ABSTRACT

The purpose of this study was to establish impact of compliance review audits on financial performance of donor funded organizations in Nyeri County, Kenya. Donor funded organizations are supposed to conform to grant and loan conditions established by donor organizations and communities. One shortfall that has greatly affected the implementation and success of the donor funded projects is accountability and poor information relays to the donors which in the end demoralizes the donors from offering more donations to organizations. The specific objectives guiding the study included: to determine the effect of compliance with rules and regulations, internal controls systems strengthening and capacity development on financial performance of donor funded organizations in Nyeri County, Kenya. The study adopted the descriptive research design and the population of the study was 2 persons in the finance/ accounting department from 42 donor funded organizations, totaling 84 respondents. Purposive sampling was employed to accommodate all the targeted respondents. The selected respondents were considered to be key informants in the study area. Data was collected from primary sources using a questionnaire. Reliability of the questions and validity was tested through piloting. Ethics in research was observed and responses were handled with utmost confidentiality, while the study ensured fair gender representation of respondents. Data was analyzed by the aid of Microsoft Excel as well as the Statistical Package for Social Studies (SPSS) computer software through frequencies, means, percentages, correlation coefficient as well as regression method. Tables and graph were used for data presentation. The findings were that the funded organizations had a high dependency rate on the donor funds since their local project income generating activities lowly facilitated budgetary needs. Compliance to donor rules and regulations was significant in explaining financial performance of the donor funded organizations. The effect of knowledge levels of the donor rules and regulations on compliance was rated low, while the other factors affecting compliance to donor regulations were cited mainly as poor leadership in funded organizations, fraud and frequent regulations change. The effectiveness of the internal control systems of the donor funded organizations was rated moderate by half of the respondents. The internal controls infrastructure was found to be relatively poor, a factor enhancing propensity for errors and fraud. Capacity building programmes lowly contributed to ensure effectiveness and efficiency in financial management, and skills development of staff. Their budgetary allocations were also low in the funded organizations. In conclusion, the three factors of compliance review audits: compliance to rules and regulations, internal controls and capacity development affected the performance of donor funded organizations in Nyeri County. It was recommended that funded organizations should strengthen their policies and financial manuals to ensure that they envisage donor regulations and this information should be effectively disseminated to the project officials and/or staff. The donor funded organizations should also ensure that appropriate mechanisms are established and used to follow up management actions in response to audit recommendations.