EFFECT OF FINANCIAL CONTROL SYSTEMS ON ORGANIZATIONAL PERFORMANCE
A CASE STUDY OF KIRUHURA DISTRICT LOCAL GOVERNMENT
CHAPTER ONE
INTRODUCTION
1.0 Introduction
This chapter presents the background of the study, the problem statement, purpose of the study, research objectives, research questions, scope of the study, significance of the study, and definitions of key terms.
1.1 Background of the Study
1.1.1 Historical Perspective
According to Downes and Goodman (2014), financial control refers to the processes and activities involved in managing an organization’s financial resources, including cash receipts, payments, and financing operations. An effective financial control system helps prevent fraud and errors, minimizes financial wastage, safeguards assets, and ensures the reliability of accounting records. It also strengthens confidence in financial reporting and supports sound decision-making.
Bohlin et al. (2016) argue that well-implemented financial control systems are generally associated with improved organizational performance. Such systems enhance financial reporting processes and promote accountability by ensuring the production of accurate and reliable financial information, which is essential for effective management.
Haselip (2015) highlights that organizational development plays a key role in promoting economic self-reliance and industrial progress, particularly through the growth of small and medium enterprises (SMEs). SMEs contribute significantly to addressing issues such as poverty, unemployment, and economic imbalance (Chang et al., 2012).
In today’s highly competitive business environment, professional management of small businesses is crucial for survival (Banabo & Koroye, 2011). However, many SMEs experience high failure rates due to poor financial management practices. Nwanko et al. (2012) note that a major weakness among small business managers is the lack of effective financial control systems.
Additionally, investors require confidence in financial reports before committing resources. The ability of management to produce reliable financial statements depends largely on the strength of internal financial controls. Although no system can completely eliminate errors, effective controls significantly reduce the risk of financial misstatements (Finkler et al., 2016).
Osadchy (2015) emphasizes that financial control systems are internal mechanisms designed to help organizations achieve financial objectives. These controls ensure proper use of resources, protect against fraud and inefficiency, promote compliance with policies, and enhance performance evaluation.
Despite their importance, financial control systems at some organizations, such as Global Paints Company Ltd, have been found to be weak and inconsistent. Issues such as delayed issuance of receipts and poor record-keeping hinder accountability and auditing processes. This study therefore seeks to examine the effect of financial control systems on organizational performance, with specific reference to Kiruhura District Local Government.
1.1.2 Theoretical Perspective
This study is guided by the Diffusion of Innovation Theory, which explains how new ideas and systems are adopted within organizations. The theory identifies four key elements influencing adoption: the innovation itself, communication channels, time, and the social system (Haung & Kapur, 2007).
Rogers (2003) categorizes adopters into innovators, early adopters, early majority, late majority, and laggards, each with different levels of readiness to embrace change. Successful adoption of innovations such as financial control systems depends on organizational support, communication, and individual perceptions.
The theory further emphasizes the role of communication channels and opinion leaders in influencing adoption decisions (Cartwright & Hammond, 2007). In the context of financial control systems, effective communication and training can enhance acceptance and utilization within organizations.
Strengths of the Theory:
- Highlights the importance of innovation in improving organizational performance.
- Emphasizes effective communication as a driver of successful system adoption.
- Recognizes the role of time in implementing organizational changes.
Weakness:
- The theory does not clearly specify the types of innovation applicable in different organizational contexts.
1.1.3 Conceptual Perspective
Financial control refers to procedures established to safeguard assets and ensure accurate recording of financial transactions, thereby preventing fraud and errors (Block & Geoffrey, 2008). The primary objective of financial control systems is to ensure efficient resource management, reliable financial reporting, and compliance with policies and regulations.
Strong financial control systems enhance operational efficiency, support decision-making, and protect stakeholder investments (Hayles, 2005). In the public sector, where large amounts of public funds are managed, financial accountability is particularly critical (Prowle, 2010).
Organizational performance refers to the extent to which an organization achieves its goals and objectives. It includes financial performance (profitability), market performance (sales and market share), and stakeholder value (Richard et al., 2009). Evaluating performance is essential for strategic management and continuous improvement.
1.1.4 Contextual Perspective
Kiruhura District Local Government operates under the Local Government Act (2006), which requires efficient utilization of resources and effective service delivery. Established in 2005, the district is headed by an LC V Chairperson and a Chief Administrative Officer.
The district faces challenges in financial management, including procurement irregularities, inflated supplier prices, and payments for undelivered services. These issues highlight weaknesses in financial control systems and raise concerns about accountability and transparency within the district.
1.2 Problem Statement
Despite having an established finance department, Kiruhura District Local Government has experienced challenges in financial management. Assessment reports (2007–2008) revealed poor performance, resulting in reduced funding from the central government.
Issues identified include poor procurement practices, lack of transparency, and weak enforcement of financial controls. Reports from oversight bodies such as the Auditor General and the Inspectorate of Government indicate cases of mismanagement, embezzlement, and financial irregularities.
These challenges suggest that existing financial control systems may be inadequate. However, it remains unclear whether strengthening these systems would significantly improve organizational performance. This study therefore seeks to investigate the effect of financial control systems on the performance of Kiruhura District Local Government.
1.3 Purpose of the Study
The purpose of this study is to examine the effect of financial control systems on organizational performance.
1.4 Objectives of the Study
- To establish the benefits of financial control systems in an organization.
- To identify challenges associated with the use of financial control systems.
- To examine the relationship between financial control systems and organizational performance.
1.5 Research Questions
- What are the benefits of financial control systems in an organization?
- What challenges do organizations face in implementing financial control systems?
- What is the relationship between financial control systems and organizational performance?
1.6 Scope of the Study
1.6.1 Content Scope
The study focuses on the effect of financial control systems on organizational performance, specifically examining their benefits, challenges, and relationship with performance.
1.6.2 Geographical Scope
The study will be conducted in Kiruhura District, located in Western Uganda.
1.6.3 Time Scope
The study will consider data from 2012 to 2018, while literature reviewed will cover the period from 2009 to 2018. The study itself will be conducted between February and July 2018.
1.7 Significance of the Study
The findings of this study will be useful to researchers, academicians, and policymakers by providing insights into the benefits and challenges of financial control systems. It will also contribute to understanding the relationship between financial control systems and organizational performance, thereby supporting improved financial management practices.
References
(References retained as provided)
