ABSTRACT
This study investigated the Internal Control System (ICS)
that influenced financial performance
(FP) in
Municipal Urban Councils in northern Uganda: a case of Kitgum Municipal Urban
Council (KMUC). The objectives of the study were: to explore the relationship
between internal control activities and FP in KMUC; to find out how the
internal control environment affects FP in KMUC; and, to assess the impact of
auditing on FP in KMUC. A descriptive research survey design was adopted using
both qualitative and quantitative methods. The study targeted 70 respondents
but 58 returned the survey questions, indicating a response rate of 83%.
Stratified sampling techniques were used to select administrative staff, and
purposive sampling used to select political leaders and top-level
administrators. Data analysis involved frequencies, percentages and inferential
statistics such as correlations, and coefficient of determinations. Findings
revealed a moderate positive relationship (0.271*) between internal control
activities and FP; significant relationship between internal control
environment and FP (0.335*); and moderate positive relationship between audit
and FP (0.265*). The study concludes that internal control activities, internal
control environment and audit positively affected FP in one way or the other.
The study recommends that KMUC should employ professional members of the
Institute of Certified Public Accountants of Uganda in the Internal Audit
Department since 36.2% of the respondents opposed sufficient staffing of the
department which is the custodian of the ICS. The environment for the
implementation of ICS should be improved by ensuring that Management is
committed to the operation of the system, closely monitoring its implementation
and giving feedback to the staff. District Public Accounts Committee capacity
should be built and their office properly facilitated to enable them follow up
on the internal audit reports so that corrective measures are taken.
TABLE OF CONTENTS
Declaration....................................................................................................................................... i
Approval.......................................................................................................................................... ii
Acknowledgements........................................................................................................................ iii
Dedication...................................................................................................................................... iv
List of Tables and Figures.............................................................................................................. xi
LIST OF ABBREVIATIONS...................................................................................................... xii
ABSTRACT.................................................................................................................................xiii
CHAPTER ONE
...........................................................................................................................
1 INTRODUCTION.........................................................................................................................
1
1.1
Introduction...............................................................................................................................
1
1.2 Background to the study.
..........................................................................................................
1
1.2.1 Historical Background
...........................................................................................................
1
1.2.2 Theoretical
Background.........................................................................................................
3
1.2.3 Conceptual
Background.........................................................................................................
5
1.2.4 Contextual Background
.........................................................................................................
7
1.3 Statement of the
problem..........................................................................................................
9
1.4 The purpose of the
study.........................................................................................................
10
1.5 Specific objectives of the study ..............................................................................................
10
1.6 Research
questions..................................................................................................................
10
1.7 Hypotheses of the Study
.........................................................................................................
10
1.8 Conceptual
framework............................................................................................................
11
1.8 Figure 1: Conceptual framework
............................................................................................
12
1.9 Significance of the
study.........................................................................................................
13
1.10 Justification of the
study.......................................................................................................
13
1.11 The scope of the study
...........................................................................................................
14
1.11.1 Geographical
scope............................................................................................................
14
1.11.2 Content
scope.....................................................................................................................
14
1.11.3 Time
scope.........................................................................................................................
14
1.12 Operational
definitions..........................................................................................................
15
1.12.1 Internal control
system.......................................................................................................
15
1.12.2 Performance.......................................................................................................................
15
1.12.3 Financial Performance
.......................................................................................................
15
1.12.4 Public Sector......................................................................................................................
15
CHAPTER
TWO........................................................................................................................
16
LITERATURE REVIEW
..........................................................................................................
16
2.1
Introduction.............................................................................................................................
16
2.2. Theoretical review
.................................................................................................................
16
2.3 Conceptual review
..................................................................................................................
17
2.4 Internal control activities
........................................................................................................
19
2.4.1 Approval and Authorizations and financial
performance.................................................... 19
2.4.2 Segregation of duties and financial
performance................................................................. 20
2.4.3 Council controls and financial
performance........................................................................
