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WOLAITA SODO UNIVERSITY SCHOOL OF GRADUATE STUDIES INTERNAL CONTROL EFFECT ON FINANCIAL PERFORMANCE OF MICRO FIANANCE INSTITUTIONS IN ETHIOPIA

WOLAITA SODO UNIVERSITY
SCHOOL OF GRADUATE STUDIES

INTERNAL CONTROL EFFECT ON FINANCIAL PERFORMANCE OF MICRO
FIANANCE INSTITUTIONS IN ETHIOPIA: THE CASE OF OMO MICRO FINANCE
INSTITUTION IN WOLAITA ZONE

A Thesis/Dissertation Submitted to Department of Accounting and Finance School of
Graduate Studies, Wolaita Sodo University

In Partial Fulfillment of the Requirements for the Award of MSc in Accounting and
Finance from Wolaita Sodo University

Biruk Zara Chanko

Major Advisor: Durga Rao (Ph.D.)

April 25, 2018
Wolaita Sodo University

TABLE OF CONTENTS
Approval Sheet………………………………………………………………………i
Declaration…………………………………………………………………………….….ii
Acknowledgement ……………………………………………………………………………………..iii
Abbreviations and Acronyms ……………………………………………………………………… iv
List of Tables ……………………………………………………………………………………………..v
List of figures………………………………………………………………………vi
Appendix…………………………………………………………………………..vii
Abstract …………………………………………………………………………………………………….viii
CHAPTER ONE: INTRODUCTION…………………………………………………………………..1
1.1 Background of the Study ………………………………………………………………………….1
1.2 Statement of the problem…………………………………………………………………………..3
1.3 Research Objective…………………………………………………………………………………..3
1.3.1. General Objective of the Study…………………………………………3
1.3.2. Specific Objective of the Study…………………………………………3
1.4. Research Questions and Hypotheses……………………………………………4
1.4.1 Research Questions………………………………………………………4
1.4.2 Research Hypothesis……………………………………………………..4
1.5. Significance of the Study……………………………………………………….5
1.6. Scope and Limitation of Study…………………………………………………5
1.7 Conceptual frameworks………………………………………………………….5
1.8. Structure of the Thesis…………………………………………………………..6
CHAPTER TWO: LITERATURE REVIEW ………………………………………………………..7
2.1 Introduction …………………………………………………………………………………………….7
2.2 Theoretical Framework………………………………………………………………………………7
2.2.1 Institutional Theory………………………………………………………7
2.2.2 Stakeholder’s Theory…………………………………………………….8
2.2.3 Stewardship Theory………………………………………………………8
2.3 Control Environment ………………………………………………………………………………..8
2.4 Internal Audit and Financial performance. …………………………………………………..8
2.5 Value of internal control and risk management………………………………………….. .10
2.6 Control Activities …………………………………………………………………………………….10
2.7 Performance………………………………………………………………………11
2.7.1 Measures of Financial performance …………………………………………………………11
2.7.1.1 Liquidity ……………………………………………………………………………………12
2.7.1.2 Accountability ……………………………………………………………………………12
2.7.1.3 Reporting……………………………………………………………………………………12
2.7.1.4 Servival………………………………………………………………………………………13
2.8 Empirical Studies ……………………………………………………………………………………14

2.9 Research Gap……………………………………………………………………14
CHAPTER THREE: RESEARCH METHODOLOGY……………………………………………15
3.1 Research Design……………………………………………………………………………………… 15
3.2 Sampling Design………………………………………………………………………………………15
3.2.1 Study Population…………………………………………………………………………….15
3.2.2 Population Size……………………………………………………………16
3.2.3 Sampling frame……………………………………………………………16
3.3 Data sources, collection and procedure…………………………………………..16
3.4 Reliability Tests for Data collection Instruments………………………………..16
3.5 Data Analysis and Presentation…………………………………………………..16
3.6 Research Ethics ……………………………………………………………………………………….17
CHAPTER FOUR: DATA PRESENTATION AND DISCUSSI ON OFFINDINGS…….18
4.1 Introduction …………………………………………………………………………………………. …18
4.2 Data Reliability…………………………………………………………………….18
4.3 Profile of Respondents…………………………………………………………………18
4.3.1 Gender Distribution……………………………………………………….18
4.3.2 Branch Distribution of the Respondents…………………………………..19
4.3.3 Position held in the organization…………………………………………..19
4.3.4 Level of Education Attained………………………………………………20
4.3.4 Work experience of respondent……………………………………………20
4.4 Descriptive Analysis………………………………………………………………21
4.4.1 Descriptive Analysis on Internal Control Environment……………………21
4.4.1.1 Integrity and Ethical Values…………………………………………21
4.4.1.2 Commitment to Competence ……………………………………….22
4.4.1.3 Management Philosophy and Operating Style………………………23
4.4.1.4 Organizational Structure…………………………………………….24
4.4.1.5 Assignment of Authority and Responsibility………………………..25
4.4.1.6. Human Resource Policy and Practices……………………………..25
4.4.2 Descriptive Analysis on Internal Audit Function…………………………29
4.4.2.1 Monitoring and Evaluation………………………………………….29
4.4.2.2 Fraud Prevention, Detection and Control……………………………29
4.4.2.3 Reporting……………………………………………………………..30
4.4.3 Descriptive Analysis on Risk Management………………………………31
4.4.3.1 Risk Identification ………………………………………………..31
4.4.3.2 Risk Evaluation …………………………………………………..31
4.4.3.3 Risk Mitigation ……………………………………………………32
4.4.4 Descriptive Analysis on Control Activities………………………………33
4.4.4.1 Information and Communication………………………………….33
4.4.4.2 Policies and Procedure ……………………………………………33
4.4.5 Descriptive Analysis on Financial Performance………………………….34
4.5 Relationship between Internal Control and financial performance………………35
4.5.1 Control environment and financial performance…………………………36
4.5.2 Internal audit and financial performance…………………………………36
4.5.3 Risk management and financial performance…………………………….37
4.5.4 Internal Control activities and financial performance…………………….37
4.6 Inferential Analysis……………………………………………………………….37
4.6.1 Regression Analysis on Internal Control Environment
Versus Financial Performance………………………………………………….37
4.6.2 Regression Analysis on Internal Audit Function versus
Financial Performance………………………………………………………….39

4.6.3 Regression Analysis on Risk Management versus
Financial Performance………………………………………………………….41
4.6.4 Regression Analysis on Control Activities versus
Financial Performance………………………………………………………. …43
4.7 Combined Effect Mode…………………………………………………………..45
CHAPTER FIVE: SUMMARY FINDINGS, CONCLUSION
AND RECOMMENDATION…. ………………………………………………………47
5.1 Introduction …………………………………………………………………………………………….47
5.2 Summary of findings ………………………………………………………………………………..47
5.2.1 Functionality of the internal control system ……………………………………..47
5.2.2 Internal Control and Financial Performance …………………………………….47
5.3 Conclusions …………………………………………………………………………………………….48
5.4 Recommendations…………………………………………………………………………………….48
REFERENCES……………………………………………………………………………………………..50
Appendix 1: Questionnaire……………………………………………………………………………..52

SCHOOL OF GRADUATE STUDIES
WOLAITA SODO UNIVERSITY
As thesis/dissertation research advisor, I hereby certify that I have read and evaluated this
thesis/dissertation prepared under my guidance by Biruk Zara entitled “Internal Control Effect
on financial performance of micro finance institutions in Ethiopia: The case of Omo micro
finance institutions in Wolaita zone”. I recommend that it be submitted as fulfilling the
thesis/dissertation requirement.

___________________ __________________ _______________
Major Advisor Signature Date

__________________ __________________ _______________
Co-Advisor Signature Date
As members of the Board of Examiners of the M.Sc in Accounting and finance
thesis/dissertation open defense examination, we certify that we have read and evaluated the
thesis/dissertation prepared by Biruk Zara Chanko and examined the candidate. We recommend
that the thesis/dissertation be accepted as fulfilling the thesis/dissertation requirements for the
degree of Masters of Science in Accounting and Finance.
_________________ __________________ _________________
Chairperson Signature Date

________________ ___________________ _________________
Internal Examiner Signature Date

________________ ___________________ _________________
External Examiner Signature Date

i

DECLARATION
By my signature below, I declare and affirm that this thesis/dissertation is my own work. I have
followed all ethical principles of scholarship in the preparation, data collection, data analysis
and completion of this thesis/dissertation. All scholarly matter that is included in the
thesis/dissertation has been given recognition through citation. I affirm that I have cited and
referenced all sources used in this document. Every serious effort has been made to avoid any
plagiarism in the preparation of this thesis/dissertation.
This thesis/dissertation is submitted in partial fulfillment of the requirement for MSc from the
School of Graduate Studies at Wolaita Sodo University. The thesis/dissertation is deposited in
Wolaita Sodo University Library and is made available to borrowers under the rules of the
library. I solemnly declare that this thesis/dissertation has not been submitted to any other
institution anywhere for the award of any academic degree, diploma or certificate.
Brief quotations from this thesis/dissertation may be used without special permission provided
that accurate and complete acknowledgement of the source is made. Requests for permission for
extended quotations from, or reproduction of, this thesis/dissertation in whole or in part may be
granted by the head of the School or Department or the Dean of the School of Graduate Studies
when in his or her judgment the proposed use of the material is in the interest of scholarship. In
all other instances, however, permission must be obtained from the author of the
thesis/dissertation.
Name: Biruk Zara Chanko Signature: _____________
Date: 25/04/2018
School/Department: Accounting and finance
Id No ACFN /MW/005

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ACKNOWLEDEMENT
I am grateful to the God for the good health that was necessary to complete this research work. I
am grateful to Durga Rao (Phd), Advisor, in the Department of Accounting and Finance. I am
extremely thankful to him for valuable guidance and encouragement.
I express my gratitude to all of my friend and parents for their help, encouragement and support.

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ABBREVIATIONS AND ACRONYMS
MFI’s – Micro-finance institutions
LIQUIDITY – Liquidity of micro finance institutions
NGOs – Non-governmental Organizations
MVA – Market Value Added
AAS – Audit and Assurance Services
AICPA – the American Institute of Certified Public Accounts
SAS – Statement on Auditing Standards
ACCA – Association of Chartered Certified Accountant
COSO – Committee of Sponsoring Organizations

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LIST OF TABLES
Table 4.1 Reliability statistics………………… …………………………………………….18
Table 4.2 Distribution of Respondents by Gender…………………………………………19
Table 4.3 Branch Distribution of the Respondents…………………………………………19
Table 4.4 Position held in the organization…………………………………………………20
Table 4.5 Highest Level of Education Attained …………………………………………..20
Table 4.6 Work experience of respondent…………………………………………………21
Table 4.7 Respondents’ Opinion on Internal Control Environment………………………..29
Table 4.8 Respondents’ Opinion on Internal Audit Function……………………………..31
Table 4.9 Respondents’ Opinion on Risk Management……………………………………33
Table 4.10 Respondents’ Opinion on Control Activities………………………………….35
Table 4.11 Respondents’ Opinion on Financial Performance…………………………….36
Table 4.12 Pearson’s Correlation analysis Correlation Matrix……………………………38
Table 4.13 Analysis of Variance (ANOVA) for Internal Control Environment……………..39
Table 4.14 Internal Control Environment and Financial Performance ………………………….40
Table 4.15 Analysis of Variance (ANOVA) for Internal Audit function………………………41
Table 4.16 Internal Audit function and Financial Performance …………………………………..42
Table 4.17 Analysis of Variance (ANOVA) for Risk Management……………………………..42
Table 4.18 Risk Management and Financial Performance…………………………………………..43
Table 4.19 Analysis of Variance (ANOVA) for Control Activities……………………………..44
Table 4.20 Risk Management and Financial Performance…………………………………………..44
Table 4.21 Model Summary………………………………………………………………44
Table 4.22 Analysis of Variance (ANOVA)………….. ………………………………….45
Table 4.23 Relationships between Internal Control and Financial Performance…………….45

