INTERNAL CONTROL SYSTEMS AND FINANCIAL PERFORMANCE OF MUNICIPAL URBAN COUNCILS IN NORTHERN UGANDA

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ABSTRACT

This study investigated the Internal Control System (ICS) that influenced financial performance

(FP) in Municipal Urban Councils in northern Uganda: a case of Kitgum Municipal Urban Council (KMUC). The objectives of the study were: to explore the relationship between internal control activities and FP in KMUC; to find out how the internal control environment affects FP in KMUC; and, to assess the impact of auditing on FP in KMUC. A descriptive research survey design was adopted using both qualitative and quantitative methods. The study targeted 70 respondents but 58 returned the survey questions, indicating a response rate of 83%. Stratified sampling techniques were used to select administrative staff, and purposive sampling used to select political leaders and top-level administrators. Data analysis involved frequencies, percentages and inferential statistics such as correlations, and coefficient of determinations. Findings revealed a moderate positive relationship (0.271*) between internal control activities and FP; significant relationship between internal control environment and FP (0.335*); and moderate positive relationship between audit and FP (0.265*). The study concludes that internal control activities, internal control environment and audit positively affected FP in one way or the other. The study recommends that KMUC should employ professional members of the Institute of Certified Public Accountants of Uganda in the Internal Audit Department since 36.2% of the respondents opposed sufficient staffing of the department which is the custodian of the ICS. The environment for the implementation of ICS should be improved by ensuring that Management is committed to the operation of the system, closely monitoring its implementation and giving feedback to the staff. District Public Accounts Committee capacity should be built and their office properly facilitated to enable them follow up on the internal audit reports so that corrective measures are taken.

TABLE OF CONTENTS

Declaration....................................................................................................................................... i

Approval.......................................................................................................................................... ii

Acknowledgements........................................................................................................................ iii

Dedication...................................................................................................................................... iv

List of Tables and Figures.............................................................................................................. xi

LIST OF ABBREVIATIONS...................................................................................................... xii

ABSTRACT.................................................................................................................................xiii

CHAPTER ONE ........................................................................................................................... 1 INTRODUCTION......................................................................................................................... 1

1.1 Introduction............................................................................................................................... 1

1.2 Background to the study. .......................................................................................................... 1

1.2.1 Historical Background ........................................................................................................... 1

1.2.2 Theoretical Background......................................................................................................... 3

1.2.3 Conceptual Background......................................................................................................... 5

1.2.4 Contextual Background ......................................................................................................... 7

1.3 Statement of the problem.......................................................................................................... 9

1.4 The purpose of the study......................................................................................................... 10

1.5 Specific objectives of the study .............................................................................................. 10

1.6 Research questions.................................................................................................................. 10

1.7 Hypotheses of the Study ......................................................................................................... 10

1.8 Conceptual framework............................................................................................................ 11

1.8 Figure 1: Conceptual framework ............................................................................................ 12

1.9 Significance of the study......................................................................................................... 13

1.10 Justification of the study....................................................................................................... 13

1.11 The scope of the study ........................................................................................................... 14

1.11.1 Geographical scope............................................................................................................ 14

1.11.2 Content scope..................................................................................................................... 14

1.11.3 Time scope......................................................................................................................... 14

1.12 Operational definitions.......................................................................................................... 15

1.12.1 Internal control system....................................................................................................... 15

1.12.2 Performance....................................................................................................................... 15

1.12.3 Financial Performance ....................................................................................................... 15

1.12.4 Public Sector...................................................................................................................... 15

CHAPTER TWO........................................................................................................................ 16

LITERATURE REVIEW .......................................................................................................... 16

2.1 Introduction............................................................................................................................. 16

2.2. Theoretical review ................................................................................................................. 16

2.3 Conceptual review .................................................................................................................. 17

2.4 Internal control activities ........................................................................................................ 19

2.4.1 Approval and Authorizations and financial performance.................................................... 19

2.4.2 Segregation of duties and financial performance................................................................. 20

2.4.3 Council controls and financial performance........................................................................ 21

2.4.4 Internal audit and financial performance ............................................................................. 22

2.4.5 Determinants of financial performance in Urban Council................................................... 23

2.4.6 Compliance with laws, regulations and policies.................................................................. 24

2.4.7 Reliable Accountability ....................................................................................................... 24

2.4.8 Timely Reporting................................................................................................................. 25