21
2.4.4 Internal audit and financial performance
.............................................................................
22
2.4.5 Determinants of financial performance in Urban Council...................................................
23
2.4.6 Compliance with laws, regulations and
policies.................................................................. 24
2.4.7 Reliable Accountability
.......................................................................................................
24
2.4.8 Timely
Reporting.................................................................................................................
25
2.4.9 The relationship between internal control systems and
financial performance................... 26
2.5 Empirical
Studies....................................................................................................................
28
2.5.1 Global Empirical
Studies.....................................................................................................
28
2.5.2 African Level
.......................................................................................................................
29
2.5.3 Ugandan Level.....................................................................................................................
29
2.6 Synthesis of Literature Review and Gap Analysis
................................................................. 30
CHAPTER THREE....................................................................................................................
31
METHODOLOGY
.....................................................................................................................
31
3.1 INTRODUCTION ..................................................................................................................
31
3.2 Research design
......................................................................................................................
31
3.3 Study
population.....................................................................................................................
31
3.4 Determination of the Sample size and
selection..................................................................... 32
3.5 Sampling techniques and
procedures......................................................................................
32
3.5.1 Stratified random
sampling..................................................................................................
33
3.5.2 Purposive
sampling..............................................................................................................
33
3.6 Data collection methods and
techniques.................................................................................
33
3.6.1
Questionnaire.......................................................................................................................
34
3.6.2
Interviews.............................................................................................................................
34
3.6.3 Document
revising...............................................................................................................
34
3.7 Data collection
instruments.....................................................................................................
34
3.7.1 Self -administered
questionnaire..........................................................................................
35
3.7.2 Interview guide ....................................................................................................................
35
3.7.3 Document
reviewing............................................................................................................
35
3.8 Data Reliability and
validity...................................................................................................
35
3.8.1 Reliability of the
instruments...............................................................................................
35
3.8.2 Validity of the
instruments...................................................................................................
36
3.9 Procedure of Data
Collection..................................................................................................
36
3.9.1 Questionnaires.......................................................................................................................
36
3.9.2 Interview
..............................................................................................................................
37
3.9.3 Reviewing
Documents.........................................................................................................
37
3.10 Data
Analysis....................................................................................................................
37
3.10.1 Analysis
of qualitative data...........................................................................................
37
3.10.2 Quantitative
data analysis. .............................................................................................
38
3.11 Measurement
of
variables.....................................................................................................
38
3.12 Ethical
issues.....................................................................................................................
38
CHAPTER
FOUR.......................................................................................................................
40
PRESENTATION, ANAYLSIS AND INTERPRETATION OF FINDINGS
...................... 40
4.1 INTRODUCTION
..................................................................................................................
40
4.2 Response
Rate.........................................................................................................................
40
4.3 Background information of the
respondents...........................................................................
41
4.3.1 Distribution of respondents by
Gender................................................................................
42
4.3.2 Distribution of respondents by Age
group...........................................................................
42
4.3.3 Respondent’s years in
service..............................................................................................
43
4.3.4 Respondents’ highest level of
education..............................................................................
43
4.3.5 Respondents nature of
employment.....................................................................................
43
4.4 Internal Control Systems affecting financial
performance ..................................................... 43
4.4.1 Establishment of Internal Control activities in
Kitgum Municipal...................................... 43
4.4.1.1 Testing the influence of the internal control
activities on Financial................................. 47
4.4.2 The influence of internal control environment and
Financial Performance. ....................... 49
4.4.2.1 Testing the influence of internal control
environment on Financial................................. 51
4.4.3 The influence of audit on financial
performance................................................................. 52
4.4.3.1. Testing the influence of
auditing on Financial Performance........................................... 54
4.4.4 Financial performance in Kitgum Municipal Urban
Council.............................................. 56
CHAPTER
FIVE ........................................................................................................................
57
SUMMARY, DISCUSSION, CONCLUSION AND
RECOMMENDATIONS.................... 57
5.1
Introduction.............................................................................................................................
