repost
International Journal of Business
and Management Invention ISSN (Online): 2319 – 8028, ISSN (Print): 2319 – 801X
www.ijbmi.org || Volume 4 Issue 1 || January. 2015 || PP.47-57
Effect of
Internal Control on Fraud Detection and Prevention in District Treasuries of
Kakamega County
Oguda Ndege Joseph 1 Odhiambo
Albert2 Prof John Byaruhanga3
1. (School
of business and economics Masinde Muliro University of Science and Technology
Kenya )
2. (Lecturer of Accounting and
Finance school of business and economics Masinde Muliro University of Science
and
Technology Kenya)
3.( Lecturer of
economics school of business and economics Masinde Muliro University of
Science and Technology Kenya)
ABSTRACT: This paper aims to ascertain the effect of internal controls on fraud
prevention and detection in district treasuries of Kakamega
County. Purposive sampling method was used to select Treasury Staffs while
simple random sampling method was used to select Heads of Departments to
respond to the data collection instruments. The study used closed ended
questionnaires designed for treasury staff and their clients and was
administered by the researcher though drop and pick method. Key respondents
were Senior Treasury Staffs and Heads of Departments in Kakamega County. Data
collected was analysed using both descriptive and inferential statistics using
Statistical Package for the Social Science (SPSS). Reliability and Validity of
data collection instruments was ascertained through the test-retest method.
Findings of the study revealed that there was a statistically significant and
positive relationship between the adequacy of internal control systems and
fraud prevention and detection in district treasuries in Kakamega County. The study recommends that effective and efficient
internal control policies and procedures should be put in place to prevent and
detect fraud within district treasuries and other institutions.
KEY WORDS : Control environment, Efficiency, Control activity,
Fraud, Risk
I.
BACKGROUND
OF THE STUDY
Investors and other stakeholders in public and
private sector institutions are concerned with the safety of their assets.
Shareholders delegate rights to managers to act in the principal’s best interest.
This separation of ownership from control implies a loss of effective control
by shareholders and taxpayers over managerial decisions hence concerns over the
safety of their investment. It is therefore important that good governance and
accountable policy practices are adopted to achieve organizational goal of
safeguarding shareholders assets and wealth maximization. Key among the best
practices is the control measures put in place to detect and prevent frauds
within the entity whether private or public (COSO, 2011).
The
Association of Certified Fraud Examiners 2002 report to the USA Federal
Government Occupational Fraud and Abuse reveals that 46.2% of frauds occur
because the victims lacked sufficient controls to prevent the fraud. In Kenya,
The Treasury News of 2010 revealed that between 25 and 30 percent of the
national budget or about Kshs. 270 billion is lost annually through fraud.
These loses were mainly attributed to the escalation of costs in Government
procurement occasioned by weak internal controls. Reports from watch dog
institutions also reveals that government departments do not properly account
for funds allocated to them.
II.
STATEMENT
OF THE RESEARCH PROBLEM
Plunder of public resources goes on in Government
in spite of the internal control systems which are put in place and structured
to deal with elements of fraud at detective and preventative levels. An
effective system of internal control can give managers the means to provide
accountability for their programs as well as the means to obtain reasonable
assurance that the programs they direct meet established goals and objectives.
(NYSGAAIC, 2007) According to Auditor General Report of 2011 six districts in
Kakamega County could not account for Kshs 40 million allocated to them due to
irregularities associated with weak controls systems. National Tax Payers Association
of Kenya (NTA) report indicated that 60% of the CDF allocation in the three
districts in Kakamega County could not be accounted for due to misappropriation
of funds (NTA, 2012). Also, the Efficiency Monitoring Unit, Internal Auditor
General in the Ministry of Finance, Inspectorate of State Corporations, the
Office of the Auditor General, and the Kenya Anti-Corruption Commission all
were established and mandated to recommend for effective internal controls
systems and deal with acts of fraud in one way or the other in Kenya. It is
upon this backdrop that this study sought to investigate the relationship
www.ijbmi.org 47 | Page
between internal controls systems put in place to
manage public resources and Fraud Detection and Prevention in the District
Treasuries in Kakamega County.
III.
