INTERNAL CONTROL PRACTICES AND FINANCIAL PERFORMANCE OF SPEKE

RESORT HOTEL MUNYONYO, KAMPALA-UGANDA

BY

BABIRYE ZAHARA NAMUGAANYI

216-035053-09337

A RESEARCH PROPOSAL SUBMITED TO THE FACULTY OF MANAGEMENT STUDIES,

DEPARTMENT OF BUSINESS STUDIES IN PARTIAL FULFILLMENT OF THE

REQUIREMENT FOR THE AWARD OF A MASTER’S IN BUSINESS

ADMINISTRATION DEGREE OF THE ISLAMIC

UNIVERSITY IN UGANDA

APRIL, 2018
Declaration

I hereby declare the originality of this proposal as an original deliverable of my own efforts

expect where explicit citations have been made. To the best of my Knowledge, it has not been

presented to any institution for any award whatsoever. All secondary sources have been duly

acknowledged.

SIGN: ………………………………………………………………….. DATE: ………………..

BABIRYE ZAHARA NAMUGAANYI (RESEARCHER)

i
Approval

I affirm that this proposal entitled “Internal control practices and financial performance of Speke

Resort Hotel Munyonyo (Kampala-Uganda)” has been done under my supervision and is

hereafter ready for submission with my approval.

SIGN: ………………………………………………………………….. DATE: …………………

TEERA JOWERIA (UNIVERSITY SUPERVISOR)

ii
 CHAPTER ONE:

Introduction

Background

Global debates in organizational development spheres have for long pushed for financial stability

through profitability (for Profit making organizations) and satisfactory service delivery for Non-

profit firms. As profit-oriented firms strive for maximum profits, non-profit firms equally strive

for social satisfaction (Ibrahim et al, 2017). In this pursuit, organization developers, researchers,

and managers are bombarded strategies in the bid to ensure financial performance of

organizations.

Besides the well-studied control systems, more specific reference to control components is

important in indicating financial performance of the institution Justin, (2018). Reconciling

financial and social performance through model based approaches is relevant to financial

performance. This is so because control components are associated with rigorous measurement

techniques that not only emphasize clear project-specific indicators but also attempt to assess if

superior impact was truly caused by the additional capital brought by impact investors Lazzarini, et

al., (2017).

Continentally, a commendable number of African economies most notably in the west and

Eastern Africa have been well addressed as regards Internal controls with much effort in the

finance and small scale operational environments (Collins, 2014). These policies are vital in

determining data reliability and integrity to facilitate operational efficiency and strategic goal

achievement. Internal controls are enforced to enable accurate data acquisition, less costly,

timely response and information completeness. Consequently, the decision making process is

made easy for the managers (Afra, 2015).

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Financial performance of institutions can be enhanced through control practices which include

separation of the roles , Cash Reconciliations and Reviews, authorization and approvals, and the

physical monitoring of the assets’ Security Gabriel, (2017). Internal control Components are

checks for all the financial transactions and activities within the organization. For example, an

Institution needs Bank Reconciliation practices to ensure that its financial records are in actual

correspondence with its actual records at the banks Wathowan, (2010).

In the East African Region, Several researchers (Mutua, (2014): Gabriel, (2017): Njiru, (2016))

reveal a positive relationship between internal control practices most notably cash reconciliation,

authorization and separation of roles with financial performance. These practices facilitate

authenticity of financial records, ensure efficiency during operational activities, protect assets

and regulate liquidity ratios of the institutions Wathowan, (2010).

Until of recent, researchers in the finance arena in Uganda had laid focus on financial

performance of Banks and micro-finance institutions with less interest in non-financial

institutions (Etengu & Amony, 2016). Most of the scholarly investments regarding Internal

controls in Uganda address financial institutions, Government, and profit making organizations.

(Aketch & Basheka, 2017) Provide some reference to Small and Medium Enterprise. None the

less, the scope remains limited.

