Influence of Auditing Practices on Financial Distress in Selected County Governments, Kenya

John Muthini Ndunda ,Willy Muturi ,Daniel M Wanyoike

doi:10.7176/rjfa/11-14-10

Abstract

County Governments of Kenya have been hit with rampant embezzlement of public funds. The misuse of public financial resources has crippled service delivery to the people as well as payments to suppliers and creditors. The role of auditing practices is to enhance accountability and safeguard the public funds from being mismanaged. However, there is an evident lack of clarity in the effectiveness of existing auditing practices in Kenyan County Governments. The consistent misplaced expenditures have contributed to financial distress since most County Governments are unable to adequately meet their financial obligations. This necessitated the undertaking of a research study on the influence of auditing practices on financial distress in County Governments of Kenya. The study was guided by the theory of critical accounting. Descriptive survey design was employed to obtain in-depth information from the auditors and accountants from Nairobi, Nakuru, Kakamega, Meru, and Kilifi County Governments. A stratified random sampling technique was applied to obtain a sample of 103 respondents from 212 auditors and accountants. Structured questionnaires were used to collect data that was analyzed through descriptive and inferential statistics with the aid of statistical packages for social sciences (SPSS). Study findings were presented through tables. Both descriptive and inferential findings showed that auditing practices influenced financial distress. Correlation analysis findings indicated that the relationship between auditing practices and financial distress was positive and statistically significant. The correlation coefficient was (R=0.455 ** ) while coefficient of determination was (R 2 =0.207) which meant that auditing practices accounted for 20.7% of variations in financial distress. Regression coefficients further showed that auditing practices had beta coefficient (β=0.360; p=0.000) that was significant at 95% confidence level. Based on the findings, it can be concluded that the ability of County Governments to settle their financial obligations and other liabilities is dependent on effectiveness of auditing practices. Existing financial distress can therefore be attributed to inadequate auditing practices which are unable to promote accountability and effective use of public funds.The study findings will be valuable in guiding the establishment and implementation of effective auditing policies for County Governments. Keywords: Auditing Practices, Financial Distress, County Governments DOI: 10.7176/RJFA/11-14-10 Publication date: July 31 st 2020

Highlights

Auditing Practices are critical dimensions of financial management in the government sector (Alcaide-Munoz, Rodriguez-Bolivar, & Lopez-Hernandez, 2017)
The current study examined the auditing practices in accordance to public financial management as guided by 2010 Kenya constitution
The researcher sought to determine whether existing auditing practices among county governments led to financial distress

Summary

Introduction

Auditing Practices are critical dimensions of financial management in the government sector (Alcaide-Munoz, Rodriguez-Bolivar, & Lopez-Hernandez, 2017). They determine accountability in the activities performed by the County governments. According to Odoyo, Adero, and Chumba (2014) auditing practices are meant to make County Governments accountable in managing public funds and make due payments as required. Ineffective auditing practices imply that mismanagement of public funds could go unnoticed, and in the end, the County Governments cannot settle their financial obligations becoming financially distressed. Local government is financially sustainable when it can generate sufficient revenues to perform its fundamental function and deliver some core services up to a minimum acceptable level (Alcaide-Munoz et al, 2017). Financial resources’ insufficiency is a common challenge among local governments globally, and the problem is even more significant in developing countries

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Conclusion