OBJECTIVE
OF THE STUDY
The study
was guided by the following specific objective:
To
establish the effect of internal control systems on fraud detection and
prevention in the District Treasury in Kakamega County.
Research Hypothesis
The study
was guided by the following research hypothesis;
H01: There is no statistically significant
effect of internal control systems on fraud detection and prevention in the
District Treasuries in Kakamega County
Conceptual Framework
.
IV. LITERATURE REVIEW
Internal
Control : Internal
control is defined as a process affected by organisation’s structure, work and authority flows, people and management
information systems, designed to help the organisation accomplice specific
goals or objectives (AICPA, 2003). Internal control systems are not new to the
Government and private sector organisations. There are checks and balances
already in place which have been part of normal day to day working of the
Government Ministries and Departments. In both sectors, accountability is of
prime importance. (COSO, 2011).Most of the internationally accepted standards
and best practices in internal control has classified internal controls into
five components namely:
·
Control Environment : The control environment sets the tone of an
organization, influencing the control consciousness
of its people. It is the foundation for all other components of internal
control, providing discipline and structure. Control environment factors
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, organizes and develops its people; and the attention and
direction provided by the board of directors (COSO, 2011). In an empirical
study by Valentine, Godkin and Lucero (2002), a positive association was found
between ethical environment and employee organizational commitment. Based on a
sample of 304 young working adults, Valentine et al (2002) found that ethical
environment was positively and significantly associated with the level of
employees’ organizational commitment. Furthermore, in a recent study, Kizirian
and Leese (2004) studied audit papers of 60 information systems audit
engagements and found that the ethical tone of the audit clients’ management
has a significant impact on the strength of their security controls.
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·
Risk Assessment and Management : Risk assessment is the identification and analysis
of relevant risks which can impair
the achievement of objectives, forming a basis for determining how the risks
should be managed. Because economic, industry, regulatory and operating
conditions will continue to change, mechanisms are needed to identify and deal
with the special risks associated with change. According to the IIA-PFF (1999),
risks are assessed in order to determine the likelihood of an event occurring,
the impact, and risk tolerance level. Once identified the risks are then
classified as high, medium and low. Based on the accuracy of the assessment,
risk tolerance level can then be determine. In order to determine whether risk
management are effective, relevant risk information should be captured and
communicated in a timely manner across the organisation, enabling staffs,
management and the board to carry out their responsibilities. (IIA: PPF, 1999)
·
Control Activities : According to NYSGAAIC Act 2007 many different
control activities can be used to counter
the risks that threaten an organization's success. Most control activities,
however, can be grouped into two categories: detection and prevention control
activities. Prevention activities are designed to deter the occurrence of an
undesirable event. The development of these controls involves predicting
potential problems before they occur and implementing ways to avoid them.
Detection activities are designed to identify undesirable events that do occur,
and alert management about what has happened. Prevention controls tend to be
more expensive than detection controls. Costs and benefits should be assessed
before control activities are implemented. Management should also remember that
an excessive use of prevention controls can impede productivity. No one control
activity provides all of the answers to risk management problems. In some
situations, a combination of control activities should be used, and in others,
one control activity could substitute for another.
·
Information and Communication : According to NYSGAAIC Act 2007, communication is
the exchange of useful information
between and among people and organizations to support decisions and coordinate
activities. Information should be communicated to management and other
employees who need it in a form and within a timeframe that helps them to carry
out their responsibilities. Communication with customers, Suppliers, regulators
and other outside parties are also essential for effective internal control.
Information can be communicated verbally, in writing and electronically. While
verbal communication may be sufficient for many day-to-day activities, it is
best to document important information. This provides a more permanent record
and enables managers and others to review the information. Information should
travel in all directions to ensure that all members of the organization are
informed and those decisions and actions of different units are communicated
and coordinated.
·
Monitoring and Assurance : Internal control systems need to be monitored - a
process that assesses the quality of
the system’s performance over time. This is accomplished through ongoing
monitoring activities, separate evaluations or a combination of the two.