57
5.2 Summary of
findings...............................................................................................................
57
5.2.1 The relationship between Internal Control activities
and FP in KMUC.............................. 57
5.2.2 The relationship between Internal Control environment
and Financial............................... 58
5.2.3 The relationship between Internal Audit and Financial
Performance in Kitgum ................ 58
5.3 Discussion of the
findings.......................................................................................................
59
5.3.1 Internal control activities and finance performance
in Kitgum Municipal.......................... 59
5.3.2 Internal control environment and financial
performance in Kitgum Municipal.................. 60
5.3.3 Audit and financial performance in Kitgum Municipal
Urban Council (KMUC) .............. 61
5.4
Conclusions.............................................................................................................................
61
5.4.1 Internal control activities and financial performance
.......................................................... 61
5.4.2 Internal control environment and financial performance.....................................................
62
5.4.3 Internal audit and financial performance
.............................................................................
62
5.5
Recommendations...................................................................................................................
62
5.5.1 Internal control activities and financial performance
at Kitgum Municipal........................ 63
5.5.2 Internal control environment and financial
performance at Kitgum Municipal.................. 63
5.5.3 Internal Audit and financial performance at Kitgum
Municipal Urban Council................. 64
5.6 Limitations of the study
..........................................................................................................
64
5.7 The contribution of the
study..................................................................................................
64
5.8 Recommendations for further
research...................................................................................
65
REFERENCES............................................................................................................................
66
APPENDIX I: CERTIFICATE OF PROOF THAT
DISSERTATION HAS BEEN EDITED..............................................................................................................
71
APPENDIX II:
Questionnaire.......................................................................................................
72
APPENDIX III: Interview
Guide.................................................................................................
77
APPENDIX IV: SUMMARY ITEMS STATISTICS FOR THE RELIABILITY
COEFFICIENT.............................................................................................................................
79
Figure 1: Conceptual framework
.................................................................................................
12
Table 1: Showing
Research respondent by
category................................................................... 32
Table 2: Reliability
.......................................................................................................................
36
Table 3: Showing response rates of
respondents..........................................................................
40
Table 4: Showing the background information of
respondents.................................................... 41
Table 5: Showing the result of how internal control
activities influence Financial Performance.44
Table 6: Relationship between internal
control activities and Financial Performance................ 48 Table 7:
Correlation coefficient showing the influence of internal control activities on
Financial
Performance..................................................................................................................................
48
Table 8: Shows results how internal control environment
affects Financial Performance of
Kitgum Municipal Urban Council................................................................................................
49
Table 9: Relationship between internal control environment
and Financial Performance........... 51
Table 10: Correlation Coefficient showing the influence of
internal control environment on
Financial Performance
..................................................................................................................
51
Table 11: Shows results how auditing influence Financial
Performance..................................... 53
Table 12: Relationship between auditing and Financial
Performance.......................................... 55
Table 13: Correlation Coefficient showing the influence of
auditing on Financial Performance 55
Table 14: The results showing the
respondents opinion on Financial Performance..................... 56
AA:
Accounts Assistant
EMBA:
Executive Masters of Business Administration
FP:
Financial Performance
GoU:
Government of Uganda
IA:
Internal Audit
ICS: Internal
Control System
KMUC: Kitgum
Municipal Urban Council
LGFAR: Local
Government Finance and Accounting Regulations
MUC:
Municipal Urban Council
NSSF:
National Social
Security Fund
OAG: Office
of Auditor General
OPM: Office
of the Prime Minister
SAA: Senior
Accounts Assistant
SIA: Senior Internal Auditor
TC:
Town Clerk
UTAMU: Uganda
Technology and Management University
UTPC: Urban
Technical Planning Committee
CHAPTER ONE
INTRODUCTION
1.1 Introduction
There is a
general perception that the enforcement of Internal Control Systems (ICS) will
always lead to improved financial performance (FP). Instituted systems of
internal control improve the reporting process, thus enhancing the
accountability function of management of the (Local Government Finance
Commission 2003, p.32). “The likelihood of achievement is, however, affected by
limitations inherent in all systems of internal control” (Hayes, 2005, p. 823)
This chapter
provides an overview of the background to the Decentralization Policy,
background to the study, statement of the problem, purpose of the study,
objectives of the study, research questions, scope of the study, significance
of the study and the conceptual framework.
