Forensic Accounting Techniques, Firm Size and Financial Performance of Microfinance Institutions in Nairobi, Kenya

Abstract

The application of forensic accounting techniques in the Microfinance sub-sector in Kenya has not yielded the desired results, as microfinance institutions continue to register adverse financial reports occasioned by fraud. These results cut across the subsector, affecting small, medium, and large Microfinance Institutions. The study aimed at determining the effect of Forensic Accounting Techniques of Fraud Risk Management, Forensic Auditing and Investigation Techniques, Mobile Banking Technology, and Litigation Support Services on Financial Performance, and the role of Firm Size in the relationship between Forensic Accounting Techniques and Financial Performance of the MFIs in the Nairobi region of Kenya. The study was informed by the accountability Theory, the Foucaultian Theory of Panopticism, the Diamond Fraud Theory, the Technology Acceptance Theory, and the Market Power Theory. The research adopted a positivist philosophy, Correlational and Descriptive research designs. The study used cross-sectional data obtained from the financial reports of twelve MFIs licensed in Kenya that were in operation between the years, 2016 to 2020. The target population was 387 staff and management drawn from Operations, Finance and Credit Control, Internal Audit and Risk Management, External Auditors, Information Communication Technology, and Litigation Departments in the Nairobi region. Sampling was done using purposive and stratified random techniques to draw 281 respondents. Primary data was collected using a questionnaire, while Secondary data was obtained from the financial reports of the MFIs for the five years using a data content analysis guide. Validity and reliability were established through Cronbach's Alpha and pretests. Data was analyzed using hierarchical regression models, and the findings showed that the Forensic Accounting Techniques of Fraud Risk Management, Forensic Auditing and Investigation Techniques, Mobile Banking Technology, and Litigation Support Services positively and significantly affected the financial performance of MFIs in Kenya. Additionally, Firm Size had a positive and significant effect on the relationship between Forensic Accounting Techniques and Financial Performance. The study concluded that Forensic Accounting Techniques positively and significantly affected financial performance, and Firm Size had a positive and significant effect on the relationship between Forensic Accounting Techniques and Financial Performance. The study recommends that the management of MFIs enhance the procedures used in identifying, recording, and responding to fraud risks to reduce the occurrence and severity of fraud losses. The study further recommended that the management implement the external auditor’s recommendations on fraud prevention. In addition, the management and the Central Bank of Kenya should design training programs on fraud detection and risk management. Further, forensic accountants are used as expert witnesses to increase the success rate of fraud-related cases. Future research is recommended in the cost of implementing forensic accounting techniques on the financial performance of MFIs.