2.4.9 The relationship between internal control systems and financial performance................... 26

2.5 Empirical Studies.................................................................................................................... 28

2.5.1 Global Empirical Studies..................................................................................................... 28

2.5.2 African Level ....................................................................................................................... 29

2.5.3 Ugandan Level..................................................................................................................... 29

2.6 Synthesis of Literature Review and Gap Analysis ................................................................. 30

CHAPTER THREE.................................................................................................................... 31

METHODOLOGY ..................................................................................................................... 31

3.1 INTRODUCTION .................................................................................................................. 31

3.2 Research design ...................................................................................................................... 31

3.3 Study population..................................................................................................................... 31

3.4 Determination of the Sample size and selection..................................................................... 32

3.5 Sampling techniques and procedures...................................................................................... 32

3.5.1 Stratified random sampling.................................................................................................. 33

3.5.2 Purposive sampling.............................................................................................................. 33

3.6 Data collection methods and techniques................................................................................. 33

3.6.1 Questionnaire....................................................................................................................... 34

3.6.2 Interviews............................................................................................................................. 34

3.6.3 Document revising............................................................................................................... 34

3.7 Data collection instruments..................................................................................................... 34

3.7.1 Self -administered questionnaire.......................................................................................... 35

3.7.2 Interview guide .................................................................................................................... 35

3.7.3 Document reviewing............................................................................................................ 35

3.8 Data Reliability and validity................................................................................................... 35

3.8.1 Reliability of the instruments............................................................................................... 35

3.8.2 Validity of the instruments................................................................................................... 36

3.9 Procedure of Data Collection.................................................................................................. 36

3.9.1 Questionnaires....................................................................................................................... 36

3.9.2 Interview .............................................................................................................................. 37

3.9.3 Reviewing Documents......................................................................................................... 37

3.10 Data Analysis.................................................................................................................... 37

3.10.1 Analysis of qualitative data........................................................................................... 37

3.10.2 Quantitative data analysis. ............................................................................................. 38

3.11 Measurement of variables..................................................................................................... 38

3.12 Ethical issues..................................................................................................................... 38

CHAPTER FOUR....................................................................................................................... 40

PRESENTATION, ANAYLSIS AND INTERPRETATION OF FINDINGS ...................... 40

4.1 INTRODUCTION .................................................................................................................. 40

4.2 Response Rate......................................................................................................................... 40

4.3 Background information of the respondents........................................................................... 41

4.3.1 Distribution of respondents by Gender................................................................................ 42

4.3.2 Distribution of respondents by Age group........................................................................... 42

4.3.3 Respondent’s years in service.............................................................................................. 43

4.3.4 Respondents’ highest level of education.............................................................................. 43

4.3.5 Respondents nature of employment..................................................................................... 43

4.4 Internal Control Systems affecting financial performance ..................................................... 43

4.4.1 Establishment of Internal Control activities in Kitgum Municipal...................................... 43

4.4.1.1 Testing the influence of the internal control activities on Financial................................. 47

4.4.2 The influence of internal control environment and Financial Performance. ....................... 49

4.4.2.1 Testing the influence of internal control environment on Financial................................. 51

4.4.3 The influence of audit on financial performance................................................................. 52

4.4.3.1. Testing the influence of auditing on Financial Performance........................................... 54

4.4.4 Financial performance in Kitgum Municipal Urban Council.............................................. 56

CHAPTER FIVE ........................................................................................................................ 57

SUMMARY, DISCUSSION, CONCLUSION AND RECOMMENDATIONS.................... 57

5.1 Introduction............................................................................................................................. 57

5.2 Summary of findings............................................................................................................... 57

5.2.1 The relationship between Internal Control activities and FP in KMUC.............................. 57

5.2.2 The relationship between Internal Control environment and Financial............................... 58

5.2.3 The relationship between Internal Audit and Financial Performance in Kitgum ................ 58

5.3 Discussion of the findings....................................................................................................... 59

5.3.1 Internal control activities and finance performance in Kitgum Municipal.......................... 59

5.3.2 Internal control environment and financial performance in Kitgum Municipal.................. 60

5.3.3 Audit and financial performance in Kitgum Municipal Urban Council (KMUC) .............. 61

5.4 Conclusions............................................................................................................................. 61

5.4.1 Internal control activities and financial performance .......................................................... 61

5.4.2 Internal control environment and financial performance..................................................... 62

5.4.3 Internal audit and financial performance ............................................................................. 62