1.2
Background to the study.
1.2.1 Historical Background
The ICS
profession evolved steadily with the progress of management especially at the
end of World War II. It is conceptually similar to financial auditing by public
accounting firms, quality assurance and banking compliance activities. Much of
the theory underlying ICS is derived from management consulting and public
accounting professions with the implementation in United States of the
Sarbanes- Oxley Act (2002, p.773). The profession’s growth accelerated, as many
internal auditors acquired the skills required to help companies and public
institutions meet the requirements of the tales.(SAS 300). According to
Auditing Standard Board, ICS is a measure of checks and balances, a method and
procedure instituted by an organization to conduct a systematic approach that
management can rely on to achieve its intended goals. However, that was in the
US and it was for private entities which may not
be applicable in public entities and many internal auditors may not possess the
required skills to help companies and public institutions meet their
objectives.
Recent development shows that there is need for public institutions or
organizations to have the ability to improve the level of financial performance
in order to add value to their activities like development projects and
progress of service delivery in their structures. This is contained in
Financial Reporting and Auditing Practice (2006, p.206.)
The concept of
ICS and FP took a big leap in the twenty-first century. It originally developed
in Britain, when a powerful, administratively strong, centralized state
emerged. It was probably the most sophisticated state since the Romans
(Warren-Hollister, 2009, p.178). The English state, particularly under Henry I
(1100 – 1135) and Henry II (1154- 1189), was premised on an efficient,
financially strong administrative system. The findings of the Treadway
Commission Reports (1987, p, 17) in the United States of America (USA)
confirmed that absence of or a weak internal control and poor FP is primarily
the cause of many cases of fraudulent acts and compromised standard of work
leading to shoddy work, value for money not being realized in public service
institutions and other business organization financial reporting. This has been
witnessed in Uganda by the various scandals that rock the National Social
Security Fund (NSSF) and the Office of the Prime Minister (OPM) , the Ministry
of Public Service, among others. If internal control systems were strong, such
transactions would have been detected and blocked. Therefore, widespread global
corporate and institutional scandals that assumed near-epidemic proportions in
recent years have created concern which this study is trying to investigate.
Notable cases include: Enron and World com, Xerox and recently alleged fraud
cases like Lehman and Brothers in the United States of America, Parmalat in
Europe, and Chuoaoyama in Asia (Higson, 2012, p.283) In South Africa, cases of
accounting scandals were recorded in JCL and Rand gold and Exploration
Companies (Randgold and Exploration Co. Ltd Annual Report (2011, p.18).
In Nigeria, the
managing Director and Chief Finance Officer of Cadbury Nigeria Plc. was
dismissed in 2006 for inflating the profits of the company for some years
before the company’s foreign partners acquired controlling interest (Cadbury
Annual Report, 2006, p.3). It is generally believed that properly instituted
systems of internal controls improve financial performance but in spite of
this, elaborate ICS FP has eluded most entities; and this called for an
investigation to the effects of ICS on FP (Michael C. Jensen, 1993, p.852).
Government of
Uganda (GoU) has had enormous cases of mismanagement of public funds despite
the establishment and existence of ICS. Examples include: UG V ONEG OBEL,
AntiCorruption criminal case No. 153 of 2010, the NSSF scandals in which
hundreds of billions of shillings were lost. In the case of David Chandi Jamwa
in the NSSF (National Social Security Fund), (Case No. COA-00-CR-0020-2011)
employees’ monthly savings worth three billion one million shilling was
misappropriated and in the case of Geoffrey Kazindavs. Attorney General Crt.
