Abstract
The purpose of this study is to examine the role of intellectual capital and isomorphic forces in strengthening internal controls over financial reporting (ICFR) in microfinance institutions (MFIs). This study is cross-sectional and correlational. Data were collected through a questionnaire survey of 66 MFIs that are members of the Association of Microfinance Institutions of Uganda (AMFIU). Both intellectual capital and isomorphic forces positively and significantly contribute to the strength of ICFR. In terms of control variables, ownership structure, capital structure and firm age are not significant predictors of ICFR. Policy-wise, the regulator(s) of MFIs should always issue-specific and time-bound directives to MFIs with ICFR shortfalls to enhance their control environment. Also, the responsibility of maintaining adequate ICFR should be extended to the management of MFIs by tasking them to account for lapses in ICFR. This would reduce incidences of senior management usurping the powers of the board, which would lead to overriding of ICFR. Also, policies should be specific on the composition of the board to improve its intellectual potential. To the authors’ knowledge, this study provides initial empirical evidence of the influence of intellectual capital and isomorphic forces in strengthening ICFR in MFIs using evidence from a developing African country. Overall, this study found that intellectual capital (entity factor) and isomorphic forces (institutional factors) are all predictors of ICFR. This is possible because managers, employees and those charged with governance of the entity can be influenced by institutional forces that affect ICFR positively.
Highlights
Internal controls over financial reporting (ICFR) are continuously being accentuated as a mechanism for improving the quality of financial reporting (Jokipii, 2009; Nalukenge et al, 2017; Rubino & Vitolla, 2014)
We argue that since managers and those charged with governance of microfinance institutions (MFIs) have absolute responsibility of designing, implementing, and maintaining a strong system of ICFR, it is likely that their intellectual capital capability and the influence of isomorphic forces will influence their decisions towards implement ing ICFR
Model 3 presents the impact of all the predictor variables on the outcome variable, and the results indicate that intellectual capital is stronger and signifi cant predictor variable of ICFR (β = 0.442**), followed by isomorphic forces which are significant (β = 0.379**)
Summary
Internal controls over financial reporting (ICFR) are continuously being accentuated as a mechanism for improving the quality of financial reporting (Jokipii, 2009; Nalukenge et al, 2017; Rubino & Vitolla, 2014). This is because ICFR are viewed as the first line of defence against financial reporting risks (IIA, 2013; Krishnan et al, 2020). More so, they are policies designed to ensure proper documentation of accounting information. According to the Bank of Uganda Financial Stability Report (“2019), total assets held by Micro Deposit-Taking Institutions (MDIs) increased to UGX 642.3 billion from UGX 562.2 billion largely due to growth in gross loans by UGX 55.2 billion and fixed assets by UGX 14.9 billion
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