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LIST OF FIGURES
Figure 1.1 Conceptual frameworks………………………………………………………………5
Figure 4.1 Regression Model of Internal Control Environment on Financial Performance……..38
Figure 4.2 Regression Model on Internal Audit Function versus Financial Performance………40
Figure 4.3 Regression Model on Risk Management versus Financial Performance……………41
Figure 4.4 Regression Model on Internal Control Activities versus Financial Performance……43

Vi

LIST OF APPENDIX

Appendix 1: Letter of Introduction by Researcher………………………………………. 55
Appendix 2: Questionnaire ………………………………………………………………………..56

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ABSTRACT
Developing the efficiency internal control for micro-finance institutions in Ethiopia business
practice is important. Various writers around the world attracted by internal control in control
environment, internal audit function, risk management and Control activities on other hand
Financial Performance Focused on perspectives of Profitability, Liquidity and Accountability. This
study investigates the internal control Effect on financial performance of micro-finance institutions
in Ethiopia. The organization and regulation is necessary in the micro-finance institutions because
they faced lot of challenges including Poor Performance, malpractices and corruption. The
background of the Study investigated to check the internal control effect on micro-Finance
institutions so as to finding the causes of poor Performance in connection with finance of internal
controls. The specific objectives included; to find out the effect of Control activities on financial
performance of MFI’s in Ethiopia, to assess the effect of control environment on financial
performance of MFI’s in Ethiopia, to identify the approvals of risk management on financial
performance of MFI’s in Ethiopia and to establish the effect of internal audit function on financial
performance of MFI’s in Ethiopia. The independent variable is internal control (risk management,
internal audit function, control environment and Control activities) and the dependent variable is
financial Performance. Research design was presented by descriptive method. Questionnaires used
to gather primary data analyzed and presented through tables.
Keywords: Control environment, internal audit, internal control effect, Micro-finance institutions
and financial performance.

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CHAPTER ONE
INTRODUCTION
1.1-Background of the Study:
Internal control defined in auditing and accounting as a process for assuring achievement of an
organization’s objectives in reliable financial reporting, operational effectiveness and efficiency,
and compliance with laws, regulations and policies. A broad concept, internal control involves
everything that controls risks to an organization.
Financial access of poor households in Ethiopia is mainly through informal mechanisms,
including trader, moneylenders, friends, relatives, ekubs and edirs (informal, credit and savings
associations). Poor households have no access to formal commercial banking institutions or
credit and savings cooperatives. Jennifer Sebstad (2014).
Microfinance is still a new phenomenon in Ethiopia and gradually more attention and support is
needed. It is embraced as an effective instrument either through stimulating social inclusion
through economic participation or through the promotion of entrepreneurship and develops
businesses. Omo Micro Finance Institution is the biggest Micro Finance Institution in Ethiopia
which is Operating in South Nation’s Nationalities and People’s Regional State.
It was established with the objective of providing efficient, effective and sustainable financial
services in collaboration with non-governmental and governmental organizations in order to
stimulate individual initiatives for self-sufficiency and take part in struggle to alleviate poverty in
in Ethiopia. Since its establishment, it has been providing saving led credit provision and savings
services to the low income societies in its operational area.
The start and growth of the sector with the launch of many, fast growing micro-credit programs
for the poor was on the bases of a theoretical framework and a strong awareness that something
needed to be done about the plight of the poor.
In Ethiopia Commercial banks granting loan to large and medium enterprises those are
creditworthy and micro-finance institutions in Ethiopia become the primary source of income
and generating income for the majority of low income group.

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Omo Microfinance institutions are one of financial institutions which are the main source of
funding to enterprise as well as other project across the country. Micro fiancé institutions loans
are smaller in terms of amount than bank loans, but have higher interest rates. Therefore the
loans are insufficient to start a big business and provide basic needs only.
Performance measures can be financial or non-financial. Both measures are used for competitive
firms in the dynamic business environment. Financial measures of organizational performance
include; return on assets, return on sales, return on equity, return on investment, return on capital
employed and sales growth (Gerrit ; Abdolmohammadi, 2010).
According to Donald (2013), appropriate performance measures are those which enable
organizations to direct their actions towards achieving their strategic objectives. Gerrit and
Abdolmohammadi (2010) contends that, performance is measured by either subjective or
objective criteria; arguments for subjective measures include difficulties with collecting
qualitative performance data from small firms and with reliability of such data arising from
differences in accounting methods used by firms.
1.2. Statement of the Problem
The establishment of internal control on financial Institutions is to achieve institutional goals,
enable production of reliable reports, prevent loss of resources and ensure compliance with laws
and regulations and thus internal control is an essential mechanism of the institutions
achievement.
Although, related studies that conducted on micro-finance institutions, clearly indicate that
institutional financial performance and internal control is understudied area. Some challenges
experienced with regard to internal control include; misuse and frauds of institutional resources,
struggles with problem of Liquidity, financial reports are not made on timely basis, and a number
of decisions made have not got the targeted results.
Micro-finance Institutions struggle with financial malpractice, inefficiency in connection with
defaulted loans, corruption, financial and operating expenses which are high for micro-finance
Institutions and revenues from Micro-finance Institutions remain lower.
The problem of financial crimes, increased for many years in the institution despite the fact that
internal control have been in existence.

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Previous studies, have Confirmed that internal control set by management in most financial
institutions has not been able to completely prevent fraudulent acts and corruption perpetuated
by employees in most financial institutions.
This research therefore investigates the internal control effect on the financial performance of
micro- finance institutions the case of Omo micro-finance institutions in Wolaita zone and
several ways have emerged on how to facilitate the Internal Controls effect thus ensuring
achievement of the institution objectives and improved financial performance.
1.3. Objectives of the Study
1.3.1. General Objective of the Study
The main objective of the study is to investigate the internal controls effect on financial
performance of micro-finance institutions in Ethiopia.
1.3.2. Specific Objective of the Study
The study specifically seeks to achieve the following objectives:
1. To find out the effect of internal audit function on financial performance of MFI’s in
Ethiopia.
2. To assess the effect of control environment on financial performance of MFI’s in
Ethiopia.
3. To identify the approvals of risk management on financial performance of MFI’s in
Ethiopia.
4. To establish the effect of control activities on financial performance of MFI’s in
Ethiopia.
1.4. Research Questions and Hypotheses
1.4.1 Research Questions
i. What is the internal control effect on financial performance of Omo micro finance
institution?
ii. What is the relationship between control environment and financial performance of Omo
MFI’s in Ethiopia?
iii. At what extent specific factors affect financial performance of Omo micro finance
institutions?

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iv. How did independent variables affect financial performance of Omo micro finance
institutions?
1.4.2 Research Hypothesis
Hypothesis stands on the theories which are related to internal control and its effect on MFI’s
financial performance and describe the relationship of internal control andMFI’s financial
performance in Ethiopia.
The following hypothesis developed to answer research questions. Therefore, this research
attempted to test the following hypotheses in the case of MFI’s.
H1: There is significance relationship between control environment and financial performance of
micro-finance institutions.
H2: There is significance relationship between internal audit function and financial performance
of micro-finance institutions.
H3: There is significance relationship between risk management and financial performance of
micro-finance institutions.
H4: There is significance relationship between Control activities and financial performance of
micro-finance institutions.
Internal control is an Independent variable measured by the Control Environment, Risk
management, internal auditing function, Control activities and their effects on Financial
Performance, a dependent variable measured by the financial performance.
1.5. Significance of the Study
The study is significant to the following groups of people:-
1. For the academicians, the study may add knowledge on internal control system and their
impact, which may be used for further research in this area.
2. The study aims at examining internal control effect on financial performance of MFI’s
,this information will be useful to micro finance institutions because it will be used to
address internal control thus improving the performance of MFI’s in the economy.
3. The findings and recommendations may be used for improving internal control effect and
operations for the MFI’s.

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1.6. Scope and Limitation of Study
This study is conducted to investigate the internal control effect on financial performance of
micro-finance Institutions.
The research is targeted on management, finance department, accounting department and agents
in the eight major Omo micro-finance Institutions (sub branches) in the area.
The study may encounter some sort of limitations. Those are time, logistics and resource
constraints in terms of finance. On other hand, getting adequate information as pertains to
internal control available posed a challenge as institutions had policies considering such
information confidential. However, some measures put in place to minimize the problems which
emerged in order to reach the Objectives of this thesis.
1.7. Conceptual Frameworks
Figure 1.1 Conceptual frameworks
INDEPENDENT

In the Conceptual framework above, internal control is an Independent variable (measured by the
Control Environment, internal audit, risk management and control activities) and its effect on
Financial Performance; a dependent variable (measured by the Liquidity, accountability and
profitability).The conceptual framework present a relationship among the key variables and its
effect the financial performance of Micro-finance Institutions. The above framework was tested
to show if the financial performance of a Micro-finance Institutions is a function of internal
control.
1.8. Structure of the Thesis
This part gives a structure of every chapter with in the thesis. The thesis consists five chapters.
INDPENDENT VARIABLE DPENDENT VARIABLE
FINANCIAL PERFORMANCE
. PROFITABLITY
. LIQUIDITY
.ACCOUNTABLITY
CONTROL ENVIRONEMT
INTERNAL AUDIT FUNCTION
RISK MANAGEMENT
CONTROL ACTIVITIES

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Chapter one is introduction, which presents background of the study, statement of the problem,
objective of the study, research questions and hypothesis, significance of the study and scope and
limitation of the study.
Chapter two presents literature review; it presents theoretical and empirical reviews. Chapter
three presents methodology employed, Research design, nature of data and data collection
instruments, target population and sampling data used in the research, variable description and
model specification and model adopted and analytical tools. Chapter four presents the result
collected from the regression output and discussion of regression result. Finally, chapter five
presented the conclusions of the results and the recommendations regarding the study.

CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This chapter outlines; theoretical literature review (control environment, internal audit, risk
management, control activities, measures of financial performance) and empirical studies.
2.1.1 Definition of Internal Control
Internal control defined as a set of mechanism designed to motivate an individual or a group
towards achievement of a desired objective (Kirsch, 2002). Similarly, Transparency International
(2006) reported that internal control is control developed by organization to generate
transparency and avoid corruption. International Standard on Auditing (ISA 400) defines internal
control as all policies and procedure adopted by the management of an entity to assist in
achieving the primary objectives of the management by ensuring that the business is conducted
in the most efficient way possible and also ensuring strict adherence to management policies,
safeguarding of asset, prevention and detection of fraud and timely preparation of reliable
account records.
2.2 Theoretical Literature Review
There are several theoretical approaches which can be used to outline the financial performance
of institutions, to select the predictors to the models, and to justify the functional form between
these predictors. In this review these approaches are classified into the following categories;
institutional theory, stewardship theory and stakeholder theory.

