Does the Internal Control Environment Drive the Performance of Cooperatives? A PLS-SEM Perspective

Abstract

This study examined the relationship between the internal control environment and financial performance of deposits taking savings and credit cooperative societies (DT-SACCOs) in Kenya. Using the Agency theory as a framework, the study focused on integrity and ethical values, commitment to competence, organization’s structure, management philosophy, and operating styles. The research utilized a quantitative approach and PLS-SEM as the main design, with data collected through a structured questionnaire from 110 DT-SACCO managers. The study revealed that the internal control environment positively impacts financial performance. Commitment to competence (β = 0.441, p <0.05), the organization’s structure (β= 0.466, p <0.05), and management philosophy and operating styles (β= 0.267, p <0.05), while integrity and ethical value had a negative impact (β=-0.317, p >0.05). The study provides valuable insights for policymakers, regulators, and DT-SACCOs, emphasizing the importance of a strong internal control framework for effective risk mitigation and enhanced governance practices. By focusing on building a robust internal control environment, DT-SACCOs can optimize their financial performance. The study extends the literature on the link between internal control environment and performance in Kenya and provides a basis for future research.