On-going monitoring occurs in the course of operations. It includes regular
management and supervisory activities, and other actions personnel take in
performing their duties. The scope and frequency of separate evaluations will
depend primarily on an assessment of risks and the effectiveness of ongoing
monitoring procedures. According to NYSGAAIC Act of 2007 monitoring is the
review of an organization's activities and transactions to assess the quality
of performance over time and to determine whether controls are effective.
Management should focus monitoring efforts on internal control and achievement
of the organization’s mission. For monitoring to be most effective, all
employees need to understand the organization's mission, objectives, risk
tolerance levels and their own responsibilities.
The
Concept of Fraud : Fraud, as
is defined in accounting standards reports,
“is an intentional act that results in
a material misstatement in financial statements that are the subject of an
audit’’ (AICPA, 2003). There are two ways in which a material misstatement
could occur with respect to fraud: misappropriation of assets and fraudulent
financial reporting. Misappropriation of assets, as the name suggests, refers
to the theft of company assets that may result in the company’s financial
statements being materiality misstated (AICPA, 2003). According to ACFE (2007),
fraud is any intentional or deliberate act to deprive another of property or
money by deception or other unfair means. The association also classifies fraud
into eight categories namely; misrepresentation of material facts, concealment
of material facts, corruption, illegal gratuity, extortion, conflict of
interest, embezzlement and theft .Fraud refers to any illegal act characterized
by deceit, concealment, or violation of trust. According to Cressey, Martin et
al. (2002), three factors that are present in every situation of fraud: motive
or pressure – the need for committing fraud: need for money, etc;
rationalization – the mind-set of the fraudster that justifies them to commit
fraud; and opportunity – the situation that enables fraud to occur – often when
internal controls are weak or non-existent.
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Empirical
review :Inconsistent
results have been found in relation to internal controls existence and the likelihood of fraud (Beasley, 1996;
McMullen, 1960; Dechow et al., 1996). However, internal control system
effectiveness has been found to reduce the likelihood that companies are
sanctioned for fraudulent financial reporting (Abbott et al., 2000). A positive
relation was found between concentration of power in the hands of insiders and
the likelihood of issuing fraudulent financial statements (Dunn, 2004). In
South Africa, a negative relation has been found between the proportion of
independent directors and institutional investors and the likelihood of fraud,
while a positive relation was found between duality (chair of board and also
the chief executive officer) and the likelihood of fraud, (Sharma, 2004). One
difference from this study to others was that in his measure of fraud (Sharma,
2004) used both financial statement fraud and misappropriation of assets.
Analysts suggest that with sufficient pressure, incentive and rationalisation, the
perpetrators often turn their attention towards the opportunities that exist
within the public financial management system’s internal control structure that
could allow for fraud to be committed (Mars Group, 2008).
In Kenya, the GFRP directs the Accounting Officer
of ministries to ensure that it has, and maintains, effective, efficient and
transparent systems of financial and risk management and internal control to
safe guard against fraud. The GFRP further requires the accounting officers to
ensure that a system of internal auditing exists under the control and
direction of an Internal Auditor General to evaluate the effectiveness of
internal controls. The impact of organizational environment on fraud has been
consistently determined in previous studies. Employee theft has been found to
be influenced by organization’s work climate (Weber et al., 2003; Appelbaum et
al., 2006; Kulas et al., 2007) and employees attitudes toward honesty
(Greenberg, 2002). It has also been determined that organizational variables
might be more likely to influence deviance directed at harming organizations
(Robinson and Bennet, 1995). Rae and Subramaniam (2008) found the quality of
internal control procedures has a moderating effect on the relationship between
perceptions of organizational justice and fraud. The authors suggest that
strategies relating to fraud need to focus on organizational factors such as
work environment, internal control activities, and training. The importance of
internal control mechanisms in curbing fraud-bent behaviour, specifically
employee fraud, has been investigated. Studies relating to internal controls
provide relevant, albeit limited, research concerning employee fraud (O’Leary’s
et al; 2006). Employees’ perceptions on both certainty and severity of
organizational sanctions were found to be related to employee theft (Hollinger
and Clark, 1983). Holmes et al (2002) found that whenever top management firmly
supports internal control, internal perpetrators and fraud were less likely to
occur. Another study found that access to various control mechanism alone does
not curb losses due to fraud (Holtfreter, 2004). Breaking the Fraud Triangle is
the key to fraud detection. Breaking the Fraud Triangle implies that an
organization must remove one of the elements in the fraud triangle in order to
reduce the likelihood of fraudulent activities. Out of the three elements,
removal of opportunity is most directly affected by the system of internal
controls and generally provides the most actionable route to detection of
fraud. (Cressey Cendrowski, et al, 2002)
V.