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2.2.1 Institutional Theory
Institutional and neo-institutional theory suggests that adoption of organizational practices and
environmental alignment is an institutional process subject to the effect of three pressures or
forces – coercive, mimetic and normative. This theory further suggests that these forces can
encourage organizations to adopt similar strategic actions thereby leading to organizational
homogeneity (Adebanjo, Ojadi, Laosirihongthong & Tickle, 2013). The interests of shareholders
have been strengthened over time, especially through efforts by the government and professional
bodies. More specifically, there has been increased pressure on management to ensure that an
organization is governed efficiently, effectively and economically for the benefit of shareholders.
Much of this pressure has been a result of social expectations in response to recent corporate
scandals (Christopher, Sarens & Leung, 2009). This study draws on institutional theory, which
essentially points that organizational management and control structures tend to conform to
social expectations. The theory therefore advances argument for enhanced corporate governance
in management of organizations resources
2.2.2 Stakeholder’s Theory
According to R. Edward Freeman (2015) stakeholder theory emphasizes that some individual or
group are very important for the survival of the organization. This explanation is seen as
organization oriented explanation, but in an earlier research Freedman reported that stakeholder
theory refers to any group or individual who can affect or who is likely to be affected by the
achievement of the organization objective. Freedman (2009) supported these in his definition of
the stakeholders theory was more balance and covers a wider area than those of the Stanford
Research Institute (SRI) (1963) which defined the theory simply as those people who, without
their support and ideas, the organization would not exist. They further stated that Freedman
definition was wider because it included individuals outside the firm and other groups that may
consider themselves as the stakeholders in the organization without the firm acknowledging them
to be so. The stakeholders in most organizations usually include shareholders, employees,
customers, lenders, suppliers, local charities and interested group etc.
2.2.3 Stewardship Theory
Andrew Keay (2017) define stewardship theory as the process where stewards protect and
maximize shareholders wealth through improved firm’s performance, because by doing so, the

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stewards recognize, that his utility function is maximized. Stewardship theory refers more to the
chief executive and manager as the main individual responsible for the stewardship function.
Block (1996) define that the stewardship role is depicted with service to the firm over self-
interest; he further established that organization and individual role can be easily achieved by
honoring the stewardship relationship and treating followers like owners and partners.
2.3 Control Environment
Oyoo Otieno Collins (2014) note that the control environment sets the tone of the organization
by influencing the control consciousness of people. They further illustrated that control
environment is viewed as the foundation for all the other components of internal control. Control
environment factors include; integrity and ethical values of personnel responsible for creating,
administering, and monitoring the controls, commitment and competence of persons performing
assigned duties, board of directors or audit committees, management philosophy and operating
and Organizational structure .
Susana bleary (2015) also believes that these factors set a basis upon which the other internal
control components can be built. They also provide a framework within which the other
components operate. However, these assertions have not always held true, since management in
organizations has always overridden these controls, the lack of mentoring has always led to
collapse of controls. The independence of audit committee has largely been theoretical in most
organizations. Boards of management have on several occasions had very little time for
institution affairs, implying that their supervisory role has always been wanting.
To trigger independence of auditors, the American Institute of Certified Public Accountants
(AICPA) Auditing Standards Board issued Statement on Auditing Standards (SAS) No. 78.
This statement requires auditors to perform procedures on every audit to enable them to
understand their client’s control environment including integrity and ethical values. In other
words, auditors are specifically required to determine whether their clients’ ethical controls are
operating. SAS No. 78 points out those ethical values and other elements of the control
environment permeate the culture of an organization and affect the strength of all other controls.
2.4 Internal Audit and Financial Performance
Eniola (2016) suggest that internal auditing is conducted as part of the monitoring activity of an
organization. It involves appraising and investigating internal controls and the efficiency with
which the various units of the organization are performing their assigned functions. An Internal

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auditor is normally interested in determining whether a department has a clear understanding of
its assignment, is adequately staffed, properly safeguarding cash, maintains good records,
inventory & other assets and cooperates harmoniously with other departments.
Mwangi Mary (2013) describe that “Internal audit is an independent appraisal function
established within an Organization to examine and evaluate its activities as a service to the
organization”. According to Gupta (2010) “the scope of internal audit is determined by
management”. This may however, impair the internal auditor’s objectivity and hampers his
independence, it is quite hard to report negatively on someone who determines the scope of your
work.
In accordance to Institute of Internal Auditors (IIA-UK; 1997), independence is applicable to all
categories of auditors. This means the opportunity granted to the auditors to report directly to the
top authority. Mugo, 2009 also an internal auditor is an employee of the enterprise and cannot
therefore be independent of it, he should be able to plan and carryout his work as he wishes and
have access to the highest level of management.
According to John ; Morris (2011) efficiency and effectiveness of internal audit procedures is
not a simple task, successful operation is governed by the extent to which the element of internal
audit procedures receive attention which include; expertise, independence and objectivity. Eniola
(2016) further supplements that perception and ownership, organization and governance
framework, legislation, improved professionalism and resources were identified as functions in
the public sector derived from the effectiveness of the internal audit procedures. For purposes of
this study, the research comprises four components of the internal control. These are; the control
environment, internal audit function, risk management and control activities.
John ; Morris (2011) drawing from Statements of Standard Auditing Practices No. 6 (SAP 6)
defines Internal control as “the plan of organization and all the methods and procedures adopted
by then management of an entity to assist in achieving management objectives of ensuring as far
as practicable, the orderly and efficient conduct of its business, including adherence to
management policies, the safeguarding of assets, prevention and detection of fraud and error, the
accuracy and completeness of accounting records and the timely preparation of reliable financial
information”.
Internal control is used to describe how management assures that an organization does meet its
managerial effectiveness, financial and other objectives.

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2.5 Value of internal control and risk management
An organization’s system of internal control has a key role in the management of risks that are
significant to the fulfillment of its business objectives.
Institution’s objectives, its internal organization and the environment in which it operates are
continually evolving and, as a result, the risks it faces are continually changing. A sound internal
control system therefore depends on a regular evaluation of the nature and extent of the risks to
which the institutions is exposed. The purpose of internal control is to help manage and control
risk appropriately rather than to eliminate it (John, 2011).
2.6 Control Activities
The last component of internal control according to John Kang’aru Kinyua is monitoring. This is
aimed at ensuring that the internal controls continue to operate as intended. This can be achieved
through ongoing monitoring or separate evaluations. Separate evaluations are non-routine
monitoring activities such as period audits by the internal auditors. Generally, internal control is
very important to the reliability of financial statements when the internal control system
examined closely in timeliness.
Internal control should be effective when examining design can extremely beneficial and is
usually for organization management and widely to financial statements (Eniola, Omoniyi Jacob,
2016) at present, all kinds of business firms have used internal controls through the formation of
policies to ensure a safeguarding assets and profitable business environment especially
accounting policy, management policy, and operational policy. Hence, internal control should be
on a regular basis review in all aspects of their institutions and insert internal controls that will
strengthen the institutions and increase profitability.
The meaning is internal controls are important to the institution’s financial trustworthiness for
stakeholders, investors or everyone who is using information from financial reporting for
decision. In this research, internal control effectiveness refers to a sufficient and appropriate
internal control that firm’s system concerning of organizational specific policies, rule, and
procedures designed.
Besides, internal control effectiveness is important to the entity level of the firm especially it
provides reliable financial information, safeguard assets and records, encourages adherence to
prescribes policies and comply with regulatory agencies .The basic concepts of internal controls
indicate that management must establish and maintain the entity’s controls by risk management
efficiency, should provide a quality of compliance applied to all employees with potential of

11

intra organization communication, and effective by a continuous monitoring adequacy (Reid ;
Ash Eniola, 2015).
John Kang’aru Kinyua (2016) mentions Control activities as another component of internal
controls. Controls activities in an organization basically comprise; performance reviews
(comparing actual performance with budgets, forecasts and prior period performance),
information processing (necessary to check accuracy, completeness and authorization of
transactions), physical controls (necessary to provide security over both records and other
assets), and segregation of duties (where no one person should handle all aspects of a transaction
from the beginning to the end).
2.7 Performance
According to Oyoo (2014), performance is the ability to profitability, survive grow, operate
efficiently and react to the environmental opportunities and threats. In agreement with this,
Sollenberg & Anderson (1995) asserts that, performance is measured by how efficient the
enterprise is in use of resources in achieving its objectives.
Eniola (2016) believes that many firms’ low performance is the result of poorly performing
assets (businesses).
2.7.1 Measures of Financial performance
Anderson (2013) found out that, objective performance measures include indicators such as
profit growth, revenue growth, return on capital employed. According to Gabriel Mwaniki
Ngari(2017), appropriate performance measures are those which enable organizations to direct
their actions towards achieving their strategic objectives Gabriel Mwaniki (2017) contends that,
performance is measured by either subjective or objective criteria; arguments for subjective
measures include difficulties with collecting qualitative performance data from small firms and
with reliability of such data arising from differences in accounting methods used by firms.
2.7.1.1 Liquidity
Stocks are more liquid. At least if a stock becomes worth less than you paid, you could deduct
the loss on your taxes. During the depths of the recession, some homeowners found that they
couldn’t sell their home for any amount of money. Businesses use liquidity ratios to measure
their financial health. The three most important are:
1. Current Ratio – current assets divided by its current liabilities. It determines whether an
institution could pay off all its short-term debt with the money it got from selling its assets.

12

2. Quick Ratio – The same as the current ratio, only using just cash, accounts receivable and
stocks/bonds. The business can’t count its inventory or prepaid expenses that can’ be easily sold.
3. Cash Ratio – Like the name implies, the institutions can only use it cash to pay off its debt. If
the cash ratio is one or greater, that means the business will have no problem paying its debt, and
has plenty of liquidity.
2.7.1.2 Accountability
According to Hayes, 2015, Managers need regular financial reports so as to make informed
decisions. Reporting (particularly financial reports) is one way through which managers make
accountability for the resources entrusted to them. Emasu (2016) asserts that Accountability can
be political, social or financial accountability. Accountability is increased and enhanced,
ensuring that projects support the organizational strategy and that better services and greater
satisfaction are provided to a customer.
2.7.1.3 Reporting
Gramling et al. (2013), comprehensiveness of internal controls in addressing the achievement of
objectives in the areas of operations, compliance and financial reporting with laws and
regulations. They further note that “Internal control also includes the program for preparing,
verifying and distributing to the various levels of management those current reports and analyses
that enable executives to maintain control over the variety of activities and functions that are
performed in a large organization”
Corporate law requires a difference between ownership and management of an entity. Owners
normally entrust their resources in the hands of managers. Managers are required to use the
resources entrusted to them in the furtherance of the entity’s objectives. Managers normally
report to the owners on the results of their stewardship for the resources entrusted to them
through a medium called financial statements.
2.7.1.4 Survival
According to Sintayehu (2013), strong performer institutions are those that can stay in business
for a number of years and the ability of institutions to survive in business is an indicator of good
financial performance.
2.8 Empirical Studies
A study carried out by (Eniola, Omoniyi Jacob, 2016) examined the importance of a well-
organized system of internal control in regard with micro finance institution. The sample was
based on 25 credit institutions of Romania. The analysis of the survey answers revealed that the

13

continuous collaboration, based on periodical meetings, between all structures of bank,
characterizes an effective internal audit department. A study carried out by John Kang’aru
Kinyua (2016) investigated the existence and adequacy of implemented security controls of
computerized accounting information systems in the Kenya’s micro finance institution. The
results of study revealed that the vast majority of Kenya’s micro finance institutions have
adequate security controls in place.
It can be concluded that effective internal controls include; the maintenance of proper accounting
records, employee accountability, timely reporting on financial matters, risk mitigation by
internal employees, effective communication among employees, efficient and effective
utilization of financial and non-financial resources and information and communication
technology in service delivery. They help to ensure that the organization is not unnecessarily
exposed to avoidable financial risks and that financial information used within the business and
for publication is reliable (Simiyu, 2014). They also contribute to the safeguarding of assets,
including the prevention and detection of fraud and misuse of organizational resources (Musa,
2015).
Mawanda (2008) conducted a research on the effects of internal control systems on financial
performance in an institution of higher learning in Uganda. A questionnaire was used to collect
data to achieve the objectives. A census was done from a population of 270 staff at Uganda
Martyrs University. This research established a strong relationship between internal control and
financial performance of the Uganda Martyrs University. The study concluded that internal
control does function and that there is a significant relationship between internal control and
financial performance in an Institution of higher learning institutions.
2.9 Research Gap
There is a notable lack of research in developed as well as developing nations regarding the
direct association of internal controls and institutions financial performance. More specifically,
among these few studies is the one conducted by Al-Matari et al. (2012) who investigated the
association between the board characteristics and performance of Kuwaiti institutions. They
called for future researchers to examine the relation between internal controls and institutions
performance, both directly and indirectly, or in light of a moderating effect.

