Effect of Internal Audit on Financial Performance of Commercial Banks Listed in Nairobi Securities Exchange, in Nairobi County, Kenya

Abstract

The recent collapse of major commercial banks in Kenya, including Imperial and Chase bank, which are currently under receivership, has raised concerns about the effectiveness of their audit practices in ensuring stability and improved financial performance. These failures have put pressure on commercial banks to reconsider how they align their internal audit processes to ensure stability and financial improvement. Consequently, this study aimed to assess the impact of internal audit on the financial performance of commercial banks listed on the Nairobi Securities Exchange (NSE). The study was guided by reliability theory. Using a descriptive survey design, the target population consisted of 10 commercial banks listed on the NSE. The unit of observation included 86 respondents from various roles within these banks, such as senior finance managers, credit managers, operations managers, risk managers, and internal auditors. Both primary and secondary data were utilized in the study. Primary data on internal audit practices were collected through a semi-structured questionnaire employing a Likert-type scale, while secondary data on the financial performance of the commercial banks were obtained from their audited financial reports. The gathered questionnaire data were quantitatively analyzed using SPSS software, incorporating descriptive statistics (mean and standard deviation) as well as inferential statistics, specifically regression coefficients and bivariate correlation, to examine the relationship between the dependent and independent variables. The study's findings revealed a significant relationship between internal audit, asset safeguarding, risk management, compliance with laws, and the dependent variables, which included return on assets, net income, and liquidity. These relationships were evident from the regression analysis conducted. Consequently, the study concluded that internal audit systems have an impact on the financial performance of commercial banks. The study recommends that commercial banks listed on the NSE reassess their internal audit systems and strengthen any identified weaknesses to enhance their financial performance. Furthermore, the study suggests that future research could explore the effects of new banking regulations, such as Basel Accord III, on the financial performance of commercial banks.