RESEARCH
METHODOLOGY
·
Research Design : The study used descriptive survey
design to collect data from the key respondent. This method was applied because of its
convenience and reliability in collecting data in an exploratory study.
According to Mugenda and Mugenda (2003), descriptive survey design is considered to be
relevant in a survey because it involves collecting data which can then be used to
answer the research question in the current state of the object of the study.
·
The Study Area : The study was conducted in Kakamega County. The county is located in the
Western region of Kenya. It consists
of 11 operational districts namely Kakamega Central, Kakamega East, and
Kakamega South, Kakamega North, Khwisero, Butere, Mumias, Matungu, Lugari,
Matete and Likuyani. It borders counties like Bungoma to the North, Vihiga to
the West, Nandi to the South and Uasin Gishu to the East. It lies between
Longitude 340 E and 420 E, Latitude 00 and 30
·
Sampling Techniques : The target respondents in the participating
treasuries comprised of key informants who
were Senior Treasury Staffs and Head of Departments (HODs) in the respective
districts. HODs were considered appropriate because they were clients who
sought for financial services from the district treasuries. Purposive sampling
technique was used to select the key informants who were the District
Accountants, District Internal Auditors and Provincial Departmental Heads. This
research method was employed because the targeted treasury officials and HODs
had access to vital information, experience and professional skills that were
necessary and relevant for the study. Due to their position of responsibility
they had a better understanding of internal controls in relation to the use of
public funds.
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·
Sample Size : In this study there were 31 key respondents sampled out of a population
of 122. In order to obtain the optimum
sample size the researcher employed Kerlinger’s method of determining sample
size.
According to Kerlinger (1983), a sample is
representative of the total population if it ranges between 10% -30% of the
total population. That translated to 20% which was within the acceptable range.
The respondents comprised of 6 District Accountants and 5 District Internal
Auditors and 20 HODs .The six accountant and five auditors were sampled from a
population of 22 while 20 HODs were randomly sampled out of a population of 100
and majority were from Kakamega central since most of them had jurisdiction
that covers the whole county. The specific number of respondents that were in
each cadre was obtained proportionately (see Table 3.1).
Table 3.1: Sample Size of Respondents
|
Category
|
Population
|
Sample
Size
|
Sampled
|
|
|
Percentage (%)
|
||||
|
|
|
|
||
|
District Accountants
|
11
|
6
|
54.55
|
|
|
District Internal Auditors
|
11
|
5
|
45.45
|
|
|
Heads of Department
|
100
|
20
|
20.0
|
|
|
Total
|
122
|
31
|
25.41
|
|
|
|
Source: Researcher (2014)
|
|
||
·
Distribution of Respondents per District
The
specific distribution of respondent in the six districts was as shown in Table
3.2:
Table 3.2: Sample Distribution of Respondents per
District
|
Name of
District
|
Accountants
|
Auditors
|
HODs
|
Total
|
|
Kakamega Central
|
1
|
1
|
6
|
8
|
|
Kakamega East
|
1
|
-
|
2
|
4
|
|
Kakamega
South
|
1
|
-
|
1
|
3
|
|
Kakamega
North
|
1
|
1
|
-
|
2
|
|
Mumias
|
1
|
1
|
-
|
2
|
|
Butere
|
1
|
1
|
5
|
7
|
|
Khwisero
|
-
|
1
|
3
|
5
|
|
Total
|
6
|
5
|
20
|
31
|
Source: Researcher (2014)
·
Data Collection Procedure : The researchers employed the drop and pick method
when administering the questionnaire
and allowed respondents up to 14 days to respond to the questionnaire items at
their convenience. During the dropping of the instruments the researcher
established rapport with the respondents to encourage them to respond to the
data collection instruments acutely and precisely and also assured them of
confidentiality for any information obtained from them. Secondary data was
collected by studying and analysing financial documents and records held at the
district treasuries’ library. it contained detailed information in relation to
internal control which Ministry of Finance have put in place to ensure prudent
management of resources in the districts. Ministry of Finance operating manuals
and guidelines and Acts of parliament like Public Finance Management Act of
2012, Public Procurement and Disposal Act 2005, Ethics and Anti-Corruption Act
2003, Government Financial Regulations and Procedures (GFRP), Treasury &
DPM circulars, Code of Regulations, Internal Audit Manuals and Charter,
International Accounting Standards Manuals, Audit and Accounting reports and
correspondences.