Pet. No.50 of 2012 Prime Minister’s Office funds meant for Northern Uganda
Recovery
Programme were
fraudulently transacted to personal accounts for personal gain. Lots of
billions of shillings were diverted; these culprits have been convicted (www.monitor.co.ug).
1.2.2 Theoretical Background
This study was guided by “The Principal Agency theory” as
put across by Jensen and Meckling
(1976, p.1) and later expanded on by
Sarens and Abdolmohammadi (2010, p. 1-20). According to the theory, a company
consists of a nexus of contracts between the owners of economic resources and
managers who are charged with using and controlling those resources (Jensen and
Meckling, 1976. p, 5). Principal Agency theory posits that agents have more
information than principals and that this Information asymmetry adversely
affects the principals’ ability to monitor whether or not their interests are
being properly served by agents. The theory also assumes that principals and
agents act rationally and use contracting to maximize their wealth which may
lead to moral hazard problem indicating that in an effort to maximize their own
wealth, agents may face the dilemma of acting against the interests of their
principals.
As argued by Tanzi (2000, p.445) between their creation and their final
implementation, fiscal decisions go through many stages at which mistakes,
indifference, passive resistance, implicit opposition and various forms of
principal agent problem may distort the outcome. The Uganda Public Finance
Management Act 2015 met such indifference and passive resistance which led to
its amendment less than a year after its enactment. The Accountants Act 2013 also
met such resistance, leading to the recruitment of non-professional members of
the institute in Accounts and Audit departments contrary to sec 34(2) of the
Act which has affected FP in the MUCs.
Deegan and Unerman (2006, p, 215) noticed
that with the agency theory the firm itself is considered to be a “nexus” of
contracts. These contracts are used with the intention of ensuring
that technocrats
who are agents align their own interest with the interest of the council to
achieve its objectives. Central government (principal) does not directly
promote the achievements of the objectives of the council but uses the
municipal structures to do so by setting up the government rules and incentives
to align the interest of the technocrats to that of the council.
Internal control
as one of the many mechanisms used in business to address the principal agency
problem and it has been proven that internal control reduces agency cost.
However, these studies may not be applicable in Government entities since it
was done on private entities. But for the purpose of this study principal
agency theory has been chosen. GoU has put in place a reward system for the
best-performing government entities to ensure that the technocrats who are
agents in this study are motivated to maximize the value of the entity (Local
Government Finance
Commission, 2003, p.2).
The theory as
put forward may be applicable in other parts of the world but not in Uganda and
Kitgum Municipal Urban Council (KMUC) in particular where professionalism is
not very important. Despite the enactment of the Accountants Act 2013 Section
34 (2) which states that all heads of Accounts, Finance and Internal audits
shall be professional members of the Institute of Certified Public Accountants
of Uganda, the municipal council has continued to recruit nonprofessionals in
these positions.
According to the
Annual Report of the Auditor General (2011,p.Vii), Internal control is a set of
systems to ensure that financial and other records are reliable, complete and
ensure adherence to the entity management policies, the orderly and efficient
conduct of the entity and the proper recording and safeguarding of assets and
resources. A process effected by the entity’s board of directors, management
and other personnel designed to provide reasonable assurance regarding the
achieving of the objectives in the categories of reliability of financial
reporting, effectiveness and efficiency of operations, and compliance with
applicable laws and regulations. Financial performance is considered in terms
of measures like profitability (using absolute and relative measures),
liquidity (using ratios current ratio, acid test, the ability of the entity to
settle its financial obligations) and accountability (in terms of financial
accountability).