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CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
These parts of the thesis focused on the methodology that used to collect data and analyze it. It
includes the research design, sample size, sampling frame, data sources, collection and
procedure, reliability tests for data collection instruments, data Analysis and presentation and
matters regarding ethics in collection of data.
3.1 Research Design
A research design is a plan of research to be used to answer the research objectives and research
questions. It is the framework or structure to solve a specific problem. It gives direction and
systematizes the research. It refers to the process that the investigator will follow from the
inception to completion of the study.
The study conducted by using both correlation and descriptive research design. Descriptive
research design is a process of collecting data in order to test hypothesis or to answer questions
concerning the current status of the subjects in the study. A descriptive research determines and
reports the way things are.
As to the descriptive studies, they are designed to obtain data that describe the characteristics of
the topic of interest in the research. In descriptive research, the research problem is structured
and well understood. The researcher begins with the idea that there might be a relationship
between two variables. The study then involved in developing causal explanations. Causal
explanations argue that phenomenon Y (Financial performance) is affected by factor X (internal
control). This design is chosen because it applied closely to the research objectives of this study.
3.2 Sampling Design
Sample design deals with study population, population size, sample frame and sampling
technique. Sampling is a technique of selecting a suitable sample for the purpose determining
parameters of the whole population. Population is the list of elements from which the sample
may be drawn (John, 2015).A sample is drawn to overcome the constraints of covering the entire
population with the intent of generalizing the findings to the entire population.
3.2.1 Study Population
A population study is a study of a group of individuals taken from the general population who
share a common characteristic. In this study the population is Omo micro finance institutions in
Wolaita Zone and the result obtained from this study used as a reference for all the other micro
finance institutions which is working in the industry.

15

3.2.2 Population Size
The population is the aggregate or collection of units about which the survey is conducted. Units
can refer to people, households, schools, hospitals, businesses etc. There are two different
populations that a survey is concerned with. We have a target population, the group of units
about which information is wanted, and a survey population, the units that we are able to survey.
The target population is the eight registered deposit taking and lending Omo micro finance
institutions in Wolaita Zone which are: Omo micro finance institution ,Sodo Area branch, Areka
branch, Damot Gale branch, Damot woyde branch, Boloso Sore branch, Duguna Fango branch,
Boditiy branch and Damot Pulasa branch, which their services towards the majorly poor
population. The study targeted one top- level manager, one mid-level manager and five staff
members from each of the eight Omo Micro-Finance institutions thus bringing the entire sample
size to 56 respondents.
3.2.3 Sampling frame and Sampling technique
The convenience sampling technique used to choose Eight Micro-finance institutions from the
target population. Its main objective is to produce a sample that can be logically assumed to be
representative of the population. This is done because of their ease of access. Convenience
sampling techniques is used to select the one top-level manager, one mid-level manager and five
staff members from each Omo Micro-Finance institutions.
3.3 Data sources, collection and procedure
The study got data from primary sources. Primary data was got from questionnaires. A
questionnaire deal with elite respondents for that matter this questionnaire chosen simply and the
researcher give sufficient time to respondents to respond the questions of the study.
3.4 Reliability Tests for Data collection Instruments
Validity of research was determined by the researcher through seek opinions in the field of study
especially the researcher advisor and lecturers in the department of Accounting and finance. The
coefficient alpha or Cronbach?s alpha was used as a measure of internal reliability of the data
collection instruments.
3.5 Data Analysis and Presentation
Data were prepared to eliminate unusual circumstances; verify and reject wrong responses and
contradictory data from unrelated questions. Blanks and non-responses were being ignored. The
data then coded and fed into a computer program (the Statistical Package for social science,
SPSS) for easy analysis and interpretation of results.

16

Descriptive statistics such as frequency distributions, percentages and frequency tables was used
to summarize and relate variables which were attained from the study. The study adopted
regression and correlation analysis. Regression analysis was used to come up with the model
expressing the hypothesized relationship between the independent variables (Control
environment, Internal Audit, Risk management and Control Activities.) and the dependent
variable (financial performance of Omo micro finance institutions in Wolaita zone). Specifically
the regression model was:
FP= ?0+ ?1X1 +?
FP= ?0+ ?2X2+ +?
FP= ?0+ ?3X3+ ?
FP= ?0+ ?4X4 +?
FP= ?0+ ?1X1+ ?2X2+ ?3X3+ ?4X4+?
Where ?0, ?1, ?2, ?3, and ?4 are regression co-efficient
FP-Financial performance measured by ROE
?0 – Intercepts of equation
?1 – Coefficients of variables
X1- Control Environment
X2-Internal Audit function
X3-Risk Management control
X4-Internal Control Activities
?o – Constant
?- Error term
3.6 Research Ethics
Ethical consideration is a major part of this research process. First the researcher gets
authorization from the top management of the Omo Micro-finance Institutions. The researcher
structures the questionnaires in such a way that there is no mention of the Interviewee’s name. A
statement as to the strict confidentiality with which data held expressly stated in the
questionnaire. Ethical considerations are also taking care of by the researcher briefing the
respondents as to the purpose of the research, their relevance in the research process, and
expectations from them.

17

CHAPTER FOUR
DATA ANALYSIS, RESULTS AND DISCUSSION
4.1 Introduction
The study adopted statistical packages for social sciences approaches to examine the internal
control effect on financial performance of Omo micro finance institutions in Ethiopia. To
descriptive statistics, the reliability among the multiple measures of the variables that comprise
this study was measured using Cronbach?s alpha coefficient generated by statistical packages for
social sciences (SPSS). Cronbach?s alpha is a measure of consistency and checks if the questions
of the questionnaire were understood and if the data are minimally reliable.
4.2 Data Reliability
The coefficient alpha is an appropriate measure of variance attributable to subjects and variance
attributable to the interaction between subjects and items (Zikmund et al., 2010). Accordingly
Cronbach?s alpha was used as a measure of internal reliability. In terms of the specific testing of
internal reliability, the following scores obtained in terms of the testing of the Cronbach?s alphas
are indicated in table 4.1.
Table 4.1: Reliability statistics
Variable Cronbach”s Alpha= =Number of items =
Internal control environment= 0.718==12=
Internal audit function= 0.71R= P=
Risk management= 0.714= P==
Control activities= 0.72M==P=
Source: computation through spss output, 2018
Thus the values in Table 4.1 internal control environment ? = 0.718, internal audit function ? =
0.715, risk management ? =0.714, control activities ? = 0.720, are sufficient confirmation of data
reliability for the independent variables. A Cronbach?s alpha of 0.60 as a minimum level is
acceptable (Zikmund et al., 2010).
4.3 Profile of Respondents
4.3.1 Gender Distribution
The gender of the respondents was investigated. Majority (85.7%) of the respondents were male
while the rest (14.3%) of the respondents were female as shown in table 4.2.The statistics show

18

that majority of employees in charge of internal control in Omo micro finance institutions are
Male. The distribution however represents unfair gender balancing.
Table 4.2 Distribution of Respondents by Gender
Gender of the respondent
Frequency Percent Valid Percent Cumulative Percent

Male 48 85.7 85.7 85.7
Female 8 14.3 14.3 100.0
Total 56 100.0 100.0
Source: computation through spss output, 2018
4.3.2 Branch Distribution of the Respondents
The distribution of respondent per branches as shown in the table 4.3 shows that there is proper
representation of Omo micro finance institutions in Wolaita zone.
Table 4.3 Branch Distribution of the Respondents
Name of institution
Frequency Percent Valid Percent Cumulative Percent

sodo zuria branch 7 12.5 12.5 12.5
Areka area branch 7 12.5 12.5 25.0
Damot gale branch 7 12.5 12.5 37.5
Damot woyde branch 7 12.5 12.5 50.0
Boloso sore branch 7 12.5 12.5 62.5
Duguna fango branch 7 12.5 12.5 75.0
Boditiy branch 7 12.5 12.5 87.5
Damot Pulasa branch 7 12.5 12.5 100.0
Total 56 100.0 100.0
Source: computation through spss output, 2018
4.3.3 Position held in the institution
The analysis results in table 4.4 show that majority of respondents in this study are Agent
28.6%, followed by manager 14.3%, chief cashier 14.3%, accountant14.3%, auditor 14.3%, and
Operation officer 14.3%.From the above description, it can be revealed that the majority of the

19

respondents in this study are those directly involved the implementation of the internal control.
Therefore, their responses are deemed to reflect what actually takes place in the institutions.
Table 4.4 Position held in the organization
Position of respondent
Position Frequency Percent Valid Percent Cumulative Percent

Valid

Manager 8 14.3 14.3 14.3
Chief Cashier 8 14.3 14.3 28.6
Accountant 8 14.3 14.3 42.9
Auditor 8 14.3 14.3 57.1
Agent 16 28.6 28.6 85.7
Operation officer 8 14.3 14.3 100.0
Total 56 100.0 100.0
Source: computation through spss output, 2018
4.3.4 Educational background
Table 4.5 indicated that, none of the respondents had only Primary education, 23.2% college
diploma holders, 76.8% were university graduates with degree. This shows that most of the
respondents had attained the minimum level of education to participate towards the achievement
of institutional objectives and better performances in the Microfinance institutions.
Table 4.5 Highest Level of Education Attained
Educational background
Frequency Percent Valid Percent Cumulative Percent

Diploma 13 23.2 23.2 23.2
Degree 43 76.8 76.8 100.0
Total 56 100.0 100.0
Source: computation through spss output, 2018
4.3.4 Work experience of respondent.
To investigate the number of years each respondent had worked in the institution 25% of the
respondents had a working experience between 6 to 10 years, 5.4% had 11 to 15 years, and 69.6
% had below 5 years. This means that the respondents had satisfactory working experience with

20

the institutions and possess the necessary knowledge and information which was considered
useful for this study.
Table 4.6; Work experience of respondent.
Work experience of respondent
Frequency Percent Valid Percent Cumulative Percent
Valid
Below 5 years 39 69.6 69.6 69.6
6-10 years 14 25.0 25.0 94.6
11-15 years 3 5.4 5.4 100.0
Total 56 100.0 100.0
Source: computation through spss output, 2018
4.4 Descriptive Analysis
4.4.1 Descriptive Analysis on Internal Control Environment
4.4.1.1 Integrity and Ethical Values
The variables for integrity and ethical values in this study were entity policies (on acceptable
business practices, conflict of interest and codes of conduct), Employee job descriptions,
including specific duties, reporting responsibilities, and constraints are clearly established and
effectively communicated to the employees. The study seek to investigate if the institution has
appropriate entity policies regarding such matters as acceptable business practices, conflict of
interest and codes of conduct and if they were adequately communicated. The questions required
the respondents to choose the following: strongly disagree, disagree, neutral, agree and strongly
agree.
The result indicated that majority (76.8%) of the respondents agreed that their institution have
appropriate entity policies regarding such matters as acceptable business practices, conflicts of
interest, and codes of conduct and that they were adequately communicated, while 5.4% strongly
agreed, 16.1% were neutral, 1.8% of the respondents strongly disagreed that their institution
have appropriate entity policies. The results revealed by Table 4.7 respondents that their
institution have appropriate entity policies regarding such matters as acceptable business
practices, conflicts of interest, and codes of conduct and that they were adequately
communicated as reflected by the mean value of 3.86 which is tending towards the maximum
point of 5. However, a significant standard deviation of 0.520 suggests varied responses
regarding acceptable business practices, conflicts of interest, and codes of conduct. Further the