·
Reliability of the Study Instruments : Test-retest technique was used to measure
reliability of the data collection
instruments. These involved administering the same instrument twice to a sample
of 10 treasury staff members and 10 heads of department in the neighbouring
Vihiga County and after keeping the initial conditions constant administered
the same test to the same respondents 2 weeks later. The responses from the
first and second round of testing were analysed using Pearson Correlation of
Reliability and a comparison drawn using Cronbach’s Alpha Index to determine
the coefficient of reliability. The study instruments obtained a coefficient of
reliability index of 0.836 which is above 0.7 the rule of the thumb.
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·
Data Analysis and Presentation Techniques : Data
were analysed by use of both descriptive and
inferential
statistics using Statistical Package for the Social Sciences (SPSS) version
20.0 for windows. The
regression model was as follows;
Y = α + β1X1 + β2X2 + β3X3 + β4X4 + β5X5 + ε
Y is the value of the Dependent variable (Y), what is
being predicted or explained
α (Alpha) is the Constant or intercept β 1 β 2 β 3 β 4 β 5 is Beta coefficients
VI. RESULTS AND DISCUSSION
·
Duty Stations of Respondents : Respondents were asked to state the districts where
they worked as at the time of data
collection. Findings are presented in Table 4.1;
Table 4.1: Duty Station of Respondents
|
|
Districts
|
Frequency
|
Percentage
(%)
|
|
|
Kakamega Central
|
8
|
25.8
|
|
|
Butere
|
7
|
22.62
|
|
|
Khwisero
|
5
|
16.1
|
|
|
Kakamega North
|
2
|
6.5
|
|
|
Mumias
|
2
|
6.5
|
|
|
Kakamega East
|
4
|
12.9
|
|
|
Kakamega South
|
3
|
9.7
|
|
|
TOTAL
|
31
|
100.0
|
The findings in Table 4.1 show
that 25.8% of the respondents worked in Kakamega Central district (sub-county)
while 22.62% were from Butere sub-county. It was also established that 16.1% of
the respondents were working in Khwisero district while12.9% were based in
Kakamega East. It was further established based on the study findings that 9.7%
of the respondents were working in Kakamega South, 6.5% working in Kakamega
North and Mumias districts respectively. Findings show that the study sought
opinion of respondents from wide spectrum of the study area and this would
enable generalization of the findings to the entire county given level of
representation.
·
Designation of Respondents : The researcher sought to establish the positions in
which the respondents worked. The
aim was to establish the level of responsibility assigned to the officer which
was to be used to assess the ability to understand internal controls and fraud
.Findings on the questionnaire item seeking information on the designation of
respondents are presented in Figure 4.1;
Figure 4.1: Designation of Respondents
The findings in Figure 4.1 reveal that 64.5% of the
respondents were heads of departments drawn from the various ministries and
departments represented in the different districts where data was collected.
Such heads of departments are clients of their respective district treasuries
and were well placed to respond on issues relative to the key study variables.
It was further established based on the study variables that 19.4% of the
respondents were District Accountants while 16.1% were District Internal
Auditors. Both District Accountants and District Internal Auditors were
interviewed because they were directly responsible for the financial
transactions at their respective district treasuries.
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·
Length of Service in the station : Respondents from the categories of District
Accountants and District Internal
Auditors were asked to state how long they had served in their current duty
stations. Respondents from the category of Heads of Departments were asked to
state how long they had transacted with their respective district treasuries.
