract

This study aimed at assessing effect of internal audit on the Financial Performance of MFIs in Buea. It identified professional competence, independence audit and internal controls as the independent variables.

Financial performance, whose measure has been based on ROA and ROE, was used as the dependent variable of study. The descriptive survey method was used wherein 40 MFIs in Buea where surveyed. Although the number of MFIs surveyed was not large, the survey was distributed across all the MFIs in Buea to ensure representativeness.

Data was obtained through a structured questionnaire designed for that purpose and the data was analyzed using descriptive and regression analysis with the help of Statistical Package for Social Sciences (SPSS) version 25. The hypothesis was tested through a correlation test, and it revealed that there is a strong positive relationship between the variables whereby 64.8% of financial performance of MFIs could be attributed to internal control.

The study concluded thus that internal audit components professional competence, independence audit and internal controls have a significant positive impact on MFIs financial performance. Therefore, the study recommends that the head of the internal audit department should be responsible to the management/board in the organisation with sufficient authority to promote independence and to ensure broad audit coverage, adequate consideration of audit reports, and appropriate action on audit recommendations.

CHAPTER ONE

INTRODUCTION

1.1Background of Study

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. Internal audit had been known to enhance the objectives and discussions within and without the organizational departments which in turn enhanced the value within the organization (Raja, 2010).

Management is obliged to increase or maximize shareholders’ wealth while displaying competence in the performance of its duties. Internal audit therefore checks on this performance in accordance with modern day practices due to the amalgamation of diverse forces which led to a quiet revolution of the profession. Companies presently require immense capability from internal audit, in light of inadequate capital, to display enhanced competence in identifying and mitigating risks.

The expansion of technology has enabled internal audit to monitor and examine facts with intensified rapidness, thereby improving the internal audit sector. Making changes to an existing internal audit department can be an important undertaking as it differs among organizations. The transformation from simply establishing and observing rules and regulations, to accurately delivering additional significance requires numerous organizational changes.

According to Ramamoorti (2009), various microfinance institutions pay their staff poorly hence making them unenthusiastic, have weak ethical standards and their governance practices are unproductive emerging into asset mismanagement.

While differences may affect the practice of internal auditing in each environment, conformance with the institute of internal auditors (IIA) international Standards for the Professional Practice of internal auditing is essential in meeting the responsibilities of internal auditors and the internal audit activity (Coupland, et al. 1993).

The international accounting standard(IAS) present general terms to allow  adoption in different national contexts with Audit committee’s an understanding that  implementation will be governed by the organization and determine effect of internal audit on  financial performance in Micro finance institutionsm the internal audit activity carries out their responsibilities and in accordance with the applicable law.

There is an apprehension in the entire world whether the internal audit function has the capability to grant divergent benefits to an organization in achieving its objectives. This latent deviated into a provocation and resulted into actualization of the meaning of internal audit by the Institute of Internal Auditors (the IIA). According to Basel Committee (20010) microfinance institutions have come to an understanding that internal audit is significant in enhancing supervision of resources in the microfinance institutions conveying an enhanced fiscal performance of microfinance institutions.

There are various theories that try to explain internal audit’s importance to an organization. The agency theory which is the overarching theory, makes the assumption that separation of ownership and management leads to transparency in internal audit function. The contingency theory states that internal audit is most effective when it is matched with the financial risks inherent to the nature of the organization. The stakeholder theory identifies stakeholders and defines performance outcomes as the defined satisfaction measure. These theories have been further discussed under literature review.

Ondieki (2014), investigated the effect internal audit had on commercial banks’ financial performance in Cameroon. He observed that internal audit practices and financial performance had a positive relationship. The study focused on internal controls, internal control standards, independence of internal audit and professional competency. It is against this backdrop that the current study will be focusing on the Microfinance Institutions in Cameroon and investigate whether similar findings will be replicated.

The financial and organization strategy of a micro finance institutions was underpinned by effective internal  systems in which the internal audit has an important role in raising the reliability of the internal  control system, improving the process of risk management and above all, satisfying the needs of  internal users. The internal audit support enhances the system of responsibility that the executive directors and employees have towards the owners and other stakeholders.