21

study sought opinion on whether employee job descriptions, including specific duties, reporting
responsibilities, and constraints are clearly established and effectively communicated to the
employees. Majority (71.4%) of the respondents agreed, 16.1% were neutral while 8.9 %
strongly agreed and 1.8% disagreed and 1.8% of the respondents strongly disagreed. The results
are summarized in table 4.7 In Table 4.7 , respondents provided their understanding in regard to
employee job descriptions, including specific duties, reporting responsibilities, and constraints
are clearly established and effectively communicated to the employees and their perceptions
show mean of 3.84, implying that they agree with the statement. Thus, a standard deviation of
0.682 suggests significant differences in responses as regards employee job descriptions,
including specific duties, reporting responsibilities, and constraints are clearly established and
effectively communicated to the employees. The study agree with COSO (2013) that outlines
control environment factors to include the integrity, ethical values and competence of the entity’s
people; management’s philosophy and operating style; the way management assigns authority
and responsibility, and organizes and develops its people; and the attention and direction
provided by the board of directors.
Related with the above results it can be concluded that most Omo micro finance institutions in
Wolaita zone have appropriate entity policies on business practices, conflict of interest and code
of conduct and that they are adequately communicated. The study also confirms that
management of those institutions demonstrates there is an appropriate employee job description,
including specific duties, reporting responsibilities, and constraints are clearly established and
effectively communicated to the employees. This confirms that most Omo micro finance
institutions in Wolaita zone have an integrity and ethical value which is a clear indication of
good internal control environment.
4.4.1.2 Commitment to Competence
The commitment to competence variables considered in this study was management
determination of the employee level of knowledge and skills required to perform a job and
adequacy of employee compensation to attract qualified individuals. The result of the finding
indicated that as to the opinion whether Management determines the level of knowledge and
skills needed to perform a particular job and if this information is used in the hiring process,
majority (75%) of the respondents agreed, 16.1% were neutral while 7.1% strongly agreed and a
few 1.8% disagreed. The results of the survey as revealed by Table 4.7 suggest that Management
determines the level of knowledge and skills needed to perform a particular job and if this

22

information is used in the hiring process. This is evident when the mean of respondents as
computed by the system is well above the average (i.e. 3.88). Nevertheless, the corresponding
standard deviation of 0.541 suggests that respondents had a variation in responses.
Further opinion on whether the institutions adequately compensates employees in order to attract
qualified individuals, most (71.4%) of the respondents agreed while 19.6% neutral, 5.4%
strongly agreed while a few (1.8%) disagreed and (1.8%) strongly disagreed. The study (as
reflected in table 4.2.3) found that the respondents seem to agree that the
Institution has an accounting and financial management system in place with a mean value of
3.77 which appears to be close to the maximum rank of 5. This shows that they generally agree
about institutions adequately compensates employees in order to attract qualified individuals.
However, the corresponding standard deviation also revealed a significant value of 0.660. This
also shows that there is a clear variation in the responses provided by the respondents.
The results are summarized in table 4.7
The result agrees with the finding by (Eniola, Omoniyi Jacob, 2016) that Control environment
factors include: Integrity and ethical values; the commitment to competence; leadership
philosophy and operating style; and the way management assigns authority and responsibility,
and organizes and develops its people.
The findings trying to confirm that employees in institutions listed in Wolaita zone have clear
job descriptions and that management determines the level of knowledge and skill needed to
perform a particular job. The institutions adequately compensate their employees and have
performance evaluation mechanism in place. This confirms that management of most institutions
in Wolaita zone is committed to competence, a clear indication of existence of good internal
control environment. This is expected to have positive impact on financial performance.
4.4.1.3 Management Philosophy and Operating Style
On management philosophy and operating style, the study sought to investigate whether
management and operating decisions were dominated by a few individual and if management did
analysis of risks before making a decision that affect achievement of the institutions objective.
The results as indicated in table 4.7, were majority (76.8%) of the respondents agreed that
management and operating decisions are not dominated by a few individuals with 16.1% neutral
while a few 5.4% strongly agreed and 1.8% was disagreed. From the table 4.7 above,
respondents seemed to agree that management and operating decisions were dominated by a few
individual and if management did analysis of risks before making a decision that affect

23

achievement of the institutions objective as reflected by the mean value of 3.86 which is tending
towards the maximum point of 5. However, a significant standard deviation of 0.520 suggests
varied responses. As to whether Management analyses the risks and potential benefits of a
venture before making a decision most (73.2%) of the respondents agreed that Management
analyses the risks and potential benefits of a venture before a decision is made while 19.6%
neutral and 5.4% remained strongly agreed. A few (1.8%) disagreed. In Table 4.7 above,
respondents provided their understanding in regard to Management analyses the risks and
potential benefits of a venture before making a decision and their perceptions show mean of
3.82, implying that they agree with the statement. A standard deviation of 0.543 suggests
significant differences in responses as regards Management analyses the risks and potential
benefits of a venture before making a decision. The results are summarized in table 4.7
The results of the finding by (Eniola, 2016) that Control environment factors include: Integrity
and ethical values; the commitment to competence; leadership philosophy and operating style;
and the way management assigns authority and responsibility, and organizes and develops its
people.
The findings confirm that management decisions in Omo micro finance institutions in Wolaita
zone are not dominated by a few individuals and that analysis of risk and potential benefits of a
venture is done before making a decision. This indicate the presence of a positive management
philosophy and style in Omo micro finance institutions in Wolaita zone, an indication of
existence of good internal control environment.
4.4.1.4 Organizational Structure
Related with the organizational structure, the study sought to investigate if the organization of
the institutions was clearly defined in terms of line of authority and responsibility, the
organizational structure was appropriate for the size and complexity of the entity. Most (76.8%)
of the respondents agreed that organization of the institution is clearly defined in terms of lines
of authority and responsibility, whereas 5.4% strongly agreed,16.1% neutral and 1.8% disagree.
The analysis results in table 4.7 reveals that to some extent, organization of the institution is
clearly defined in terms of lines of authority and responsibility as reflected by a mean value
above average, 3.86. However, even the 56 of the respondents seemed to have varied responses
regarding organization of the institution is clearly defined in terms of lines of authority and
responsibility as revealed by a standard deviation of 0.520.

24

Upholding ethical values in management decisions is in line As to whether the institutional
structure was appropriate for the size and complexity of the institutions, most (69.6%) of the
respondents agreed that institutional structure was appropriate for the size and complexity of the
entity while 8.9% neutral and 14.3% strongly agreed while 5.4% of the respondents were
disagreed and 1.8% of the respondents were strongly disagreed. The analysis results in table 4.7
reveals that to some extent, organizational structure was appropriate for the size and complexity
of the entity as reflected by a mean value above average, 3.98. However, even the 57 of the
respondents seemed to have varied responses regarding organizational structure was appropriate
for the size and complexity of the entity as revealed by a standard deviation of 0.587. The results
are summarized in table 4.7
The results confirm that organization structure of Omo micro finance institutions in Wolaita zone
is clearly defined in terms of lines of authority and responsibility. The findings also confirm that
the organization structure for most of the institutions is appropriate for the size and complexity.
This is a clear indication of existence of good internal control environment.
4.4.1.5 Assignment of Authority and Responsibility
Regarding assignment of authority and responsibility, the study was to investigate if the
institutions had clear assignment of responsibilities and delegation of authorities and if
employees had job responsibilities including specific duties, reporting relationship clearly
established and communicated. The findings as summarized in table 4.7, were (62.5%) of the
respondents agreed that there was clear assignment of responsibility and delegation of authority
to deal with such matters as organizational goals and objectives, operating functions, and
regulatory requirements, whereas 21.4% strongly agreed while 12.5% neutral, 3.6% were
disagreed. The analysis of results in Table 4.7 reveal a mean of 3.82, implying that the
respondents were in agreement in regard to there was clear assignment of responsibility and
delegation of authority to deal with such matters as organizational goals and objectives,
operating functions, and regulatory requirements. However, a standard deviation of 0.636 reveals
a significant variation in the opinions. Further opinion was collected on whether all employees
have job responsibilities, including specific duties, reporting relationships clearly established and
communicated, the results indicated majority (67.9%) of the respondents agreed that employees
have job responsibilities, including specific duties, reporting relationships clearly established and
communicated, 3.6% neutral, 25% strongly agreed, also 1.8% were disagreed and 1.8% strongly
disagreed. The results of the survey as reflected in Table 4.7 revealed that the employees have

25

job responsibilities, including specific duties, reporting relationships clearly established and
communicated as shown by a mean of 3.82, even though there were variations in responses to
this test as revealed by the standard deviation of 0.636.
The findings approved that employees of Omo micro finance institutions in Wolaita zone have
clear assignment of responsibility and delegation of authority, an indication of existence of good
internal control environment.
4.4.1.6. Human Resource Policy and Practices
For human resource policy and practices, the study investigate if all personnel including key
managers possess adequate knowledge and experience to discharge their responsibilities, if
turnover of key personnel is low and if there is management commitment to competence to
ensure that personnel receive adequate training to perform their duties. In relation to opinion,
majority (62.5 %) of the respondents agreed that personnel including key managers possess
adequate knowledge and experience to discharge their responsibilities, 10.7% neutral while
23.2% were strongly agreeing and 3.6% disagreed. In Table 4.7 above, respondents provided
their understanding in regard to personnel including key managers possess adequate knowledge
and experience to discharge their responsibilities and their perceptions show mean of 3.89,
implying that they agree with the statement. A standard deviation of 0.528 suggests significant
differences in responses as regards personnel including key managers possess adequate
knowledge and experience to discharge their responsibilities.
Management’s monitoring of implementation of internal control Finally on whether management
has shown commitment to competence and ensured that personnel receive adequate training to
perform their duties, most (53.6%) of the respondents agreed that management has shown
commitment to competence and ensured that personnel receive adequate training to perform their
duties while 28.6% strongly agreed. 12.5% of the respondents were neutral while a few 5.4%
disagreed. From the table 4.7 above, respondents seemed to agree that management has shown
commitment to competence and ensured that personnel receive adequate training to perform their
duties as reflected by the mean value of 3.91 which is tending towards the maximum point of 5.
However, a significant standard deviation of 0.695 suggests varied responses. The results are
summarized in table 4.7
The control environment provides discipline and structure for the achievement of the primary
objectives of internal control. The results confirm that most Omo micro finance institutions have

26

good human resource policies and practices which are assurance to existence of good internal
control environment.

27

Table 4.7 Respondents’ Opinion on Internal Control Environment.
__________________________________________________________________________________
Strongly Disagree Neutral Agree Strongly
Disagree Agree
Respondents opinion Mean Std. Deviation
__________________________________________________________________________________
The institution has policies
regarding acceptable business
practices, conflicts of interest, 0% 1.8% 16.1% 76.8% 5.4% 3.86 .520
and codes of conduct and they
adequately communicated
__________________________________________________________________________________
Employee job descriptions,
including specific duties,
reporting responsibilities, and 1.8% 1.8% 16.1% 71.4% 8.9% 3.84 .682
constraints are clearly established
and effectively communicated to
the employees
__________________________________________________________________________________
Management determines the level
of knowledge and skills needed to
perform a particular job and this 0% 1.8% 16.1% 75% 7.1% 3.88 .541
information is used in the hiring
process
__________________________________________________________________________________
The institution adequately
compensates employees in order
to attract qualified individuals 1.8% 1.8% 19.6% 71.4% 5.4% 3.77 .660
__________________________________________________________________________________
Management and operating decisions
are not dominated by a few individuals 0% 1.8% 16.1% 76.8% 5.4% 3.86 .520
__________________________________________________________________________________
Management analyses the risks and
potential benefits of a venture before 0% 1.8% 19.6% 73.2% 5.4% 3.82 .543
making a decision
The organization of the institution is
clearly defined in terms of lines of 0% 1.8% 16.1% 76.8% 5.4% 3.86 .520
authority and responsibility
The institutions structure appropriate for
the Size and complexity of the entity 0% 1.8% 12.5% 71.4% 14.3% 3.98 .587
There is clear assignment of responsibility