The objective of this question was to assess the length of exposure and
interaction with control challenges within the treasuries. Findings from the
two sets of responses are presented in Figure 4.2;
|
Less
than 1 year
|
|
1 to 5
years
|
|
6 to 10
years
|
|
Over 10
years
|
|
|
|
|
10%
13%
35.7%
41.3%
Figure 4.2: Length of Service of Respondents
Results in Figure 4.2 indicate
that 41.3% of the respondents had worked in their present duty stations for a
period between 6 and 10 years while 35.7% had worked in their current duty
stations for over 10 years. Findings further revealed that 13% of the
respondents had worked in their present stations for between 1 year and 5 years
while 10% had worked for less than 1 year. This is an indication that most
respondents had worked a longer period of time in their current duty stations
and that they were well placed to respond accurately to the questions in
relations to internal control and fraud prevention and detection in the
treasuries. It was there appropriate to conclude that the information they gave
were reliable.
·
Level of Education : The researcher sought to determine the level of
education of respondents from the category
of treasury staff. The category had District Accountants and District Internal
Auditors. Findings are presented in Table 4.2;
Table
4.2: Level of Education of Treasury Staff
|
Education
Level
|
Frequency
|
Percentage
(%)
|
|
Certificate
|
-
|
0.0
|
|
Diploma
|
3
|
27.27
|
|
Undergraduate Degree
|
6
|
54.55
|
|
Postgraduate
|
2
|
18.18
|
|
TOTAL
|
11
|
100.0
|
Results in Table 4.2 reveal that 54.55% of the
respondents in the category of treasury staff had undergraduate degrees while
27.27% had diploma qualifications. It was also established that 18.18% of the
respondents from this category had postgraduate qualifications. Findings show a
well-educated and highly qualified work force at the district treasuries that
would discharge their functions with utmost competence. This indicates the
level of literacy and competence and ability to understand the concept of
controls and fraud prevention and detection at their place of work. This
further reinforce reliability of their responses.
To further establish the percentage response on the
4 point Likert scale for the items under internal control factors and how they
influence fraud detection and prevention, the researcher computed percentage
responses for each factor and presented findings in Table 4.3.
Findings of the study reveal that all the various
components as selected by this study to operationalize internal control systems
had influence on fraud detection and prevention in district treasuries with
varying magnitudes.
Table
4.3: Descriptive Scores of the Effect of Internal Control Factors on Fraud
Detection and Prevention
|
|
|
Influence
Of Specific Internal Control
|
Strongly
|
|
|
Strongly
|
|
|
|
|
Factors
On Fraud Detection And
|
Agree
|
Disagree
|
|||
|
|
|
Agree
|
Disagree
|
||||
|
|
|
Prevention
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
Information and Communication
|
37.9%
|
39.1%
|
12.3%
|
10.7%
|
|
|
|
|
Risk management
|
39.7%
|
38.5%
|
16.5%
|
5.3%
|
|
|
|
|
Monitoring
|
42.1%
|
43.3%
|
7.3%
|
7.3%
|
|
|
|
|
Control Environment
|
39.7%
|
45.1%
|
13.7%
|
1.5%
|
|
|
|
|
Control Activities
|
40.4%
|
42.3%
|
10.9%
|
6.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
53 | Page
|
||
Findings in Table 4.6 reveal that majority of
respondents agree that internal control factors have a significant bearing on
fraud detection and prevention in district treasuries in Kakamega County.
·
Inferential results : The study sought to determine whether internal
control systems within district treasuries
had effect on fraud detection and prevention in Kakamega County. This was
tested using Pearson Product Moment Correlation Coefficient at 95% confidence
level and findings presented in Table 4.4;
Table 4.4: Relationship between Internal Control
Systems on Fraud Detection and Prevention
|
|
|
|
Fraud
|
Detection
|
and
|
|
|
|
|
prevention
|
|
|
|
|
Internal
|
Pearson Correlation
|
.596**
|
|
|
|
|
Control
|
Sig. (2-tailed)
|
.000
|
|
|
|
|
Systems
|
N
|
31
|
|
|
**Correlation is significant at 0.05 levels (2- tailed)
*Correlation significant at 0.01 levels (2 - tailed)
The findings in Table 4.4 reveal a statistically
significant positive relationship between internal control systems and fraud
detection and prevention (r=0.596; P<0.05). This means that an improvement
in internal control strategies results in improved fraud detection and
prevention in district (sub-county treasuries) in Kakamega County. The first 6
items in the questionnaire under control activities sought to determine the
understanding of respondents regarding how internal control influences fraud
detection and prevention. A descriptive summary of the responses relation to
the first 6 items under control activities is presented in Table 4.5.