5.5 Recommendations................................................................................................................... 62

5.5.1 Internal control activities and financial performance at Kitgum Municipal........................ 63

5.5.2 Internal control environment and financial performance at Kitgum Municipal.................. 63

5.5.3 Internal Audit and financial performance at Kitgum Municipal Urban Council................. 64

5.6 Limitations of the study .......................................................................................................... 64

5.7 The contribution of the study.................................................................................................. 64

5.8 Recommendations for further research................................................................................... 65

REFERENCES............................................................................................................................ 66

APPENDIX I: CERTIFICATE OF PROOF THAT DISSERTATION HAS BEEN EDITED.............................................................................................................. 71

APPENDIX II: Questionnaire....................................................................................................... 72

APPENDIX III: Interview Guide................................................................................................. 77

APPENDIX IV: SUMMARY ITEMS STATISTICS FOR THE RELIABILITY

COEFFICIENT............................................................................................................................. 79

List of Tables and Figures

Figure 1: Conceptual framework ................................................................................................. 12

Table 1: Showing Research respondent by category................................................................... 32

Table 2: Reliability ....................................................................................................................... 36

Table 3: Showing response rates of respondents.......................................................................... 40

Table 4: Showing the background information of respondents.................................................... 41

Table 5: Showing the result of how internal control activities influence Financial Performance.44

Table 6: Relationship between internal control activities and Financial Performance................ 48 Table 7: Correlation coefficient showing the influence of internal control activities on Financial

Performance.................................................................................................................................. 48

Table 8: Shows results how internal control environment affects Financial Performance of

Kitgum Municipal Urban Council................................................................................................ 49

Table 9: Relationship between internal control environment and Financial Performance........... 51

Table 10: Correlation Coefficient showing the influence of internal control environment on

Financial Performance .................................................................................................................. 51

Table 11: Shows results how auditing influence Financial Performance..................................... 53

Table 12: Relationship between auditing and Financial Performance.......................................... 55

Table 13: Correlation Coefficient showing the influence of auditing on Financial Performance 55

Table 14: The results showing the respondents opinion on Financial Performance..................... 56

LIST OF ABBREVIATIONS

AA: Accounts Assistant

EMBA: Executive Masters of Business Administration

FP: Financial Performance

GoU: Government of Uganda

IA: Internal Audit

ICS: Internal Control System

KMUC: Kitgum Municipal Urban Council

LGFAR: Local Government Finance and Accounting Regulations

MUC: Municipal Urban Council

NSSF: National Social Security Fund

OAG: Office of Auditor General

OPM: Office of the Prime Minister

SAA: Senior Accounts Assistant

SIA: Senior Internal Auditor

TC: Town Clerk

UTAMU: Uganda Technology and Management University

UTPC: Urban Technical Planning Committee

CHAPTER ONE

INTRODUCTION

1.1 Introduction

There is a general perception that the enforcement of Internal Control Systems (ICS) will always lead to improved financial performance (FP). Instituted systems of internal control improve the reporting process, thus enhancing the accountability function of management of the (Local Government Finance Commission 2003, p.32). “The likelihood of achievement is, however, affected by limitations inherent in all systems of internal control” (Hayes, 2005, p. 823)

This chapter provides an overview of the background to the Decentralization Policy, background to the study, statement of the problem, purpose of the study, objectives of the study, research questions, scope of the study, significance of the study and the conceptual framework.

1.2 Background to the study.

1.2.1 Historical Background

The ICS profession evolved steadily with the progress of management especially at the end of World War II. It is conceptually similar to financial auditing by public accounting firms, quality assurance and banking compliance activities. Much of the theory underlying ICS is derived from management consulting and public accounting professions with the implementation in United States of the Sarbanes- Oxley Act (2002, p.773). The profession’s growth accelerated, as many internal auditors acquired the skills required to help companies and public institutions meet the requirements of the tales.(SAS 300). According to Auditing Standard Board, ICS is a measure of checks and balances, a method and procedure instituted by an organization to conduct a systematic approach that management can rely on to achieve its intended goals. However, that was in the US and it was for private entities which may not be applicable in public entities and many internal auditors may not possess the required skills to help companies and public institutions meet their objectives.

Recent development shows that there is need for public institutions or organizations to have the ability to improve the level of financial performance in order to add value to their activities like development projects and progress of service delivery in their structures. This is contained in Financial Reporting and Auditing Practice (2006, p.206.)