1.2.3 Conceptual Background
The key concepts for this study are
internal control systems and financial performance. The relationship between
ICS and Good financial performance is that ICS is a tool to achieve good
financial performance and good financial performance is the ideal output of
ICS. ICS in the study is measured using factors such as Control environment,
Internal Audit and Control activities. Good financial performance is measured
by Timely Accountability, Reliable reporting and Compliance with laws, regulations
and guidelines. The ICS in the study was the independent variable and financial
performance the dependent variable Mwindi (2008, p.134) reports that internal
controls are processes designed and effected by those charged with governance,
management and other personnel to provide reasonable assurance about the
achievement of an entity’s objectives with regard to reliability of financial
reporting, effectiveness, efficiency of operations and compliance with
applicable laws and regulations .The Internal control systems are put in place
to, among other things, oversee public sectors compliance and adherence to
national policies in the implementation of government programs. According to J.
Boyle, Cooper and A. Geiger (2004, p.4) Internal control is a process designed
to provide reasonable assurance regarding the achievement of objectives for
reliable financial statement, effective and efficient operations and compliance
with applicable laws and regulations. Internal controls are processes designed
and affected by those charged with governance, management and other personnel
to provide reasonable assurance about the achievement of an entity’s objectives
with regard to reliability of the financial reporting, effectiveness and
efficiency of operations and compliance with applicable laws and regulations.
Financial performance was considered in terms of measures like profitability
(using absolute and relative measures), liquidity (using liquidly ratio like
current ratios, acid test ratios, the case with which the entity settles its
financial obligations) and accountability (in terms of financial
accountability) (ACCA- Managerial Finance paper 8, 1998, p.154).
According to Financial Analysis Conceptual
Framework (p, 49) financial performance is the process of measuring the result
of a firm’s policies and operations in monetary terms. In order to evaluate
financial condition and performance of a firm, the financial analyst needs
certain tools to be applied on various financial aspects. One of the widely
used and powerful tools for measuring financial performance is ratios or index.
Ratios can be classified into four broad groups on the basis of items used:
liquidity ratio, capital structure/leverage ratio, profitability ratio and
activity ratio, but these are in private settings.
According to
Analyzing Local government financial performance, evidence from Brazilian
municipalities (2008, p.707) in terms of managing performance, finance is a
resource and therefore also very likely to be an end in the performance management
framework. There are several ways of assessing local government financial
conditions but assets and liabilities, debt reduction and fiscal health of the
city in terms of risk of bankruptcy can be used. According to Whitney (2013,
p.191) is the result of budgetary mismanagement couple with rising pension and
debt cost are the measures of financial performance. In this study, assets and liabilities relate
to reporting; Debt reduction makes the municipal liquid; and fiscal health
relates to accountability. The core service area of KMUC is service delivery to
the public which makes the entity accountable to the public. Internal control
system is conceptualized in terms of internal control activities, control
environment and internal auditing, whereas financial performance is
conceptualized in terms of reliable accountability, timely reporting and
compliance with the laws, regulations and guidelines.
1.2.4 Contextual Background
Kitgum is a town
and District in Northern Uganda and was recently awarded municipality status in
recognition of its strategic status with vote No.784. It is located in the
center of Kitgum town, and comprises three divisions, Central, Pager and
Pandwong, with 28 cells and 11 parishes The name Kitgum derived from Acoli word
“Kit-gum” meaning what a luck.it is located between
Longitude 320E,
and 340E, Latitude 020N, The district is composed of two counties called Chua
and Chua East with nine sub counties and one municipal urban council which is
the area under study.
Kitgum district
is bordered by Lamwo in the north, the republic of South Sudan in the north
east, Kotido district in the east, Agago district in the south east, Pader
district in the south and Gulu district in the north west. Kitgum town is
located approximately 108 kilometers (67 miles) by road to the north east of
Gulu town, the largest city in the sub region. By road Kitgum is located
approximately 460 kilometers (290 miles) north of Uganda’s Capital Kampala.