Table 4.5: Descriptive Analysis for Control
Activities Based on Responses
|
|
Question
|
Strongly
|
Agree
|
Disagree
|
Strongly
|
|
|
Agree
|
Disagree
|
|||
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
There is
strict compliance with the existing government
|
|
|
|
|
|
|
regulation, rules and procedures by treasury
staffs and AIE
|
|
|
|
|
|
|
holders
|
38.2%
|
26.8%
|
24.3%
|
10.7%
|
|
|
|
|
|
|
|
|
|
There is a well-designed and properly understood
organisation
|
39.1%
|
30.7%
|
22.5%
|
8.7%
|
|
|
line of
authority and responsibility at the
district treasury
|
||||
|
|
|
|
|
|
|
|
|
Authorization, duty segregation, reconciliation
are the most
|
|
|
|
|
|
|
important tools
in safe guiding public funds at the D. Treasury
|
32.3%
|
33.3%
|
19.9%
|
14.5%
|
|
|
|
|
|
|
|
|
|
The current Treasury operations are benchmarked
against the
|
29%
|
36.1%
|
15.7%
|
19.2%
|
|
|
internal
accounting standards and best practices
|
||||
|
|
|
|
|
|
|
|
|
External factors have strong impact on the
efficient operations
|
|
|
|
|
|
|
and service delivery at the district treasury
leading to override
|
31.4%
|
32.3%
|
17.9%
|
18.4%
|
|
|
of
controls by management?
|
|
|
|
|
|
|
With proper rules and regulation ,no public fund
will be lost
|
|
|
|
|
|
|
|
35.2%
|
30.8%
|
11.7%
|
22.3%
|
|
|
|
|
|
|
|
|
|
You are aware of any important financial
reconciliation that
|
16.7%
|
15.1%
|
|
|
|
|
has not been performed that should be performed?
|
28.9%
|
39.3%
|
||
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
Petty cash is reconcile and replenished monthly
as require by
|
29.9%
|
36.7%
|
15.9%
|
17.9%
|
|
|
the
regulation
|
||||
|
|
|
|
|
|
|
|
|
Do you agree with one of the watch dog institutions report
|
|
|
|
|
|
|
that 40 % of funds allocated for government
programs are lost
|
27.8%
|
34.4%
|
17.7%
|
20.1%
|
|
|
due to
weak internal controls
|
|
|
|
|
The findings in Table 4.5 show that 34.2% of the
respondents strongly agreed with the first 6 items of the questionnaire which
sought to affirm that internal control measures assist in fraud detection and
prevention. It was also established that 31.67% of the respondents agreed with
the first 6 items while 18.67% disagreed. Study findings further reveal that
5.63% of the respondents strongly disagreed with positive items regarding the
relationship between control activities and fraud detection and prevention.
Findings of this study were consistent
www.ijbmi.org 54 | Page
to (Ardts, Jansen & Van der Velde, 2001) who
found that the ethical environment within the firm is likely to influence
employee behaviours in two ways. First, through organizational socialization
processes, employees will learn to behave according to the level of ethical
climate, and the higher the ethical values, the greater the ethical outcomes.
Since findings of the study predict a significantly positive association
between internal control strategies and fraud prevention and detection at 95%
confidence level, According to result of this test hypothesis is hereby
rejected and its alternative which states that there is a statistically
significant effect of internal control systems on fraud detection and
prevention adopted.
