BACKGROUND OF THE STUDY

               Financial reporting functions to convey information to its users (Mauraina & Dandago, 2020). Financial information can be conveyed through various means, such as press realease, websites, interim reports, conferences and annual reports (Mahdi Sahdi et al 2022). The evolution of financial reporting has been influenced by various factors including regulatory requirement, techological advancements, and channging stakeholder expectation. In many countries, standardized accounting principles have been established (e.g. GAAP in the US and IFRS globally).

Financial reports are therefore prepared by management of an organisation to assist shareholders and other external stakeholders in assessing the performance of directors (Onuorah & Imene, 2016). Financial reporting has to provide information on how a company earns and spends cash as well as all related and relevant financial resources, including cash dividends and distribution of other company resources to shareholders (Rapina, Anggraeni, Praise, Anugrah, & Setyani, 2019).

One of the reasons of financial reporting is to provide high quality financial statements relating to information about economic entities and the financial condition of the real beneficial for decision making (Kewo & Afiah, 2017). To achieve high quality reporting concerning economic entities, information contained in financial reports must be relevant, faithfully represented, comparable, verifiable, timely and understandable (Glezakos, Mylonakis, & Kafourus, 2018)

In recent years, there has been an increasing emphasis on corporate governance and accountability due to high-profile corporate failures that highlighted deficiencies in both internal controls and financial reporting practices. The early 2000’s saw high profile accounting scandals cases like Enron and Worldcom, Marconi, Parmalat, Toshiba which had a disastrous impact on the economy and reduced investors confidence in information accounting of listed company.

 The causes of these various scandals were  seen to be ; lack of effective corporate governace, inadequate auditing, opportunistic management behavior and  a weak internal congtrol system. The later was seen as one of the main cause because it led to inacurate financial statements, fraud misappropriation inefficiens in the financial reporting process. This has highlited concerns about corporate governance and ethical standards in accounting practices. The quality of internal control plays an important role in increasing the quality of financial reports ensuring the safety of enterprises assets, reducing financial fraud and improving risk prevention.

 Internal control is a process effected by an entity’s board of directors, management and other other personnel designed to provide reasonable assurance relating to the achievement of ojectives relating to operations, reporting and compliance (COSO 2013). Internal control systems comprise the processes and procedures an organization implements to ensure the intergrity of financial reporting, compliance with laws and regualtions, and operational efficiency.

Internal control is an established process by the company’s top management to ensure achieving the company’s primary goals and objectives such as an effective and efficient operations, safeguarding the assets, ensuring the accuracy and validity of accounting information, following the organisations’ policies and procedures and preparing reliable reports in timely basis (Salameh, 2019).

            Brink (2009) contents that internal control concept has existed as early as there have been substansive relationships. Brink (2009) added its origin can be documented and traced back to civilized communities that existed around 5000 B.           C. The Governemnts of these empires imposed a number of taxes on individuals and business. For the proper accounting and collection of these taxes, an elaborate system of checks and counterchecks was established. Such early internal control sytem were designed primarily to minimize errors, and safeguard the state property from dishonest tax collectors.

Internal control system is a concept of great importance in maintaining consistency, direction and discipline in firms and organizations. It is widely experienced in day-to-day activities, and provides managers of assurance that the programs they are handling meet the organizational goals and objectives.. Existing literature indicates that robust internal control scan minimize the likelihod of financial mistatement and fraud, thereby enhacing the quality of financial reporting (Sweeney, 2015 ; Cohen et al ., 2002).

In Kenya, a study conducted by Simiyu (2011) on effectiveness of internal control system in higher institutions of learning in Kenya clearly indicate that Institutions of higher learning face quiet a number of challenges during internal controls in performance like struggles with liquidity problems, financial reports are not made timely, accountability for the financial resources is still wanting, frauds and misuse of institutional resources.

Njui (2012) investigated the effectiveness of internal control and audit in promoting good governance in the public sector in Kenya and found that internal control has the greatest effect on corporate governance within Kenya government ministries followed by risk management while compliance and consulting had the least effect.

Kakucha (2009) evaluated the level of effectiveness of internal controls operating in Nairobi and established that there are deficiencies in the systems of internal controls, with the degree of deficiencies varying from one enterprise to another.

This research was based on four  theories. The theories supported the study to give a clear view of the effect of internal control systems on the quality of financial reporting of microfinance institutions. the study was guided by the agency theory,contingency theory, the stewardship theory and the attribution theory.