28

The organization of the institution
is clearly defined in terms of lines 0% 1.8% 16.1% 76.8% 5.4% 3.86 .520
of authority and responsibility
______________________________________________________________________________
The institutions structure
Appropriate or the size and 1.8% 5.4% 8.9% 69.6% 14.3% 3.98 .587
complexity of the entity
______________________________________________________________________________
There is clear assignment of
responsibility and delegation
of authority to deal with 0% 3.6% 12.5% 62.5% 21.4 % 3.82 .636
organizational goals and objectives,
operating functions, and regulatory
requirements
______________________________________________________________________________
All employees have job responsibilities,
including specific duties, reporting 1.8% 1.8% 3.6% 67.9% 25% 3.82 .636
relationships clearly established and
communicated
___________________________________________________________________________________
All personnel, including key managers,
possess adequate knowledge and 0% 3.6% 10.7% 62.5% 23.2% 3.89 .528
experience to discharge their responsibilities
___________________________________________________________________________________
Management has shown commitment to
competence and ensured that 0% 5.4% 12.5% 53.6% 28.6% 3.91 .695
receive adequate training to personnel
perform their duties.
_____________________________________________________________________________
Source: computation through spss output, 2018
4.4.2 Descriptive Analysis on Internal Audit Function.
4.4.2.1 Monitoring and Evaluation
Related with monitoring and evaluation, the study investigates the institutions weather internal
audit department has developed manual that guide on planning monitoring and evaluation. The

29

result as shown in table 4.8, indicated that most (62.5%) of the respondents agreed that internal
audit unit in the institution has developed an internal audit manual that guides audit operations
such as planning, implementation, monitoring, and evaluation, 3.6% strongly agreed while 8.9%
strongly disagreed,3.6% disagreed and 21.4% were neutral.
4.4.2.2 Fraud Prevention, Detection and Control
On fraud prevention, detection and control, the study sought to investigate if internal audit plays
a major role in fraud detection and prevention. The result as shown in table in table 4.8 indicates
opinion on whether internal audit department in the institution plays a major role in fraud
detection and prevention, most (50%) of the respondents agreed that internal audit department in
the institution plays a major role in fraud detection and prevention, while 7.1% strongly agreed
and 19.6% remained neutral.10.7% and 12.5 % strongly disagreed and disagreed respectively.
The results agree with the findings by Alexander Morris (2015) that organizations with effective
and efficient internal audit function are able to detect fraud more than those that have not such a
function within their organizations. The result confirms that Omo micro finance institutions in
Wolaita zone have internal audit function that play the role of fraud detection, prevention and
control, an indication existence of good internal control.
4.4.2.3 Reporting
The study sought to investigate whether the head of internal audit is a member of the senior team
in the institution. The results as shown in table 4.8 were as follow. Opinion as to whether the
head of the internal audit function is a member of the senior management team in the institution
and reports to the chief executive officer, 62.5% of respondents agreed that the head of the
internal audit function is a member of the senior management team in the institution, 3.6%
strongly agreed, 10.7% were neutral while 14.3% and 8.9% disagreed and strongly disagreed
respectively. The results are summarized in table 4.8
It agrees with the findings by Al Matarneh (2011) that internal audit encompasses oversight
activities taken by the board of directors and audit committees to make sure that the financial
reporting process is credible.
The findings show that Omo micro finance institution in Wolaita zone have internal audit
department which plays the role of objective and independent assurance. This is an indication of
existence of good internal control in Omo micro finance institution in Wolaita zone.

30

Table 4.8 Respondents’ Opinion on Internal Audit Function
____________________________________________________________________________
Strongly Disagree Neutral Agree Strongly
Disagree Agree
Respondents opinion Mean Std. Deviation
__________________________________________________________________
The internal audit unit in the institution
has developed an internal audit manual
that guides audit operations such as 8.9% 3.6% 21%.4 62.5% 3.6% 3.68 .876
planning, implementation, monitoring,
and evaluation
____________________________________________________________________________________
The internal audit unit in the institution
plays a major role in fraud detection 10.7% 12.5% 19.6% 50% 7.1% 3.73 .944
and prevention
____________________________________________________________________________________
The head of the internal audit function
is a member of the senior management 8.9% 14.3% 10.7% 62.5% 3.6% 3.61 .908
team in the institution and reports to the CEO
_____________________________________________________________________________
Source: computation through spss output, 2018
4.4.3 Descriptive Analysis on Risk Management.
4.4.3.1 Risk Identification
In relation to risk identification the study sought to establish if the institution had a monitoring
system that identifies potential risks. The results as shown in table 4.9 indicates that majority
(60.7%) of the respondent agreed that the institution has a monitoring system that identifies
potential risks, 3.6% strongly agreed while 19.6% were neutral. The remaining 7.1% and 8.9%
disagreed and strongly disagreed respectively.
The results confirm that Omo micro finance institution in Wolaita zone have well documented
policies on risks and management encourage reporting of events in order to identify risk, an
indication of existence of good internal control.

31

4.4.3.2 Risk Evaluation
Based on risk evaluation the study sought to investigate if the institution had adequate capacity
to risk assessment. The results as shown in table 4.9 below indicates that majority (48.2%) of the
respondents agreed that their institution had adequate capacity to perform risk assessment, 7.1%
strongly agreed, 19.6% were neutral while 14.3% disagreed and 10.7% strongly disagreed.
The results support the finding by Gabriel Mwaniki (2017) that the survival and success of a
financial organization depends critically on the efficiency of managing these risks. The results
confirm that most Omo micro finance institution in Wolaita zone adequately evaluates and
records the risk an indication of good internal control.
4.4.3.3 Risk Mitigation
Respondents opinion on whether the institutions has adequately implemented any inspection
plans to reduce the inherent risks and if those plans which are periodically revised, 62.5% of
respondent agreed while 1.8% strongly agreed. 12.5% of the respondents were neutral while
14.3% disagreed and 8.9% strongly disagreed. The results are summarized in table 4.9
The results support the findings Anderson (2014) who observed good risk management is highly
relevant in providing better returns to the shareholders. The results confirm that most Omo micro
finance institution in Wolaita zone in their operations enterprise risk management an indication
of existence of good internal control.
Table 4.9 Respondents’ Opinion on Risk Management
__________________________________________________________________
Strongly Disagree Neutral Agree Strongly
Disagree Agree
Respondents opinion Mean Std. Deviation
__________________________________________________________________
The institution has a monitoring
System that identifies potential risks 8.9% 7.1% 19.6% 60.7% 3.6% 3.64 .903
_____________________________________________________________________________________
There is adequate capacity to perform
risk assessment in my institution 10.7% 14.3% 19.6% 48.2% 7.1% 3.68 .956
____________________________________________________________________________________
The institution has adequately

32

implemented any inspection plans 8.9% 14.3% 12.5% 62.5% 1.8% 3.57 .931
to reduce the inherent risks which
are periodically revised
____________________________________________________________________________________
Source: computation through spss output, 2018
4.4.4 Descriptive Analysis on Control Activities
4.4.4.1 Information and Communication
Respondent’s opinion regarding whether the institution has well established information and
communication channels, most 60.7% of the respondents agreed, 3.6% strongly agreed while
23.2% were neutral, 3.6% disagreed and 8.9% strongly disagreed. On other hand the institution
utilizes „suggestion boxes? for obtaining information that is sensitive and confidential for the
effective management of the institution, 48.2% of the respondent agreed, 7.1% strongly agreed
while 21.4% were neutral, 12.5% of the respondents disagreed and a few (10.7%) strongly
disagreed. The results are shown in table 4.10.
The result confirms that Omo micro finance institutions in Wolaita zone have well defined
channels of information and communication, an indication of good internal control.
4.4.4.2 Policies and Procedure
On policies and procedure whether the institution has developed effective policies and
procedures on information and communication,60.7% of the respondent agreed, 3.6% strongly
agreed,12.5% were neutral while 14.3% disagreed and 8.9% strongly disagreed. The results are
shown in table 4.10
The results concur with the finding of John Davis (2014) that Control activities involve two
elements: a policy establishing what should be done and procedures to affect the policy. All
policies must be implemented thoughtfully, conscientiously and consistently to achieve the
desired objectives. The results confirm that most Omo micro finance institutions in Wolaita zone
have put in policies and procedure that assist in running their operations an indication of
existence good internal control.

33

Table 4.10 Respondents’ Opinion on Control Activities
__________________________________________________________________
Strongly Disagree Neutral Agree Strongly
Disagree Agree
Respondents opinion Mean Std. Deviation
__________________________________________________________________
The institution has well established
information and communication 8.9% 3.6% 23.2% 60.7% 3.6% 3.68 .876
channels
____________________________________________________________________________________
The institution utilizes suggestion
boxes for obtaining information that 10.7% 12.5% 21.4% 48.2% 7.1% 3.68 .956
is sensitive and confidential for the
effective management
____________________________________________________________________________________
The institution has developed
effective policies and procedures 8.9% 14.3% 12.5% 60.7% 3.6% 3.61 .867
on information and communication.
_____________________________________________________________________________
Source: computation through spss output, 2018
4.4.5 Descriptive Analysis on Financial Performance
Respondent’s opinion on Profitability in institution over the last 5 years has been increasing
steadily and the results were 57.1% of the respondents agreed, 16.1% strongly agreed and 16.1%
were indifferent. The balance 7.1% and 3.6% disagreed and strongly disagreed respectively. On
whether the Institution Accounting system adequately identifies the income and expenditure,
majority 53.6% agreed followed by 21.4% indifferent. 16.1% of the respondent were strongly
agreed, 7.1% disagreed while 1.8% strongly disagreed. Opinion on whether the institution has
enough cash to meet its obligations effectively, 48.2% of the respondents agreed, 10.7% strongly
agreed and majority 30.4% were indifferent. The balance 8.9 % and 1.8% of the respondents
disagreed and strongly disagreed respectively. The results are summarized in table 4.11

34

Table 4.11 Respondents’ Opinion on Financial Performance
__________________________________________________________________
Strongly Disagree Neutral Agree Strongly
Disagree Agree
Respondents opinion Mean Std. Deviation
_____________________________________________________________________________
Profitability in institution over
the last 5 years has been 3.6% 7.1% 16.1% 57.1% 16.1% 3.79 .909
increasing steadily
_____________________________________________________________________________
The Institution Accounting
system adequately identifies 1.8% 7.1% 21.4% 53.6% 16.1% 3.79 .909
the income and expenditure
_____________________________________________________________________________
The institution has enough
cash to meet its obligations 1.8% 8.9% 30.4% 48.2% 10.7% 3.79 .909
effectively
________________________________________________________________________________________
Source: computation through spss output, 2018
4.5 Relationship between Internal Control and financial performance
This section answers objective of the research. The relationship between internal controls and
financial performance in micro finance institutions in Ethiopia, the case of 0mo micro finance
institutions in Wolaita zone was investigated using control environment, internal audit function,
Risk management and control activities as dimensions for internal control while Profitability,
liquidity and accountability were for financial performance.

35

Table 4.12: Pearson’s Correlation analysis Correlation Matrix
1 2 3 4 5 6 7
Control environment

1

Internal Audit

0.266** 1

Risk Management

0.387** 0.179** 1

Control Activities

0.299** 0.389** 0.276** 1

Profitability 0.216** 0.148** 0.373** 0.386** 1

Accountability

0.213** 0.086** 0.362** 0.347** 0.208** 1

Liquidity

0.197** 0.083** 0.332** 0.372** 0.216** 0.162** 1

** ?=0.01 (correlation is significant at 0.01 level (2-tailed)
Source: computation through spss output, 2018
The correlation describe the relationship between internal Controls measured by control
environment, internal audit, Risk management and control activities against financial
performance, measured by liquidity, Accountability and Profitability. The results show that all
the variables relate positively.
4.5.1 Control environment and financial performance
Table 4.12 indicate that the control environment is positively related to Profitability with r =
0.216 and standard error, p < 0.01, the control environment is positively related with
accountability with r = 0.213 and standard error, p < 0.01, and the control environment is
positively related to Liquidity with r = 0.197 and p < 0.01.
The results suggests that the Control environment is related with financial performance therefore
hypothesis one (H1), there is a relationship between the control environment and financial
performance of micro finance institutions is accepted.

