Operational Internal Controls and Financial Performance Efficiency of Selected Non-Governmental Organizations in Nairobi City County, Kenya
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Date
2025-07
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Kenyatta University
Abstract
Operational internal control systems played a critical role in promoting financial performance efficiency, particularly in the Non-Governmental Organization (NGO) sector, where accountability, transparency, and optimal resource utilization were essential. In Kenya, NGOs continued to face persistent challenges such as financial mismanagement, inadequate budgetary control, delayed financial reporting, and the inability to account for donor funds. These challenges were often associated with inadequate or poorly executed internal oversight structures. This research endeavored to scrutinize the impact of functional internal oversight—namely preventative, detective, directive, and managerial oversight—on the fiscal output effectiveness of non-governmental organizations active within Nairobi City County, Kenya. The investigation centered on how crucial oversight mechanisms such as task separation, authorization protocols, internal assessments, fiscal guidelines, and budgetary methods affected fiscal effectiveness metrics, encompassing the program effectiveness index, resource mobilization effectiveness index, overhead expense index, budget deviation analysis, and recipient expense effectiveness. Anchored in Agency Theory, Stewardship Theory, Contingency Theory, and the COSO Framework, the research offered a multifaceted comprehension of the connections between internal oversight systems and fiscal results. A descriptive survey research approach was utilized, targeting NGO personnel engaged in fiscal administration. Layered probabilistic sampling was employed to choose a representative subset of 157 participants from a group of 263 NGOs. Information was gathered via standardized questionnaires and examined using both descriptive and inferential statistics. Multiple linear regression was utilized to assess the associations between internal oversight classifications and fiscal output effectiveness. Instrument consistency was evaluated using Cronbach’s Alpha, while validity was determined through specialist evaluation, factor analysis, the KMO statistic, and Bartlett’s test of sphericity. Multicollinearity was verified using Variance Inflation Factors (VIF). The research anticipated yielding empirical proof regarding the importance of functional internal oversight in improving fiscal output effectiveness in NGOs. The outcomes provided significant understanding for NGO administrators, benefactors, and policy creators aiming to reinforce fiscal governance, responsibility, and long-term viability within the non-profit domain. The study found that preventive controls had the strongest positive effect on financial performance efficiency (r = 0.691, B = 0.521, p < 0.001), followed by management controls (r = 0.772, B = 0.374, p < 0.001). Directive (r = 0.667, B = 0.439) and detective controls (r = 0.352, B = 0.423) also showed significant positive effects. The model accounted for 64.45% (R² = 0.6445) of performance variation among NGOs in Nairobi City County. The study concluded that operational internal controls significantly influence the financial performance efficiency of NGOs. Preventive controls were most impactful, emphasizing the need for proactive risk mitigation. Detective, directive, and management controls also contributed meaningfully to transparency, compliance, and strategic oversight. Collectively, these controls enhance financial stewardship and accountability, confirming their critical role in ensuring sustainable financial practices in Nairobi-based NGOs. NGOs should institutionalize robust preventive controls like duty segregation. Regular audits should reinforce detective controls. Directive controls such as staff training and policy manuals should be standardized. Lastly, management controls, including budgeting and performance appraisals, should be strengthened to ensure strategic financial alignment and efficient resource use
Description
A Research Project Submitted to the School of Business, Economics and Tourism in Partial Fulfilment of the Requirements for the Award of Degree of Master of Business Administration (Finance) of Kenyatta University, July, 2025
Supervisor:
1.Anthony Mugetha Irungu