Based on the limited contributions linking internal control practices and financial performance in

Uganda’s Hotel Industry, the purpose of this study will be to establish the effect of internal

control practices to financial performance of the Hotel Sector with specific Reference to Speke

Resort Hotel Munyonyo.

2
Statement of the Problem

In the continued pursuit of profitability among firms, internal control practices are vital to sustain

financial stability (Ibrahim et al, 2017). Through such practices, organizational accountability,

auditing, monitoring and communication are enhanced thereby facilitating financial

performance. Njiru et al., (2016) note that separation of duties, Cash Reconciliations and

Approvals help the institution to restructure its financial stand and improve their financial

performance.

Recent Researchers have extensively addressed the concept of internal control systems in

relation to financial performance (Etengu & Amony, 2016). This study confers with existent

research in relation to the banking sector and the Microfinance institutions.

However, although the studies address internal controls in the banking sector, Micro-finance

institutions and in SMEs, there are a few specific references to the Hotel industry. Besides, the

existent content is focused on the overall internal control systems such as control environments,

control Activities and Risk control. Contributions towards control components of Reconciliation,

authorization, and Separation of duties are still scarce hence the need for more contribution in

this line.

General Objective

The main objective of this study will be to relate Internal Control Practices and Financial

Performance of Speke Resort Hotel Munyonyo, Kampala-Uganda

Specific Objectives

To establish the effect of Reconciliation and Review on financial performance of Speke Resort

Hotel Munyonyo

3
To establish the effect of Segregation of duties on financial Performance of Speke Resort Hotel

Munyonyo

To establish the effect of authorization and approval on financial Performance of Speke Resort

Hotel Munyonyo

Research Hypothesis

There is not significance between Reconciliation and Review on financial performance of Speke

Resort Hotel Munyonyo

There is no significance between Segregation of duties and financial Performance of Speke

Resort Hotel Munyonyo

There is no significance between authorization and approval on financial Performance of Speke

Resort Hotel Munyonyo

Significance Of the study

Regardless of the profit motive of the organization, organizational performance is paramount to

any institutional performance (Ibrahim et al, 2017). Speke resort as profit making entity

consequently demands for proper cash reconciliation practices, Authorization and approval

practices, and segregation of duties so as to improve performance. This study seeks to establish

better policy enforcement procedures that would be of importance.

In addition to the existent scholarly literature and empirical evidence regarding the incorporation

of Internal control systems in organizational development. This study provides quantifiable

inference for subsequent researchers in the bid to further elaborate applicability of internal

control practices in the hotel industry let alone the financial Institutions in Uganda.

4
Research Scope and Limitations

Geographical Scope

Speke Resort is located 12Km via Gaba by road and is in the south East of Kampala city center

along Wavamuno Road. The Hotel is situated in idyllic setting in Munyonyo on the shores of

Lake Victoria

Content Scope

The study will be limited to assessing the effect of Internal Control Practices on the financial

performance of Speke Resort Hotel Munyonyo.

Time Scope

A time scope from 2012 to 2017 will be considered for comparative purposes. This time frame is

chosen because it is when there has been much discussions regarding internal control practices of

the Hotel Industry. Besides, this period has been associated to decreasing revenue and

administrative challenges in Speke Resort Hotel.

Definition of Operational Terms

Internal control

As defined by (Mawanda, 2011),Internal control systems are processes prescribed and

implemented by organizational governing personnel, associated stakeholders, and management

in pursuit of providing assurance to achievement of anticipated operational goals. These

encompass ensuring reliable financial reporting, compliance and efficiency of organizational

policies and regulations internal control is a diverse concept and of pivotal concern to all

operational entities.

5
Control Activities

According to (Ibrahim et al, 2017), Internal Control activities constitute of the approaches

enforced and instituted in the organization to facilitate attainment of organizational goals,

missions, and objectives. These act as check points of wastage, fraud, and asset mismanagement

within the organizations there by providing for systematic implementation of organizational

demands.