The concept of ICS and FP took a big leap in the twenty-first century. It originally developed in Britain, when a powerful, administratively strong, centralized state emerged. It was probably the most sophisticated state since the Romans (Warren-Hollister, 2009, p.178). The English state, particularly under Henry I (1100 – 1135) and Henry II (1154- 1189), was premised on an efficient, financially strong administrative system. The findings of the Treadway Commission Reports (1987, p, 17) in the United States of America (USA) confirmed that absence of or a weak internal control and poor FP is primarily the cause of many cases of fraudulent acts and compromised standard of work leading to shoddy work, value for money not being realized in public service institutions and other business organization financial reporting. This has been witnessed in Uganda by the various scandals that rock the National Social Security Fund (NSSF) and the Office of the Prime Minister (OPM) , the Ministry of Public Service, among others. If internal control systems were strong, such transactions would have been detected and blocked. Therefore, widespread global corporate and institutional scandals that assumed near-epidemic proportions in recent years have created concern which this study is trying to investigate. Notable cases include: Enron and World com, Xerox and recently alleged fraud cases like Lehman and Brothers in the United States of America, Parmalat in Europe, and Chuoaoyama in Asia (Higson, 2012, p.283) In South Africa, cases of accounting scandals were recorded in JCL and Rand gold and Exploration Companies (Randgold and Exploration Co. Ltd Annual Report (2011, p.18).

In Nigeria, the managing Director and Chief Finance Officer of Cadbury Nigeria Plc. was dismissed in 2006 for inflating the profits of the company for some years before the company’s foreign partners acquired controlling interest (Cadbury Annual Report, 2006, p.3). It is generally believed that properly instituted systems of internal controls improve financial performance but in spite of this, elaborate ICS FP has eluded most entities; and this called for an investigation to the effects of ICS on FP (Michael C. Jensen, 1993, p.852).

Government of Uganda (GoU) has had enormous cases of mismanagement of public funds despite the establishment and existence of ICS. Examples include: UG V ONEG OBEL, AntiCorruption criminal case No. 153 of 2010, the NSSF scandals in which hundreds of billions of shillings were lost. In the case of David Chandi Jamwa in the NSSF (National Social Security Fund), (Case No. COA-00-CR-0020-2011) employees’ monthly savings worth three billion one million shilling was misappropriated and in the case of Geoffrey Kazindavs. Attorney General Crt. Pet. No.50 of 2012 Prime Minister’s Office funds meant for Northern Uganda Recovery

Programme were fraudulently transacted to personal accounts for personal gain. Lots of billions of shillings were diverted; these culprits have been convicted (www.monitor.co.ug).

1.2.2 Theoretical Background

This study was guided by “The Principal Agency theory” as put across by Jensen and Meckling

(1976, p.1) and later expanded on by Sarens and Abdolmohammadi (2010, p. 1-20). According to the theory, a company consists of a nexus of contracts between the owners of economic resources and managers who are charged with using and controlling those resources (Jensen and Meckling, 1976. p, 5). Principal Agency theory posits that agents have more information than principals and that this Information asymmetry adversely affects the principals’ ability to monitor whether or not their interests are being properly served by agents. The theory also assumes that principals and agents act rationally and use contracting to maximize their wealth which may lead to moral hazard problem indicating that in an effort to maximize their own wealth, agents may face the dilemma of acting against the interests of their principals.

As argued by Tanzi (2000, p.445) between their creation and their final implementation, fiscal decisions go through many stages at which mistakes, indifference, passive resistance, implicit opposition and various forms of principal agent problem may distort the outcome. The Uganda Public Finance Management Act 2015 met such indifference and passive resistance which led to its amendment less than a year after its enactment. The Accountants Act 2013 also met such resistance, leading to the recruitment of non-professional members of the institute in Accounts and Audit departments contrary to sec 34(2) of the Act which has affected FP in the MUCs.

Deegan and Unerman (2006, p, 215) noticed that with the agency theory the firm itself is considered to be a “nexus” of contracts. These contracts are used with the intention of ensuring

that technocrats who are agents align their own interest with the interest of the council to achieve its objectives. Central government (principal) does not directly promote the achievements of the objectives of the council but uses the municipal structures to do so by setting up the government rules and incentives to align the interest of the technocrats to that of the council.