Meckling and Jensen (1976) in their paper on the theory of the firm defined the agency relationship as a contract under which one or more persons ( the principal(s) engage another person (the agent)) to perform some service on their behalf which involves delegating some decision-making authority to the agent. The theory further explains the concept of information asymmetry in which one party has more information than the other. This theory is applicable to this study in that, strong internal control will help reduce information asymmetry as well as agency cost.

The contigrncy theory which explains the behaviour and functions of companies are influenced bt predictors like technology, culture and the external environment in which the company operates.

The attribution theory is a social psychology that discovers how people interpret events and behaviours and how they ascribe causes to the events and behaviours. This theory was proposed by Fritz Heider in 1958. This theory advocates for auditors to report on the effectiveness of firm’s internal control.

Financial reporting quality represents financial statements that provide accurate and fair

Information about the underlying financial position and economic performance of an entity.

Quality financial reporting emphasizes transparency, which is assessed based on the accuracy

of the company’s objectives and the quality of the information disclosed therein (Ellili, 2022).

The traditional accounting definition of internal control depends on financial reporting and compliance aspects of control. However, COSO (2004) describes interenal control systems as a process in which the board, managemetn and other staff are involved to ensure the goals of the organization can be achieved. The goals are categorized as ; Effectiveness and efficiency of business operations, reliability of fiancial reporting, compliance with relevant laws and regulations.

 According to (Ali, 2018), internal control components are primarily intended to increase the reliability of financial output, either directly or indirectly, by increasing the accountability of information supplied in an organization. The incraese of business units has encouraged the use of internal control as it ensures orderly and efficient conduct of business including adherance to internal policies.

The institution’s ability to maximize its profit depends in part on the design and effectiveness of the processes and safeguards it has put in place over accounting and financial reporting (Ndungu, 2013). While no practical control system can absolutely assure financial reports will never contain material errors or misstatements, an effective system of internal control over financial reporting can substantially reduce the risk of such misstatements and inaccuracies in company’s financial statements (Kaplan, 2008).

STATEMENT OF THE PROBLEM.

The prevalence of business failures and corporate scandals has underscored the critical role of internal control systems in ensuring trusrworthy financial reporting. KPMG identifies weak internal controls as a singnificant factor contributing to these failiures, emphasizing the need for robust mechanisms that can safeguard the intergrity of financial information. According to Suryzni (2018), the internal control system encompassses processes, policies, and procedures that management develops to ensure accurate financial reporting in compliance with relevant accounting framework.

Internal control systems play a pivotal role in enhancing the quality of financial reporting by safeguarding assets, ensuring the accuracy of finacial records, managing risks, and ensuring compliance with applicable laws and regulations.An effective internal control system promotes efficiency, facilitates the achievement of financial and operational objectives, protects assets, ensures reliable financial reporting and guarantees compliance with legal requirements (Selezneva et al 2020).

Several studies have been carried out on internal controls. For example ;Lari, Salehi and Safdel (2020) investigated the relationship between internal controls and financial reporting quality on listed family firms in Iran. Salameh (2019) investigated the impact of internal control system on the quality for Jordanian banks.

 However, majority of these studies have concentrated on different industries in different countries , while others have concentrated on a mix of listed firms in their localities. In addition, the studies employed different methodologies hence such studies may not be generalized to the study context.

Despite the recognized importance of internal control systems, there is insufficient  emperical evidence linking its effectiveness to the quality of financial reporting of microfinance institutions in the locality of yaounde .

This research is focused on identifying and examining the effectiveness of ICS variable’s in micro finance institution as well as to investigate the impact of the effectiveness of internal control systems on the quality of financial statements.Specifically, it will explore how defficiencies in internal control can lead to inaccuracies in financial reporting. By addressing these issues, the research seeks to contribute to a deeper understanding of the relationship between internal controls and financial reporting quality.

1.3 RESEARCH OBJECTIVE

MAIN RESEARCH OBJECTIVE.

• To determine the effect of internal control systems on the quality of financial reporting.

SECONDARY RESEARCH OBJECTIVE.

• To determine the effect of control environment on the quality of financial reporting
• To determine the effect of control activities on the quality of financial reporting.
• To determine the effect of risk assessment quality of financial reporting.

1.4 RESEARCH QUESTIONS.

MAIN RESEARCH QUESTION.

• How does internal control systems impact the quality of financial reporting of MFI’s?

 SPECIFIC RESEARCH QUESTIONS.

• How does the control environment of an enterprise affects the quality of reporting of MFI’s ?
• How does control activities influence the quality of financial reporting of MFI’s ?
• How does a company risk assesment process affects the quality of financial reporting of MFI’s ?