Conceptual Framework

Figure1: A Schematic conceptual framework

Internal Control Practices Financial Performance

Segregation of duties Profitability

Review and Reconciliation Asset Accumulation

Authorization and Approval Returns on Investment

Source: Primary data 2018

6
 CHAPTER TWO

Literature Review

Effect of Reconciliation and Reviews on Financial Performance

Wathowan, (2010) Studied control Environment and Liquidity levels in indigenous Ugandan

Commercial Banks. He suggested that commercial Banks have a million of daily transactions.

Therefore, Cash reconciliations within the institutions come in to confirm whether or not all the

deposits that were recorded were actually made. He therefore posited that reconciliation was

important in proving the correctness of the banks’ financial statement issued to the institution.

Thus, timeliness in financial Reconciliations and reviews ensures maintaining of true liquidity

levels thereby enhancing financial performance of the institution.

Afia, (2015) evaluated the effects of Internal Controls in the operation of financial institutions

with reference to Bond Savings and Loans Institutions in Ghana. Findings from his study

revealed that control activities like Cash Reconciliations and Reviews help ensure management

directives are carried out. He adds that Reconciliations ensure that necessary actions are taken to

address risks to achievement of the entity‘s objectives. According to him, Reconciliations may

occur through the organization, in all organizational functions and at all levels of the

organization.

Justin, (2018) assessed the epitome motive of Bank reconciliation and why it works for financial

institutions. In his perception, Bank reconciliation as a practice of comparing institutions’

records against the bank records was is significant to the financial performance of the institution.

The author further opines that reconciliation is a check point for financial performance because it

helps the institution to identify any unusual transactions that may be caused by fraud accounting

errors.

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Lazzarinin, et al., (2017) undertook an empirical study of Impact oriented investors. Central to

this study was to establish how reconciling financial and social performance through model

based approaches was relevant to financial performance. The study revealed that reconciliation

mechanism through contractual incentives will normally be associated with rigorous measurement

techniques that not only emphasize clear project-specific indicators but also attempt to assess if

superior impact was truly caused by the additional capital brought by impact investors.

Nick, et al. (2006) laid down a guide to Bank reconciliation, in this manual, they reveal two

significant roles of reconciliation within an institution. First, they suggest that Reconciliation and

Review helps to confirm the amount of the Cash that the institution believes it holds to the actual

existent amount of the cash at Bank. Secondly, It provides assurance of the correctness of the

books and records of the institution. It is based on this assurance that Bank reconciliation

becomes an important internal control activity.

The Aspen Center for Physics (ACP) documented an account Review procedure in which they

suggested the significance of Account Reconciliation and Review to the financial performance of

an institution. The authors commend that an Account Review procedure is significant as it

outlines the processes and the expectations for regular reconciliation and review of the sponsored

projects accounts by the financial administrators. Besides, Reconciliations and Reviews guide in

monitoring of the funds to ensure that the rate of expenditure is in line with project performance

and that there is timeliness in accounts adjustments ACP, (2014).

Oluwagbemiga et al, (2014) studied about Cost Management Practices in Manufacturing

Organizations drawing evidence from the data collected from data from 40 manufacturing

companies listed on the Nigeria stock exchange during the period of 2003 to 2012. Among the

key themes of the study was to ascertain how reconciliation practices impacted financial
8
performance. Results from the study revealed a significant relationship between Cash

Reconciliations and financial performance of the organizations.

Njiru, (2016) also outlined Reconciliation and Reviews as significant Internal control practice in

facilitating financial performance of Public Water supply companies. the results from this

descriptive investment reveal a significant relationship between financial performance and Public

Water supply entities.

Njeru et al., (2015) explored the effect of cash management on financial performance of deposit

taking SACCOs in Mount Kenya Region. The study among others evaluated the relevance of reviews

and reconciliations as an internal control practice on financial performance of such institutions. Best

on the results therein specified, the study recommended that there was an urgent need for cash

control practices to guarantee improved financial performance.