Kitgum is the most convenient gateway to kidepo Valley national game park- one
of Uganda’s best stocked game parks where visitors dine in close proximity
lions, large herds of elephant’s buffaloes and other wild animals. It is
estimated that the population of Kitgum is 204,048 as of the 2014 national
population and housing census with the population of Kitgum municipality alone
estimated at 75,594. Agriculture is the main economic activity in Kitgum
district. Crops grown includes millet, sorghum, cassava, potatoes, peas,
sim-sim, sunflower, cotton, tobacco, cabbages, tomatoes and ranching practiced
in small areas. characterized by many deaths and social disruption resulting
from the twenty-year civil war and cattle rustling by the karimojong warriors
within the region since the late 1980s. It is administered through politically
established and civil service structures. The political wing is headed by the
Mayor and the divisions are headed by LC III Chairpersons who head the
councils, which are the highest political authorities with both legislative and
executive powers. The technical wing is headed by the Town Clerk (TC) and
Assistant Town Clerks for the divisions who supervise all civil servants in the
urban council and the divisions.
The executives
make resolutions which are forwarded to the council for approval, then implementation
is done by the TC (Section 63 of the Local government Act).
Internal control
system weakness and poor financial performance in Uganda can be seen from the
way the government was forced to close banks like International Commercial Bank
(ICB), Greenland Bank, and Cooperative Bank which undermined market discipline
in 2002. Subsequently, after the closure of the above banks, the Uganda
Commercial Bank Limited was acquired by the Stanbic Group in a privatization
arrangement in February 2002.
In KMUC,
financial performance has met challenges as seen in the Annual Report of the
Auditor General (2011, p.349) where the council got qualified - except for
opinion. The report indicated long outstanding advances of UGX 53,733,330 and
doubtful expenditures of UGX
21,514,400. According to LGFAR (2007,p.25) Administrative advances to council
employees shall be authorized by the Chief Executive (CE) and shall be
accounted for within a month, the CE shall not authorize any advance to a
council employee who has not accounted for the previous advance. With effective
ICS and adherence to the regulations such incidences of unaccounted for funds
would not have arisen.
1.3 Statement of the problem
The GoU has put
in place the necessary organs to empower ICS in MUC so as to set up financial
performance of MUC (Financial and Accounting Regulations, 2007,p.15). KMUC has
always had an Internal Audit department to help in compliance with the ICS,
regulations and procedures. The Auditor General conducts financial and compliance
audit to provide assurance to the legislatures that various sectors of
government have managed their finance affairs according to sound financial
principles and the legal framework, and achieve their financial objectives
(Nitasha, 2004, p.1).
Despite all the above, efforts KMUC still
struggles with timely accountability, reliable reports, compliance with laws,
regulations and policies, frauds, and misuse of council resources which has
been unearthed by the, Annual Report of the Auditor General (2011, p.286).
KMUC, one of the oldest in northern Uganda, got qualified except for opinion
and one of the reasons for qualifying the opinion was evaluation of the
District Public Accounts Committee (DPAC). Although the Internal auditors have
produced the reports for the four quarters, it was noted that they were not
reviewed by DPAC (Annual Report of the Auditor General, 2011, p.354). Internal
Auditors are the custodians of ICS; so failure to follow up these issues as
required under section 16 of the LGFAR (2007, P.17) means ignoring internal
controls. This study investigated the persistent poor FP from the perspective
of ICS which has hitherto been ignored.
1.4 The purpose of the study
The purpose of the study was to assess the
contribution of Internal Control Systems towards enhancement of financial
performance in Municipal urban Councils in northern Uganda.
1.5 Specific objectives of the study
1. To
explore the relationship between internal control activities and financial
performance in
Kitgum Municipal Urban Council (KMUC);
2. To
find out how internal control environment affect financial performance in KMUC;
3. To
assess the impact of auditing on financial performance in KMUC.
1.6 Research questions
1. What
are the relationships between internal control activities and financial
performance in
KMUC?
2. How
does control environment affect financial performance in KMUC?
3. What
are the impacts of auditing on financial performance in KMUC?
1.7 Hypotheses of the Study
1.There
are positive relationships between internal control activities and financial
performance
in KMUC.
2. There
are positive relationships between control environment and financial
performance in
KMUC.