Taken together, the internal audit department provides a reliable, objective, and neutral service to the management, board of directors, and audit committee, while stakeholders were interested in budget effeteness, sustainable growth of economy, strong leadership, and reliable reporting on the financial performance and practices of an organization.

Cameroon microfinance industry has grown significantly over the last twenty five years, comprising different types of Microfinance institutions (MFIs) with varying legal structures and ownership structures. The entry of many institutions into the sector coupled with the transformation of the original players from NGO status to deposit taking microfinance institutions has created an intensely competitive environment.

Competition is further realized from established commercial banks offering similar products (Waweru & Spraakman, 2012). In fact, Cameroon’s microfinance industry is among the oldest and mos testablished in Africa (Hulme, Kashangaki, &Mugwanga, 1999).

Cameroon microfinance sector comprises of providers who vary in their legal structure, mission, methodology and sustainability and include Microfinance Banks, Commercial Banks (focus on micro-finance), non-banking financial institutions (NBFIs), Deposit Taking MFIs (DTMs), Credit only MFIs, Wholesale Micro-finance Lenders, Developmental Institutions, Insurance companies, Savings and Credit Cooperatives (SACCOs), Rotating Savings and Credit Associations (ROSCAs), Financial Services Associations (FSAs) and local money lenders (Ali, 2015). This is an indication of a competitive sector.

Cameroon microfinance institutions are further characterized by their level of formalness or ownership structure, where the formal MFIs’ operations are subject to general laws, banking regulation and supervision while semi-formal MFIs are registered but not subject to bank regulation and supervision (Ayele, 2014). With the rise in competition, there is an increased risk of unethical lending practices and loan pricing among the microfinance institutions which leads to an increased need for internal audit to check on these practices in order to enhance accountability and transparency in reporting of financial performance.

1.2 Statement of the Problem

The internal audit function gauges the usefulness of microfinance firms in accomplishing approved objectives and in implementing recommendations made by internal audit for improvement of their risk management, control and governance processes (Van Gansberghe, 2005).

The internal audit function offers an unfailing, impartial and objective service to the directors of the board, management and the audit committee whereas the stakeholders are more concerned on ROI, growth, sustainability, leadership and the reporting that can rely on the financial performance. Various studies have been done regarding the influence of internal audit on financial performance.

Hutchinson and Zain (2009) while exploring the association between quality of internal audit performance of the firm and return on equity (ROE) in Cameroon  depicted the association between quality of internal audit and the performance of firms. Opportunities that result to high growth are further increased by the independence of the audit committee. Also Salih (1983) while evaluating the internal controls alluded that the lack of separation of custodian and accounting functions was a weakness within the branch that affected service delivery to customers and increased costs.

Locally Otieno (2012) studied the enforcement of corporate authority on financial performance of  microfinance institutions and posited that corporate governance acts as a crucial role on microfinance institutions steadiness, presentation and the institution’s capacity to grant liquidity in complex market conditions.

22.4% of microfinance institution’s financial performance was attributed to corporate governance factors, according to the findings. Akenga (2011) studied about benchmarking and performance in microfinance institutions, and found that internal audit is important in benchmarking the firm’s financial utilization aspects. It is evident that majority of the studies relied on qualitative approaches and lacked robust statistical tests on the relationships among studied variables. Further, some of the studies such as Gaturu and Ngahu (2015) did not specify and justify their research designs and the sampling procedures used.

The existing studies have also not explored, under the conceptual discussion, the influence of factors such as internal audit standards, the independence of the audit department staff, professional competence and internal control mechanisms in the context of MFIs in Cameroon. This leads to this study’s primary contention by answering the research question; what effect does internal audit have on the financial performance of MFI?

1.3 Research question

1.3.1 Main Research Question

The main research question was to investigate the effect of internal audit on financial of micro finance institutions in Buea?

1.3.2 Specific Research Question

1. What is the effect of professional competence of internal audit on the ROA and ROE of MFIs Buea?
2. What is the impact of the Independence of Internal Audit on the ROA and ROE of MFIs Buea?
3. What is the effect of internal controls on the ROA and ROE of MFIs Buea?

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