EFFECT OF FINANCIAL AUDIT ON FRAUD MITIGATION: THE CASE OF GOVERNMENT ENTITIES IN THE COASTAL REGION OF KENYA

Abstract

The public sector has been faced with continued challenges on fraud and corruption related cases. Most nations have established financial audit systems to test and provide assurance whether processes are working as expected and that financial statements taken as a whole, are free from material misstatements due to fraud or errors. At the same time there has been continued public outcry on the level of fraud cases reported in the public sector in Kenya. In Kenya, the Auditor General reports have highlighted issues such as lack of productivity, inadequate internal audit structures, and lack of capacity/skills, inadequate internal controls and financial malpractices as some of the challenges negatively affecting the attainment of Government objectives. Kenya losses about a third of its state budget to corruption every year. Counties in the coastal region largely experience irregularities in financial management, recruitment, project implementation and procurement malpractices. The effectiveness of fraud mitigation is arguably a result of a relationship among four variables namely: financial audits, internal controls, risk management and audit committees. There has been limited studies on the effect financial audit on fraud in the coastal region of Kenya focusing on the county governments and the state corporations. The purpose of this study was to assess the adequacy of financial audits on fraud control, prevention and detection among counties and public entities operating in Coastal Region. This study was guided by two theories namely: Fraud Diamond theory and Agency theory. The study used descriptive statistics, correlation analysis and multiple regression analysis. Primary data was collected using structured questionnaires from all 33 public organizations in Coastal Region. Data was analyzed using SPSS statistical package. Reliability test was done using Cronbach alpha and values of the variables in the questionnaire were greater than 0.700 and thus reliable. Multicollinearity of predictor variables was tested using variance inflation factors (VIFs) and values of all predictor variables were less than 10 hence acceptable. The study results were presented inform of tables, charts, frequencies, percentages, means and standard deviations. Results on financial audits indicated that all organizations had at least carried out an internal or external audit. About 87% of the entities had internal control policies while only 58% of the entities had risk management policies. It was noted that only 48.4% of entities had audit committees. Correlation analysis indicated that proactive audit, internal Control, risk management, audit committee and size of organization associated positively with values of 0.749, 0.984, 0.471, 0.793 and 0.722 respectively. Multiple regression analysis was used to determine the statistical relationship between independent and dependent variables at 5% level of significance and the value of adjusted R2 was 68.6%. The coefficients of the regression model showed that internal controls, audit committee and size of organization are positive and significant. Therefore, the study recommends that public entities should establish and adhere to internal control policies as well as create functional audit committees with appropriate skill mix and finally develop adequate administrative structures commensurate with organization’s size as measures of fraud mitigation.