3. There
are positive impacts of auditing on financial performance in KMUC
1.8
Conceptual framework.
Conceptual framework
is defined as an interconnected set of ideas or theories about how a particular
phenomenon functions or is related to its parts (Svinicki, 2010, p.5). The
framework serves as a basis for understanding the casual or correlational
patterns among study variables, provide a context for interpreting the study
findings and explain observations. It illustrates the relationships between ICS
as the independent variable and Financial Performance as the dependent variable
in this study.
From the above
framework it can be argued that the independent variable which is the internal
control system measured by control activities, internal control environment and
internal audit is associated with positive correlation with financial
performance as measured by timely reporting, reliable accountability and
compliance with the laws, regulations and policies. If there are effective ,
financial performance is likely to improve and the reverse is true. It is
therefore hypothesized that if the ICS are in existence, they are likely to affect
financial performance of an entity.
1.9 Significance of the study
According to Kothari (2014, p.5) research provides the basis
for nearly all government policies in our economic system. In the case of
Kitgum Municipal Urban Council, the study will help in that:
1.
The findings of the study will specifically
help Kitgum Municipal Urban Council administration to improve on their Internal
Control System for better financial performance.
2.
The study will also help policy makers to
formulate ways to improve the Internal Control System.
3.
The study findings will act as a basis of
further research in the field of Internal Control Systemon matters of
transparency and accountability.
1.10 Justification of the study
Public sector
entities exist to serve the public. This mandate is the filter through which
the key characteristics of public sector entities are differentiated from less
relevant attributes.
In order to
achieve this mandate, public sector entities have been granted powers, rights
and responsibilities, including a responsibility for policy development and
implementation. The mandate to serve the public over the long term and the
granted powers, rights and responsibilities demand public accountability for
the actions, decisions and results of a public sector entity. This need for
public accountability is the overriding characteristic of public sector
entities (Conceptual Framework Consultation, Paper 2, 2012, p.8). The
government of Uganda has put in place Audit Committees that shall assist the
Accounting Officers in carrying out the oversight responsibilities relating to
financial practices, internal controls, corporate governance issues, compliance
with laws, ethics and audit matters (Public Finance Management Act, 2015, p,
48). The research is deemed necessary because policy makers and practitioners
have continued to share concerns about deviations from the policies in
Municipal Urban Councils that affect financial performance. The reason for this
study is to enable KMUC and all its stakeholders improve Internal Control
Systems and financial performance.
1.11 The scope of the study
The scope of the
study is examined at three levels, namely: geographical coverage of the study,
content of the study and time scope
1.11.1 Geographical scope
The study was
conducted in KMUC a public institution located at a distance of 452 kilometres
North of Kampala, the capital city of the Republic of Uganda.
1.11.2 Content scope
This focuses on
three key dimensions; internal control systems, determinants of financial
performance and relationship between internal control systems and financial
performance as captured in the conceptual framework
1.11.3 Time scope
This study
covered a period of five financial years from 2010/2011-2014/2015. This period
was considered because it was the period when KMUC experienced challenges in
financial performance until 2013-2014 and 2014-2015 when it got unqualified
reports (Audit Report of the
Auditor General, 2011)
1.12 Operational definitions
1.12.1 Internal control system
As defined in Accounting and Auditing is a process of
assuring achievement of an organization’s
objectives in
operational effectiveness and efficiency, reliable financial reporting and
compliance with laws, regulations and policies
1.12.2 Performance
The word
performance refers to the accomplishment of a given task measured against
present standards of accuracy, completeness, cost and speed (Financial
performance Analysis conceptual framework, 2012, p, 49)
1.12.3 Financial Performance
Is a general measure of an entity’s overall financial health over a given
period of time and can be used to compare similar entities across the same
industry or to compare industries or sectors in aggregation.
1.12.4 Public Sector
Is the part of
national economy providing basic goods or services that are either not or
cannot be provided by the private sector. It consists of national and local
governments, their agencies and parastatals.
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