Effect of Segregation of Duties on Financial Performance

Asoke (2005) wrote about financial management from a management perspective, in this study

he revealed the importance of segregation of duties noting that the likelihood of fraud and theft,

which may reduce organizational performance, is reduced this is witnessed in the event that there

may be necessity of allying with others in undertaking an offence. For example, a person selling

seats to a movie may be tempted to pocket some money received from customers who enter the

theatre. This temptation is realized if the person staffing the box office is required to issue tickets

that are then collected by a different employee as people come into the theatre.

Njiru, (2016) assessed the effect of internal controls on the financial performance of public

Water companies, the specific areas of focus in this study included the segregation of duties,

cash reconciliation, inventory audits, cash management. Based on the findings of this study, it

9
was established that these internal control practices had a significant impact on the financial

performance of public water companies. The author therefore maintained that the separation of

roles helped improve financial performance of such companies.

Assigning different people the responsibilities of authorizing transactions, recording transactions,

and maintaining custody of assets is intended to reduce the opportunities to allow any person to

be in a position to both perpetrate and conceal errors or fraud in the normal course of the

person’s duties. Examples of segregation of duties include reporting, reviewing and approving

reconciliations, and approval and control of documents Mary, et al., (2014).

According to Manasseh, (2004) segregation of duties reduces the risk of fraud and error and

manipulation in the business thus increasing efficiency in the company’s operations and

improving performance. Plan of organization should describe proper separation of functional

responsibilities. Authorizing transactions and running a department should not be the

responsibility of one person.

Meyer, & Rowan, (1977) presented an early conceptualization of the internal control practices

reference to higher level policies under which institutional duties can be assigned. Certain

control activities may depend on the existence of appropriate higher level policies established by

management or those charged with governance. For example, authorization controls may be

delegated under established guidelines, such as investment criteria set by those charged with

governance; alternatively, non-routine transactions such as major acquisitions or divestments

may require specific high level approval, including in some cases that of shareholders. This will

help curb malpractices like a rogue employee selling a company asset without proper authority.

10
Ljubisavljević, & Jovanovi, (2011), documented an empirical research on the internal audit

position of companies in Serbia, as their findings, synergy of applicability of internal control

activities does exist depending on the size of the company. The concepts underlying control

activities in small entities are likely to be similar to those in larger entities, but the formality with

which they operate varies. Further, small entities may find that certain types of control activities

are not relevant because of controls applied by management. For example, management’s

retention of authority for approving credit sales, significant purchases, and draw-downs on lines

of credit can provide strong control over those activities, lessening or removing the need for

more detailed control activities.

Consistently, an appropriate segregation of duties often appears to present difficulties in small

entities. Companies that have only a few employees, however, may be able to assign their

responsibilities to achieve appropriate segregation or, if that is not possible, use management

oversight of the incompatible activities to achieve control objectives (ISA UK and Ireland 315).

Effect of Authorization and approval on financial Performance

Gabriel, (2017). Wrote about the effect of Internal Controls on Micro-finance Institutions in

Kenya Specifically, the study evaluated the relationship between Authorization and approvals in

ensuring better financial performance of the institutions. the author maintained that the scope and

volume of MFI preclude the owners from authorizing every activity or product in the

organization forcing them to hire managers to do that work. With reference to the agency theory,

the authors recommended that authorization and approval is done by someone hierarchical

superior as authorization by peers may be prone to influence and partiality.

11
The COSO framework also establishes that a documented level of authority creates an expectation

of responsibility and accountability. Only those acting within the scope of their responsibility should

authorize, approve, and execute transactions. Consequently, the authorizer and the approver are, to

some extent, just as accountable as the person executing the transaction. Because of this, managers

and employees must have actual knowledge of the transactions they approve and should question any

unusual items before signing COSO, (2010).