Internal control as one of the many mechanisms used in business to address the principal agency problem and it has been proven that internal control reduces agency cost. However, these studies may not be applicable in Government entities since it was done on private entities. But for the purpose of this study principal agency theory has been chosen. GoU has put in place a reward system for the best-performing government entities to ensure that the technocrats who are agents in this study are motivated to maximize the value of the entity (Local Government Finance

Commission, 2003, p.2).

The theory as put forward may be applicable in other parts of the world but not in Uganda and Kitgum Municipal Urban Council (KMUC) in particular where professionalism is not very important. Despite the enactment of the Accountants Act 2013 Section 34 (2) which states that all heads of Accounts, Finance and Internal audits shall be professional members of the Institute of Certified Public Accountants of Uganda, the municipal council has continued to recruit nonprofessionals in these positions.

According to the Annual Report of the Auditor General (2011,p.Vii), Internal control is a set of systems to ensure that financial and other records are reliable, complete and ensure adherence to the entity management policies, the orderly and efficient conduct of the entity and the proper recording and safeguarding of assets and resources. A process effected by the entity’s board of directors, management and other personnel designed to provide reasonable assurance regarding the achieving of the objectives in the categories of reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. Financial performance is considered in terms of measures like profitability (using absolute and relative measures), liquidity (using ratios current ratio, acid test, the ability of the entity to settle its financial obligations) and accountability (in terms of financial accountability).

1.2.3 Conceptual Background

The key concepts for this study are internal control systems and financial performance. The relationship between ICS and Good financial performance is that ICS is a tool to achieve good financial performance and good financial performance is the ideal output of ICS. ICS in the study is measured using factors such as Control environment, Internal Audit and Control activities. Good financial performance is measured by Timely Accountability, Reliable reporting and Compliance with laws, regulations and guidelines. The ICS in the study was the independent variable and financial performance the dependent variable Mwindi (2008, p.134) reports that internal controls are processes designed and effected by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of financial reporting, effectiveness, efficiency of operations and compliance with applicable laws and regulations .The Internal control systems are put in place to, among other things, oversee public sectors compliance and adherence to national policies in the implementation of government programs. According to J. Boyle, Cooper and A. Geiger (2004, p.4) Internal control is a process designed to provide reasonable assurance regarding the achievement of objectives for reliable financial statement, effective and efficient operations and compliance with applicable laws and regulations. Internal controls are processes designed and affected by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of the financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations. Financial performance was considered in terms of measures like profitability (using absolute and relative measures), liquidity (using liquidly ratio like current ratios, acid test ratios, the case with which the entity settles its financial obligations) and accountability (in terms of financial accountability) (ACCA- Managerial Finance paper 8, 1998, p.154).

According to Financial Analysis Conceptual Framework (p, 49) financial performance is the process of measuring the result of a firm’s policies and operations in monetary terms. In order to evaluate financial condition and performance of a firm, the financial analyst needs certain tools to be applied on various financial aspects. One of the widely used and powerful tools for measuring financial performance is ratios or index. Ratios can be classified into four broad groups on the basis of items used: liquidity ratio, capital structure/leverage ratio, profitability ratio and activity ratio, but these are in private settings.

According to Analyzing Local government financial performance, evidence from Brazilian municipalities (2008, p.707) in terms of managing performance, finance is a resource and therefore also very likely to be an end in the performance management framework. There are several ways of assessing local government financial conditions but assets and liabilities, debt reduction and fiscal health of the city in terms of risk of bankruptcy can be used. According to Whitney (2013, p.191) is the result of budgetary mismanagement couple with rising pension and debt cost are the measures of financial performance. In this study, assets and liabilities relate to reporting; Debt reduction makes the municipal liquid; and fiscal health relates to accountability. The core service area of KMUC is service delivery to the public which makes the entity accountable to the public. Internal control system is conceptualized in terms of internal control activities, control environment and internal auditing, whereas financial performance is conceptualized in terms of reliable accountability, timely reporting and compliance with the laws, regulations and guidelines.

1.2.4 Contextual Background

Kitgum is a town and District in Northern Uganda and was recently awarded municipality status in recognition of its strategic status with vote No.784. It is located in the center of Kitgum town, and comprises three divisions, Central, Pager and Pandwong, with 28 cells and 11 parishes The name Kitgum derived from Acoli word “Kit-gum” meaning what a luck.it is located between

Longitude 320E, and 340E, Latitude 020N, The district is composed of two counties called Chua and Chua East with nine sub counties and one municipal urban council which is the area under study.