36

4.5.2 Internal audit and financial performance.
The results in table 4.12 indicate a positive relationship between internal audit and Profitability
with r = 0.148 and p < 0.01, internal audit is positively related to accountability with r = 0.086
and p < 0.01, and positively related to liquidity with r = 0.083 and p < 0.01.Since there is a
positive relationship between the internal audit function and financial performance; liquidity,
accountability and profitability, hypothesis two (H2); an effective internal audit function is
related with the financial performance of micro finance institutions is accepted.
4.5.3 Risk management and financial performance
Table 4.12 shows that the risk management is positively related to profitability with r = 0.373
and standard error, p < 0.01, the risk management is positively related with accountability with r
= 0.362 and standard error, p < 0.01, and the risk management is positively related to liquidity
with r = 0.332 and p < 0.01.
The results suggests that the Control environment is related with financial performance and
therefore hypothesis three (H3), there is a relationship between the risk management and
financial performance of micro finance institutions is accepted.
4.5.4 Internal Control activities and financial performance
Results in table 4.12 indicate a positive relationship between internal control activities with
Profitability, r = 0.386 with a standard error, p < 0.01. Internal control activities further relate
positively with accountability, r = 0.347 with a standard error, p< 0.01 and with liquidity, r =
0.372 with a standard error, p < 0.01. Therefore, internal control activities affect financial
performance, thus hypothesis four (H4), Functionality of internal control activities and financial
performance of micro finance institutions is accepted.
4.6 Inferential Analysis
Regression analysis was done to establish the statistical significance relationship between the
independent variables (internal control environment, internal audit function, risk management
and control activities) on the dependent variable which was financial performance. According to
Ehrhardt (2013), Regression Analysis is a statistical process of estimating the relationship
between variables. Regression analysis helps in generating equation that describes the statistics
relationship between variables. The regression analysis results were presented using a scatter plot
diagram, regression model summary tables, Analysis of Variance (ANOVA) table and beta
coefficients tables.

37

4.6.1 Regression Analysis on Internal Control Environment versus Financial Performance
H1: There is significant relationship between internal control environment and financial
performance.
Regression analysis was conducted to determine the significance of the relationship of internal
control environment against financial performance. Figure 4.1 illustrates scatter plot diagram of
internal control environment versus financial performance. The Figure 4.1 presents that all the
points of an estimate line that is increasingly positively upwards. This implies that there is a
positive linear relationship between internal control environment and financial performance.
Figure 4.1 Regression Model of Internal Control Environment on Financial Performance

Observed Cum Prob
Source: computation through spss output, 2018
The Analysis of variance (ANOVA) results as shown in Table 4.12 further confirms that the
model fit is appropriate for this data since p-value of 0.001 which is less than 0.05. This implies
that there is a significant linear relationship between internal control environment and financial
performance.

38

Table 4.14: Internal Control Environment and Financial Performance

Coefficient
__________________________________________________________________
Unstandardized Standardized
Coefficients Coefficients
___________________________________________________________________
B Std. Error Beta t Sig.
(Constant) 2.703 1.067 2.534 .001a
Internal Control 0.216 0 .040 0 .320 3.921 .001a
Environment
___________________________________________________________________
a. Dependent Variable: financial performance
Source: computation through spss output, 2018

Table 4.13: Analysis of Variance (ANOVA) for Internal Control Environment
ANOVA
Model Sum of Squares df Mean Square F Sig.
1
Regression 16.751 6 2.792 4.309 .001a
Residual 31.749 49 .648
Total 48.500 55
a. Predictors: (Constant): Internal Control Environment.
Source: computation through spss output, 2018
The results further indicate that internal control environment have positive and significant
effects on financial performance (Table 4.14). The fitted model FP = 2.703+0.216*X1. This
implies that a unit change in internal control environment will increase financial performance
by the rate of 0.216. Even when internal control environment is non-existence, financial
performance is still positive at 2.703 indicating that there are other drivers of financial
performance including internal audit, risk management and control activities.

39

4.6.2 Regression Analysis on Internal Audit Function versus Financial Performance
H2: There is significant relationship between internal audit function and financial performance.
Regression analysis was conducted to determine the significance of the relationship of internal
audit function against financial performance. Figure 4.2 illustrates scatter plot diagram of
internal audit function versus financial performance. The Figure 4.2 presents a line that is
increasingly positively upwards. This implies that there is a positive linear relationship between
internal audit function and financial performance.
Figure 4.2 Regression Model on Internal Audit Function versus Financial Performance

Source: computation through spss output, 2018
The Analysis of variance (ANOVA) results as shown in Table 4.15 confirms that the model fit is
appropriate for this data since p-value of 0.000 which is less than 0.05. This implies that there is
a significant positive relationship between internal audit function and financial performance.

40

Table 4.15: Analysis of Variance (ANOVA) for Internal Audit function
ANOVA
Model Sum of Squares df Mean Square F Sig.
1
Regression 15.670 3 5.223 8.274 .000a
Residual 32.830 52 .631
Total 48.500 55
a. Predictors: (Constant): internal audit function
Source: computation through spss output, 2018
The results further indicate that internal audit function has a positive on financial performance
(Table 4.16). The fitted model FP = 2.269 +0.291*X2. This implies that a unit change in internal
audit function will increase financial performance by the rate of 0.291. Even when internal audit
function is non-existence, financial performance is still positive at 2.269 indicating that there are
other drivers of financial performance including internal control environment, risk management
and control activities.
Table 4.16: Internal Audit function and Financial Performance
Coefficient
__________________________________________________________________
Unstandardized Standardized
Coefficients Coefficients
___________________________________________________________________
B Std. Error Beta t Sig.
(Constant) 2.269 0.768 2.954 .000a
Internal Audit 0.291 0.118 0 .394 3.301 .000a
Function
___________________________________________________________________
a. Dependent Variable: financial performance
Source: computation through spss output, 2018
4.6.3 Regression Analysis on Risk Management versus Financial Performance

41

H3: There is significant relationship between risk management control and financial
performance.
Regression analysis was conducted to determine the relationship between risk management and
financial performance. Figure 4.3 illustrates scatter plot diagram of risk management versus
financial performance. The Figure 4.3 presents a positive linear relationship between risk
management and financial performance.
Figure 4.3: Regression Model on Risk Management versus Financial Performance

Source: computation through spss output, 2018
The Analysis of variance (ANOVA) results as shown in Table 4.17 confirms that the model fit is
appropriate for this data since p-value of 0.002 which is less than 0.05. This implies that there is
a significant positive relationship between risk management and financial performance.
Table 4.17: Analysis of Variance (ANOVA) for Risk Management
ANOVA
Model Sum of Squares df Mean Square F Sig.
1
Regression 7.664 2 3.832 5.831 .002a
Residual 34.836 53 .657

42

Total 42.500 55
a. Predictors: (Constant), Risk Management
Source: computation through spss output, 2018
The results further indicate that risk management control has a positive and significant effect on
financial performance (Table 4.18). The fitted model FP = 1.918 +0.243*X3. This implies that a
unit change in risk management will increase financial performance by the rate of 0.243. Even
when risk management function is non-existence, financial performance is still positive at 8.918
indicating that there are other drivers of financial performance including internal control
environment, internal audit function and control activities.
Table 4.18: Risk Management and Financial Performance
Coefficient
__________________________________________________________________
Unstandardized Standardized
Coefficients Coefficients
___________________________________________________________________
B Std. Error Beta t Sig.
(Constant) 1.918 0.598 3.218 .002a
Risk Management 0.243 0.115 0 .268 2.242 .002a
___________________________________________________________________
a. Dependent Variable: financial performance
Source: computation through spss output, 2018
4.6.4 Regression Analysis on Control Activities versus Financial Performance
H4: There is significant relationship between internal control activities and financial
performance.
Regression analysis was conducted to determine the significance of the relationship of internal
control activities against financial performance. Figure 4.4 illustrates scatter plot diagram of
internal control activities versus financial performance. The Figure 4.4 presents a line that is
increasingly positively upwards. This implies that there is a positive linear relationship between
internal control activities and financial performance.

43

Figure 4.4: Regression Model on Internal Control Activities versus Financial Performance

Source: computation through spss output, 2018
The Analysis of variance (ANOVA) results as shown in Table 4.19 confirms that the model fit is
appropriate for this data since p-value of 0.011 which is less than 0.05. This implies that there is
a significant positive relationship between internal control activities and financial performance.
Table 4.19: Analysis of Variance (ANOVA) for Control Activities
ANOVA
Model Sum of Squares df Mean Square F Sig.
1
Regression 6.513 2 3.256 4.903 .011a
Residual 35.201 53 .664
Total 41.714 55

a. Predictors: (Constant): Internal Control Activities.
Source: computation through spss output, 2018

44

The results further indicate that internal control activities have a positive and significant effect on
financial performance (Table 4.20). The fitted model FP = 1.891 +0.212*X4. This implies that a
unit change in control activity will increase financial performance by the rate of 0.212. Even
when internal control activities are non-existence, financial performance is still positive at 1.891
indicating that there are other drivers of financial performance including internal control
environment, internal audit function and risk management.
Table 4.20: Risk Management and Financial Performance
Coefficient
__________________________________________________________________
Unstandardized Standardized
Coefficients Coefficients
___________________________________________________________________
B Std. Error Beta t Sig.
(Constant) 1.891 0.646 2.930 .011a
Internal Control 0.212 0.118 0 .239 1.921 .011a
Activities
___________________________________________________________________
a. Dependent Variable: financial performance
Source: computation through spss output, 2018
4.7 Combined Effect Model
The research aimed at finding out the overall effect of the independent variables that is internal
control environment, internal audit function, risk management and internal control activities on
financial performance.
The model FP= ?0+ ?1X1+ ?2X2+ ?3X3+ ?4X4+? explained 65.1% of the variations in
financial performance as shown in Table 4.21. This showed that internal control environment,
internal audit function, risk management and control activities explained 34.9% of the variations
were due to other factors not in the study.
Table 4.21.: Model Summary.
Model Summary
Mode R R Square Adjusted R Square Std. Error of the Estimate
1 .743a .701 .651 .320

45

a. Predictors: internal control environment, internal audit function, risk management and control
activities.
Source: computation through spss output, 2018
The analysis of variance results in Table 4.22 indicates that the model fit is significant = 0.000,
F=423.62 with 49 degrees of freedom. This implies that internal control environment, internal
audit function, risk management and control activities have a significant and positive combined
effect on financial performance.
Table 4.22: Analysis of Variance (ANOVA)
ANOVA
Model Sum of Squares df Mean Square F Sig.

Regression 47.075 6 7.846 423.617 .000a
Residual .908 49 .019
Total 47.982b 55

Source: computation through spss output, 2018
The overall model as shown on Table 4.23 indicated that risk management and internal control
environment were highly significant at p=0.0000 and p=0.0011 respectively. However internal
audit function and control activity were significant at p=0.0015 and 0.0081.The fitted model was
FP= 0.215X1+ 0.506X2+ 0.369X3+ 0.287X4
Table 4.23: Relationship between Internal Control and Financial Performance
Coefficients
__________________________________________________________________
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
___________________________________________________________________
Internal Control .215 .180 .264 1.192 .0011
Environment
Internal Audit .506 .022 .721 1.313 .0015
Function
Risk Management .369 .034 .328 2.190 .0000

46

Control Activities .287 .051 .013 3.192 .0081
___________________________________________________________________
a. Dependent Variable: Financial performance
b. Linear Regression through the Origin
Source: computation through spss output, 2018
Where: Y= Financial Performance, X1= Internal control environment, X2= Internal audit
functions, X3= Risk management, X4=Control activities and ? = Error Term.
From the model, it is clear that, all the variables are positively related to the dependent variable
as all the coefficients are positive.
The results show that, Internal control environment has a positive relationship with financial
performance of MFIs result to 0.215 times increase in the financial performance.
From the model, it is also clear that, a unit increase in internal audit function would result to
0.506 times increase in the financial performance, a unit increase in the risk management would
lead to 0.369 times increase in financial performance and a unit change in control activities
would result to 0.287 times changes in financial performance. The significance of the
coefficients at 5% level with a 2-tailed test was found to be significant as indicated by their p-
values which are all less than 0.05 (the critical value at 5% level).