Mary et al., (2014) studied the effect of internal control systems on the financial performance of

sugar cane out growers in Kenya. Specifically, they established how the internal control practices

like authorization and reconciliations affect the financial performance of such firms. Based on the

evidence of the data collected from the nine Sugar Cane grower institutions in Kenya, The study

revealed a positive significance between financial performance and internal control activities.

According to the Minnesota Management and Budget, (2010), Authorization and approval are

significant Internal Control practices in pursuance of financial performance of an institution.

They mitigate the risk of inappropriate transactions. They serve as fraud deterrents and enforce

segregation of duties. Thus, the authorizer and the approver should generally be two separate people.

Protiviti (2007). Consistently notes that the responsibilities partaken in a particular level define

the position occupied by the appropriate officer. MFI’s have given their officers different levels

in terms of approving payments and advancing loans. This system is based on the order of

seniority of the officers such that senior officers approve cheques bearing bigger amounts

relative to junior officers. There is a sealing for every position such that the holder of that

particular position cannot approve cheques more than the sealing put (Wright 2002).

According to Carmichael (1999), through laying explicit duties for the authoritative personnel,

Authorization and Approval may enhance adherence and synchronization of financial activities
12
within the Institution. Officers have variant responsibilities depending with a particular MFI and

position held along the organization structure.

Authorization and Approval is an important control exercised by the MFI’s. It is destined to

ensure objectivity in reviewing payments COSO, (2004). It ensures each of the officer’s check

the authenticity of the payment notwithstanding the fact that it has been attended by other

signatories. It is hard for one officer to pass payment single handedly COSO, (2002).

Besides the hierarchical authority as provided by the agency theory and the specific

organizational staffing, approval and authorization as an internal control can also be boosted by

the mandates given to the bank for transacting the accounts of an institution. An MFI can give

conditionality after appointing signatories as all to sign, some to sign or mandatory signatories.

The agency theory, stewardship theory and management control theories are relevant to

authorization and approval of accounting transactions and aspects surrounding it Gabriel, (2017).

Summary of the Research Gaps

The Existent researches both globally and locally have extensively addressed internal control

systems and its relationship to financial performance of financial institutions, Micro-finance

institutions, and the Small and Medium enterprises. This study confers to this relationship.

However, the study differs with the existent contributions in terms of the area of focus and the

content scope. Majority of studies focus on

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 CHAPTER THREE:
Methodology
Research Design

In this study, A Descriptive research design will be employed in the study. (Mutua, 2014) In his

study on chain supply of 5 star hotels in Kenya successfully employed a descriptive research

design. According to (Mutua, 2014), descriptive research design is successfully applicable to

such a study because it allows the researcher to find out the size, distribution, and form of a

given phenomenon. Consequently, it is easy to deduce statistical inference representing a

broader population and ascertaining real life implication of the findings.

Study Population

Selected a target population is vital in a successful study, although the entire population may not

participate in the study; the selected population is assumed to be a valid representative of the

entire population (Robinson, 2014). The target population of this study will categorically consist

of the operational managers, the hotel employee, Clients, Policy maker in charge of tourism and

Hotel Industry, and the local community surrounding the Hotel Premises.

Sample size

Out of the entire composition of these categories, the study will consider a target sample of 5

operational managers, 20 hotel employees, 40 Clients, 10 Policy makers in charge of tourism and

Hotel Industry, 25 members from the local community surrounding the Hotel Premises. The

Sample size is illustrated in the frequency distribution below;

14
 Table 1: An illustration for the sampling and Sampling Technique (source: Primary data 2018)

Category Sample Sampling Technique

Clients 40 Simple Random sampling

Operational Managers 10 Purposive Sampling

Hotel employees 20 Simple Random Sampling

Local Community 25 Simple Random Sampling

Hotel and Tourism professionals 05 Purposive Sampling

Source: primary data 2018

Sampling Techniques

Sampling technique refers to the approach adopted so as to ascertain a representative sample of

research participants from the entire target population. Some of these techniques include

probability sampling, random sampling, and purposive sampling. Regardless of the technique

chosen, the selected sample is perceived to exhibit characteristics of the entire study population

(Robinson, 2014).In this study, two approaches; simple random sampling and Purposive

sampling will be used in the sampling process.

