Effect of Internal Audit Function on Financial Performance of Postbank Kenya

Abstract

Internal audit is an independent and objective assurance and consulting function that enhances organizational governance, risk management, and internal control systems. In banking institutions, an effective internal audit function is expected to strengthen accountability, improve operational efficiency, and enhance financial performance. However, empirical evidence regarding the contribution of internal audit functions to the financial performance of state-owned financial institutions in Kenya remains limited. This study was therefore conducted to examine the effect of the internal audit function on the financial performance of the Post Office Savings Bank in Nairobi County, Kenya. The study adopted a descriptive and correlational research design. A census approach was used to target 40 respondents drawn from the internal audit, finance, risk, and compliance departments, audit committees, and branch management at Postbank Nairobi County. Primary data were collected using structured questionnaires based on a five-point Likert scale. Of the 40 questionnaires distributed, 32 were completed and returned, representing an 80% response rate. Data were analyzed using SPSS version 25 and Microsoft Excel. Descriptive statistics were used to summarize the data, while Pearson correlation and multiple regression analyses were employed to examine the relationship between dimensions of the internal audit function and financial performance at a 0.05 level of significance. The findings revealed that all dimensions of the internal audit function were positively and statistically significantly related to financial performance. Internal control systems exhibited the strongest positive correlation with financial performance (r = 0.468, p < 0.01), followed by the staff size of the internal audit department (r = 0.433, p < 0.05), management support (r = 0.375, p < 0.05), and the quality of the internal audit function (r = 0.371, p < 0.05). The regression model was statistically significant (F = 3.016, p = 0.035) and explained 30.9% of the variation in financial performance at Postbank (R² = 0.309). The study concludes that the internal audit function significantly influences financial performance at Postbank. Strengthening the quality of internal audits, enhancing internal control systems, increasing management support, and ensuring adequate audit staffing are essential to improving financial performance in state-owned financial institutions.