Kitgum district is bordered by Lamwo in the north, the republic of South Sudan in the north east, Kotido district in the east, Agago district in the south east, Pader district in the south and Gulu district in the north west. Kitgum town is located approximately 108 kilometers (67 miles) by road to the north east of Gulu town, the largest city in the sub region. By road Kitgum is located approximately 460 kilometers (290 miles) north of Uganda’s Capital Kampala. Kitgum is the most convenient gateway to kidepo Valley national game park- one of Uganda’s best stocked game parks where visitors dine in close proximity lions, large herds of elephant’s buffaloes and other wild animals. It is estimated that the population of Kitgum is 204,048 as of the 2014 national population and housing census with the population of Kitgum municipality alone estimated at 75,594. Agriculture is the main economic activity in Kitgum district. Crops grown includes millet, sorghum, cassava, potatoes, peas, sim-sim, sunflower, cotton, tobacco, cabbages, tomatoes and ranching practiced in small areas. characterized by many deaths and social disruption resulting from the twenty-year civil war and cattle rustling by the karimojong warriors within the region since the late 1980s. It is administered through politically established and civil service structures. The political wing is headed by the Mayor and the divisions are headed by LC III Chairpersons who head the councils, which are the highest political authorities with both legislative and executive powers. The technical wing is headed by the Town Clerk (TC) and Assistant Town Clerks for the divisions who supervise all civil servants in the urban council and the divisions.

The executives make resolutions which are forwarded to the council for approval, then implementation is done by the TC (Section 63 of the Local government Act).

Internal control system weakness and poor financial performance in Uganda can be seen from the way the government was forced to close banks like International Commercial Bank (ICB), Greenland Bank, and Cooperative Bank which undermined market discipline in 2002. Subsequently, after the closure of the above banks, the Uganda Commercial Bank Limited was acquired by the Stanbic Group in a privatization arrangement in February 2002.

In KMUC, financial performance has met challenges as seen in the Annual Report of the Auditor General (2011, p.349) where the council got qualified - except for opinion. The report indicated long outstanding advances of UGX 53,733,330 and doubtful expenditures of UGX 21,514,400. According to LGFAR (2007,p.25) Administrative advances to council employees shall be authorized by the Chief Executive (CE) and shall be accounted for within a month, the CE shall not authorize any advance to a council employee who has not accounted for the previous advance. With effective ICS and adherence to the regulations such incidences of unaccounted for funds would not have arisen.

1.3 Statement of the problem

The GoU has put in place the necessary organs to empower ICS in MUC so as to set up financial performance of MUC (Financial and Accounting Regulations, 2007,p.15). KMUC has always had an Internal Audit department to help in compliance with the ICS, regulations and procedures. The Auditor General conducts financial and compliance audit to provide assurance to the legislatures that various sectors of government have managed their finance affairs according to sound financial principles and the legal framework, and achieve their financial objectives (Nitasha, 2004, p.1).

Despite all the above, efforts KMUC still struggles with timely accountability, reliable reports, compliance with laws, regulations and policies, frauds, and misuse of council resources which has been unearthed by the, Annual Report of the Auditor General (2011, p.286). KMUC, one of the oldest in northern Uganda, got qualified except for opinion and one of the reasons for qualifying the opinion was evaluation of the District Public Accounts Committee (DPAC). Although the Internal auditors have produced the reports for the four quarters, it was noted that they were not reviewed by DPAC (Annual Report of the Auditor General, 2011, p.354). Internal Auditors are the custodians of ICS; so failure to follow up these issues as required under section 16 of the LGFAR (2007, P.17) means ignoring internal controls. This study investigated the persistent poor FP from the perspective of ICS which has hitherto been ignored.

1.4 The purpose of the study

The purpose of the study was to assess the contribution of Internal Control Systems towards enhancement of financial performance in Municipal urban Councils in northern Uganda.

1.5 Specific objectives of the study

1. To explore the relationship between internal control activities and financial performance in

Kitgum Municipal Urban Council (KMUC);

2. To find out how internal control environment affect financial performance in KMUC;

3. To assess the impact of auditing on financial performance in KMUC.

1.6 Research questions

1. What are the relationships between internal control activities and financial performance in

KMUC?

2. How does control environment affect financial performance in KMUC?

3. What are the impacts of auditing on financial performance in KMUC?

1.7 Hypotheses of the Study

1.There are positive relationships between internal control activities and financial performance

in KMUC.