47

CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction
This chapter describes summaries of the research findings as per the research objective,
conclusions based on those findings and recommendations which are based on both the research
findings and other relevant literatures.
5.2 Summary of findings
This part presents the summarized results and interpretation based on the objective of research as
established at the beginning of the study.
5.2.1 Functionality of the internal control
The study found out that there are acceptable business practices, conflict of interest and codes of
conduct in the Omo micro finance institution in Wolaita zone and institutions had clear
assignment of responsibilities and delegation of authorities and if employees had job
responsibilities including specific duties, reporting relationship clearly established and
communicated. On the effectiveness of the internal audit, the study found out internal audit plays
a major role in fraud detection and prevention and does produce regular audit reports. The study
also found that the internal audit department has developed manual that guide on planning
monitoring and evaluation. Regarding with control activities, the study found that, the institution
has developed effective policies and procedures on information and communication. In relation
to risk management the study also found out that the institution had established a monitoring
system that identifies potential risks and institutions has adequately implemented any inspection
plans to reduce the inherent risks and if those plans which are periodically revised .
5.2.2 Internal Control and Financial Performance
The study established a significant relationship between internal control and financial
performance. This relationship was examined through the dimensions of internal control and that
of the financial performance selected for this particular study. The dimensions of internal control
(control environment, internal audit, and risk management and control activities) were linked to
the dimensions of performance (liquidity, accountability, and profitability). Details show that
control environment is related to profitability (r = 0.216, p ? 0.01), control environment is also
related to accountability, (r = 0.213, p ? 0.01), and control environment is related with liquidity
(r = 0.197, p ? 0.01). Like, the study found that internal audit as a dimension of internal control,
is related with all the dimensions of financial performance in the following details; internal audit

48

and profitability are related (r = 0.148, p ? 0.01), internal audit is related with accountability, (r =
0.086, p ? 0.01), and internal audit and liquidity have relationship (r = 0.083, p ? 0.01).On other
hand risk management is related to profitability (r = 0.373, p ? 0.01), risk management is also
related to accountability (r = 0.362, p ? 0.01), and risk management is related with liquidity (r =
0.332, p ? 0.01). In addition, control activities as a dimension of internal control and all the
dimensions of financial performance are related; control activities and profitability are related (r
= 0.386, p ? 0.01), control activities and accountability are related (r = 0.347, p ? 0.01), and
control activities and liquidity are related (r = 0.372, p ? 0.01).
5.3 Conclusions
Based on the findings of the study, it is concluded that the institutions have an effective internal
control as supported by the study findings of policies regarding acceptable business practices,
conflicts of interest, and codes of conduct which are adequately communicated and clear
separation of roles, supervision, training, and commitment of management. Confirming the
argument of the findings of this study suggests that internal control systems is one significant
area in institutions should give attention to in order to enhance their financial performance. The
findings of this research support the findings of previous researchers. This study elicits the key
determinants of internal control which can be nurtured by the management of institutions to
better their financial performance. Hence this study widens the scope of identifying measures
that will enhance institutions financial performance like internal control environment, internal
audit function, risk management and control activities. Therefore the institutions have to invest
in establishing strong internal control to realize better their financial performance. Further it can
be concluded that effective internal control must enhance financial performance. There is
conclusion on study is that there is a significant positive relationship between internal control
(control environment, internal audit, and risk management and control activities) with financial
performance (liquidity, accountability, and reporting). From the above conclusion, strong
internal control must be entrenched in all levels of the organization by the managers to enhance
organization’s financial performance. The study thus accepts the alternative hypothesis.
5.4 Recommendations
The following recommendations were gathered from the results, findings and conclusions of the
study. The management of Omo micro finance institutions should exert collective efforts in
identifying the ideal mix of effective and efficient internal control that matches their business
needs and invest in them. The managers should embrace risk management and internal audit to

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maximize on the financial benefits of internal control. Good internal audit will not only ensure
that management does not override the internal controls but also help in reducing corruption and
assist in enhancing financial performance of Omo micro finance institutions..
The study also recommends that the institution establishes a strategy for improving the
generation of additional finances for the operation of the Omo micro finance institutions. This
could be done through writing projects, other competitive endeavors which are directly aimed at
winning funds for the Omo micro finance institutions. Finally, the study recommends that there
should be a deliberate attempt to conduct a study which establishes the relationship of
management’s commitment based on factors that are external to the Omo micro finance
institutions such as, financial stress of parents, and information communication technology.

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REFERENCES
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International Publishers.
Gaskill, M. (2015). Research methods: Quantitative and qualitative approaches.
McGraw-Hill, Business research Methods. 7th Editions.
Zikmund, W. G., Babin, B. J., Carr, J. C., & Griffin, M. (2010). Business research methods.
(8thEdition).
Published theses and dissertations
Letenah Ejigu (2009) Performance Analysis of a sample Microfinance Institutions of Ethiopia.
Eniola, Omoniyi Jacob (2015) Effect of Internal Control on Financial Performance of Firms in
Nigeria. (A Study of Selected Manufacturing Firms)
Mugo Jeremiah Munene. (2009) Effect of Internal Control on Financial Performance of
Technical Training Institutions in Kenya.
Aikins, S.K. (2013). An examination of government internal audits’ role in improving financial
performance.
Mawanda, P. (2014). Effects of internal control systems on financial performance in Uganda
Christian University, Uganda.
Adel, S. M. (2011). Internal audit effectiveness: an expansion of present methods, Managerial
Auditing Journal, 16(8).
Bett, C. (2014).The relationship between effectiveness of internal audit function and financial
performance of companies listed in Uganda.
Jokipii, A. (2010). Determinants and consequences of internal control in firms: A contingency
theory based analysis.
CPA Australia (2008). Internal Controls for Small Business. Business Management Journal.
Melbourne, Australia.

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Mawanda, S. P. (2008). Effects of Internal Control Systems on Financial Performance in an
Institution of Higher Learning in Uganda: A Case of Uganda Martyrs University.
Bett, C. (2014).The relationship between effectiveness of internal audit function and financial
performance of companies listed in Uganda.
Mihret, D. G., & Yismaw, A. W. (2007). Internal audit effectiveness: An Ethiopian public sector
case study. Managerial Auditing, Journal, 22(5), 470-484.
Wanjara, S (2014). Influence of internal control system on the financial performance of Kenya
Power Company.
Al Matarneh, G. F. (2011). Factors determining the internal audit quality in banks: Empirical
evidence from Jordan. International Research Journal of Finance and Economics.
Web-sites
http://common.books.com
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http://www.published research.com
http://www.worldbank.org/june-2013
.

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Appendix 1: Letter of Introduction by Researcher
Date: _______________________________
Dear Respondent,
This questionnaire is prepared to target top- level managers, mid-level managers and staff
members of Omo micro finance institutions in Wolaita zone. The objective is to get an input for
the accomplishment of MSc, in Accounting and finance on the title “Internal Control Effect on
Financial Performance of Micro Finance Institutions in Ethiopia”: The Case of Omo Micro
Finance Institutions in Wolaita Zone. The information you provide is valuable for the success of
the research and will only be used for academic purpose. It shall also be kept confidential.
Thank you in advance for your time and cooperation.
Yours faithfully,
Biruk Zara Chanko
Student, MSc, Accounting and finance
Registration ID Number ACFN/MW/005/2009

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Appendix 2: Questionnaire
PART 1: Background Information
1.1Name (Optional) _____________________
1.2 Please indicate your Gender. Female Male
1.3 Name of your institution_____________________________
1.4 What is your position in your institution __________________________
1.5 What is your highest educational qualification?
A, Diploma B, Degree C, Postgraduate D, other
1.6 For how long have you worked in this institution?
A, Below 5 years B, 6-10 years C, 11-15 years D,16-20 years E, Over 20 years
PART 2: Internal control environment
Using the following table, please tick on the statements which describes your opinion of internal
control environment in your institution.
Scale: (Strongly agree=5, agree=4, Neutral=3, Disagree=2, strongly Disagree=1)
Integrity and ethical values 5 4 3 2 1

2.1
The institution has policies regarding
acceptable business practices, conflicts of
interest, and codes of conduct and they
adequately communicated.

2.2
Employee job descriptions, including specific
duties, reporting responsibilities, and
constraints are clearly established and
effectively communicated to the employees.

Commitment to competence

2.3
Management determines the level of
knowledge and skills needed to perform a
particular job and this information is used in
the hiring process.

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2.4

The institution adequately compensates
employees in order to attract qualified
individuals.

Management philosophy and operating style

2.5
Management and operating decisions are not
dominated by a few individuals.

2.6

Management analyses the risks and potential
benefits of a venture before making a decision.

Organizational structure

2.7
The organization of the institution is clearly
defined in terms of lines of authority and
responsibility.

2.8

The institutions structure appropriate for the
size and complexity of the entity.

Assignment of authority and responsibility

2.9
There is clear assignment of responsibility and
delegation of authority to deal with
organizational goals and objectives, operating
functions, and regulatory requirements.

2.10
All employees have job responsibilities,
including specific duties, reporting
relationships clearly established and
communicated.

Human resource policy and practices

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2.11 All personnel, including key managers, possess
adequate knowledge and experience to
discharge their responsibilities.

2.12
Management has shown commitment to
competence and ensured that personnel receive
adequate training to perform their duties.

PART 3: Internal Audit Function
Using the following table, please tick on the statements which describes your opinion of Internal
Audit Function in your institution.
Scale: (Strongly agree=5, agree=4, Neutral=3, Disagree=2, strongly Disagree=1)
Monitoring and evaluation 5 4 3 2 1
3.1 The internal audit unit in the institution has
developed an internal audit manual that guides
audit operations such as planning,
implementation, monitoring, and evaluation.

Fraud prevention, detection and control
3.2 The internal audit unit in the institution plays a
major role in fraud detection and prevention

Reporting
3.3 The head of the Internal audit function is a
member of the senior management team in the
institution and reports to the CEO.

PART 4: Control Activities
Using the following table, please tick on the statements which describes your opinion of control
activities in your institution.
Scale: (Strongly agree=5, agree=4, Neutral=3, Disagree=2, strongly Disagree=1)
Information and communication 5 4 3 2 1

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4.1 The institution has well established information
and communication channels.

4.2 The institution utilizes „suggestion boxes? for
obtaining information that is sensitive and
confidential for the effective management.

Policies and procedure
4.3 The institution has developed effective policies
and procedures on information and
communication.

PART 5: Risk Management
Using the following table, please tick on the statements which describes your opinion of risk
management in your institution.
Scale: (Strongly agree=5, agree=4, Neutral=3, Disagree=2, strongly Disagree=1)
Risk identification 5 4 3 2 1
5.1 The institution has a monitoring system that
identifies potential risks.

Risk evaluation
5.2 There is adequate capacity to perform risk
assessment in my institution.

Risk mitigation
5.3 The institution has adequately implemented any
inspection plans to reduce the inherent risks
which are periodically revised.

PART 6: Financial Performance.
Using the following table, please tick on the statements which describes your opinion of
financial performance in your institution.

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Scale: (Strongly agree=5, agree=4, Neutral=3, Disagree=2, strongly Disagree=1)
Statement 5 4 3 2 1
6.1 Profitability in institution over the last 5 years has
been increasing steadily.

6.2 The Institution Accounting system adequately
identifies the income and expenditure.

6.3 The institution has enough cash to meet its
obligations effectively.

Thank You for Your Cooperation.