Table 4.6: Multinomial Logistic Regression Analysis for Internal Control
Factors Against Fraud Detection Prevention
|
Model
|
Unstandardized
|
Standardized
|
|
|
|
|
|
Coefficients
|
|
Coefficients
|
T
|
Sig
|
|
|
B
|
Std.
|
Beta
|
|
|
|
|
|
Error
|
|
|
|
|
1 (constant)
|
1.115
|
.081
|
-
|
.033
|
.001
|
|
Information and Communication
|
.192
|
.071
|
.179
|
.100
|
.033
|
|
|
|
|
|
|
|
|
Risk management
|
1.025
|
.064
|
1.048
|
.039
|
.016
|
|
|
|
|
|
|
|
|
Monitoring
|
1.007
|
.059
|
1.001
|
.072
|
.043
|
|
|
|
|
|
|
|
|
Environment
|
.305
|
.055
|
.050
|
.128
|
.045
|
|
|
|
|
|
|
|
|
Control Activities
|
1.201
|
.054
|
.023
|
1.225
|
.024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A regression analysis was conducted using control
systems variables as a predictor of the direction and influence of control
systems on fraud detection and prevention in district treasuries in Kakamega
County. The regression equation becomes
Y = 1.115 + .192X1 + 1.025X2 + 1.007X3 + .305X4 + 1.201X5
Where X1 X2 X3 X4 and X5 represents Information and Communication, Risk
management, Monitoring, Environment and Control Activities as components of
internal control respectively and Y represent Indicators of fraud prevention
& detection.
Findings of this study were
compared with empirical studies relating to internal control aspects involved
in fraud detection and prevention. Kenneth Lauden et.al. (2009),found that
pertinent information must be identified, captured and communicated in a form
and timeframe that enables people to carry out their responsibilities. Huge
amounts of money are spent on information systems and technology hardware,
software, telecommunication and management consulting services due to
importance attached to information and communication. Management use of
technology and the impact of technology make it a very interesting area in
frauds control.
Organizations are moving towards
a digital firm where nearly all the significant business relationships with
customers, employees, suppliers are digitally enabled and mediated Kenneth
(2009). Digital firms respond to the organization environment of achieving
operational excellence faster than the traditional methods. Information systems
produce reports, containing operational, financial and compliance-related
information that make it possible to run and control the business.
V. CONCLUSIONS
In line
with the findings of the study, the study concludes that there is a significant
positive relationship between internal control systems and fraud detection and
prevention in sub-county treasuries in Kakamega County.
VI. RECOMMENDATIONS
The
following recommendations are made:
Fraud
detection is based on the premise that fraud is not a random occurrence but
occurs where the conditions are right for it to occur. Fraud detection attacks
the root causes and enablers of fraud. Improving organizational procedures to
reduce or eliminate the causal factors of fraud is the single best defence
against fraud. Therefore there is need for treasury staffs to maintain
effective, efficient and transparent governance and
www.ijbmi.org 55 | Page
financial systems to minimize or
eliminate fraud .This will address the weakness within the organisation
structure that normally exposes resources to risk of loss due to fraud. It is
recommended that Management should always ensure that, risks are effectively
assessed and managed, laws and regulations strictly complied with, and that,
there is effective communication and monitoring within the district treasuries.
This wills ensure effectiveness and efficiency of operations, reliability of
financial reporting, and compliance with laws and regulations and finally
prudent use of public funds
The five
identified and studied components of effective internal controls: control
environment; risk assessment; control activities; information and
communications and monitoring, need to be applied in a synergistic linkage to
form an integrated system that reacts dynamically to changing conditions. The
internal control system should be intertwined with the operating activities of
the various districts (sub-counties) to detect and prevent fraud.
Suggestions
for Further Research
[1]
Further
research can be undertaken on the impact of internal control systems on fraud
detection and prevention in the private sectors especially manufacturing
organizations and results compared with those of this study. This will broaden
our understanding of the extent to which internal control systems impact on
detection and prevention of fraud depending on the governance structures .
[2]
Further
still, the relationship between organizational culture (way of doing things)
and fraud detection and prevention in government departments to be interrogated
and explored. This is because culture is inbuilt in all systems in terms of
value, attitudes and norms shared across members of the organization. Therefore
for fraud detection and prevention to succeed, organizational culture issues
need to be looked into as predictors of success of such programs. This argument
is supported by Victor and Cullen (1988).
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