2. There are positive relationships between control environment and financial performance in

KMUC.

3. There are positive impacts of auditing on financial performance in KMUC

1.8 Conceptual framework.

Conceptual framework is defined as an interconnected set of ideas or theories about how a particular phenomenon functions or is related to its parts (Svinicki, 2010, p.5). The framework serves as a basis for understanding the casual or correlational patterns among study variables, provide a context for interpreting the study findings and explain observations. It illustrates the relationships between ICS as the independent variable and Financial Performance as the dependent variable in this study.

From the above framework it can be argued that the independent variable which is the internal control system measured by control activities, internal control environment and internal audit is associated with positive correlation with financial performance as measured by timely reporting, reliable accountability and compliance with the laws, regulations and policies. If there are effective , financial performance is likely to improve and the reverse is true. It is therefore hypothesized that if the ICS are in existence, they are likely to affect financial performance of an entity.

1.9 Significance of the study

According to Kothari (2014, p.5) research provides the basis for nearly all government policies in our economic system. In the case of Kitgum Municipal Urban Council, the study will help in that:

1. The findings of the study will specifically help Kitgum Municipal Urban Council administration to improve on their Internal Control System for better financial performance.

2. The study will also help policy makers to formulate ways to improve the Internal Control System.

3. The study findings will act as a basis of further research in the field of Internal Control Systemon matters of transparency and accountability.

1.10 Justification of the study

Public sector entities exist to serve the public. This mandate is the filter through which the key characteristics of public sector entities are differentiated from less relevant attributes.

In order to achieve this mandate, public sector entities have been granted powers, rights and responsibilities, including a responsibility for policy development and implementation. The mandate to serve the public over the long term and the granted powers, rights and responsibilities demand public accountability for the actions, decisions and results of a public sector entity. This need for public accountability is the overriding characteristic of public sector entities (Conceptual Framework Consultation, Paper 2, 2012, p.8). The government of Uganda has put in place Audit Committees that shall assist the Accounting Officers in carrying out the oversight responsibilities relating to financial practices, internal controls, corporate governance issues, compliance with laws, ethics and audit matters (Public Finance Management Act, 2015, p, 48). The research is deemed necessary because policy makers and practitioners have continued to share concerns about deviations from the policies in Municipal Urban Councils that affect financial performance. The reason for this study is to enable KMUC and all its stakeholders improve Internal Control Systems and financial performance.

1.11 The scope of the study

The scope of the study is examined at three levels, namely: geographical coverage of the study, content of the study and time scope

1.11.1 Geographical scope

The study was conducted in KMUC a public institution located at a distance of 452 kilometres North of Kampala, the capital city of the Republic of Uganda.

1.11.2 Content scope

This focuses on three key dimensions; internal control systems, determinants of financial performance and relationship between internal control systems and financial performance as captured in the conceptual framework

1.11.3 Time scope

This study covered a period of five financial years from 2010/2011-2014/2015. This period was considered because it was the period when KMUC experienced challenges in financial performance until 2013-2014 and 2014-2015 when it got unqualified reports (Audit Report of the

Auditor General, 2011)

1.12 Operational definitions

1.12.1 Internal control system

As defined in Accounting and Auditing is a process of assuring achievement of an organization’s

objectives in operational effectiveness and efficiency, reliable financial reporting and compliance with laws, regulations and policies

1.12.2 Performance

The word performance refers to the accomplishment of a given task measured against present standards of accuracy, completeness, cost and speed (Financial performance Analysis conceptual framework, 2012, p, 49)

1.12.3 Financial Performance

Is a general measure of an entity’s overall financial health over a given period of time and can be used to compare similar entities across the same industry or to compare industries or sectors in aggregation.

1.12.4 Public Sector

Is the part of national economy providing basic goods or services that are either not or cannot be provided by the private sector. It consists of national and local governments, their agencies and parastatals.

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Buyers are expected to confirm that the material you are paying for is available on our website ProjectShelve.com and you have selected the right material, you have also gone through the preliminary pages and it interests you before payment. DO NOT MAKE BANK PAYMENT IF YOUR TOPIC IS NOT ON THE WEBSITE.

In case of payment for a material not available on ProjectShelve.com, the management of ProjectShelve.com has the right to keep your money until you send a topic that is available on our website within 48 hours.

You cannot change topic after receiving material of the topic you ordered and paid for.