Simple Random Sampling (SRS)

The Simple Random Sampling approach involves ascertaining a criterion upon some cases of the

entire population will be selected. This approach is often applied on large scale and sparsely

populated participants for example during opinion polling and public advantage selection

(Robinson, 2014).Simple Random Sampling will be used to select 40 hotel clients, 25 local

community members from the nearby premises of the Hotel, and 20 Hotel employs below the

managerial hierarchy.

15
Purposive sampling

Purposive sampling evolves selected specific individuals from the population. This specificity in

selection is drawn towards the sample’s possession of sector specific and unique knowledge in

regard to the study for example professionals of specialized expertise in a given pattern of

Knowledge which is otherwise limited to the rest of the population (Robinson, 2014). This

particular approach will be used to select 5 professionals in the Hotel and Tourism sector and 10

operational managers in the Hotel industry.

Data collection Instruments

In the data collection process, the study employs Questionnaires, and Interviews as the data

collection instruments. These approaches are commended for their ability to seek for insight

information (Reja et al, 2003,).

Questionnaires

This study will employ both open ended and closed ended questioners. Open ended questionnaire

facilitate open mindedness of the respondents in expressing their opinions thereby eliminating

researcher based bias in the study (Reja et al, 2003, p.162). However, Open-ended questionnaires

are associated to coding complexities in extraction of knowledge. As such, they may be less

effective in providing solutions in complex questions. To fill this gap, closed ended

questionnaires will provide pre-encoded responses from which the participants will select from

(Holland & Christian, 2009, p.197). Closed ended questionnaires eliminate coding complexities

in the data collection process thereby simplifying the collection of quantitative data.

16
Interview guides

The interview approach involves face to face between the two parties; the interviewer and the

interviewee. Interviews are highly adaptive and effective in primary data collection because they

facilitate detailed insight of the respondents’ views regarding the issues of interest. According to

(Bonham and Bacchi, 2017), focusing on response exactness provides benchmarks for reducing

post-structural difficulties of the study.

Data Validity and Reliability

According to (Leung, 2015), Research validity is determined by the research process

appropriateness. For a valid research, the methodology used should be corresponding to the

research purpose and objectives without disregard to relevance of the research variables used in

the analysis. It should precisely provide solutions to the research question established. In pursuit

of validity, Zohrabi (2013) maintains that the dynamic nature of modern research ventures

demand that the evaluation of the research process should be clearly traced from research

initiation to completion. Additionally, research feasibility should be ascertained before Kick

starting the process.

Leung (2015, p. 326) also explains that reliability of the study is its ability provide the same

results in the event that it is carried out in future or was carried out in preceding investments.

While controlling for other intervening factors, the study carried out under same research

constraints should provide similar inferences or with minimal errors

Data Processing and analysis

As technology takes its course, new complexities emerge in regard to data extraction, encoding

and analysis. In this light there should be well structured time, and cost effective data processing

17
and analysis mechanism (Zhang et al. 2017). In this particular study, data collected from the

respondents will be encoded and presented for analysis. Two main platforms will be used in the

analysis; Excel Microsoft program and The Statistical Package For Social Scientists (SPSS)

program. Statistical descriptive like frequencies, means, standard deviations will be used to

illustrate the demographic characteristics of the respondents and where possible, graphical

illustrations will be employed. In response to the research questions and for purposes of testing

the research hypothesis, Regressions and correlational relationships will be developed depict

how the constructs of control activities, liquidity regulation, and risk assessment relate to

financial performance of Speke Resort Hotel Munyonyo. Interpretation of these findings will

thereafter be discussed and concluded upon in the final documentation of this study

18
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