An Examination of the effect of internal controls on fraud mitigation among commercial banks in Kenya

Abstract

Fraud continues to be a persistent threat to the stability and integrity of commercial banks in Kenya, notwithstanding the existence of regulatory frameworks and governance mechanisms. The Central Bank of Kenya (2024) reported a 264 per cent increase in fraud-related losses to KShs 1.5 billion in 2024, underscoring the severity and escalation of financial crime within Kenya's banking sector. This study examined the effect of internal controls on fraud mitigation among commercial banks in Kenya, focusing on four components drawn from the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework: Control Environment, Control Activities, Monitoring of Controls, and Risk Assessment Policy. The study was anchored on the Fraud Diamond Theory and Routine Activity Theory. Anchored in the positivist philosophy and employing an explanatory research design, the study gathered quantitative data through structured questionnaires from 91 respondents, 35 Chief Risk Officers and 56 Internal Auditors, spanning 35 commercial banks, achieving a response rate of 82.0% against a revised target of 111. The data were subjected to descriptive statistics, principal component factor analysis, Pearson correlation analysis, model diagnostic tests, and ordinal logistic regression to examine the hypothesized relationships. The findings indicate that all four internal control components had a statistically significant positive effect on fraud mitigation. Control Activities had the strongest positive effect, followed by Control Environment, Monitoring of Controls, and Risk Assessment Policy. These findings are consistent with and provide empirical support for both the Fraud Diamond Theory and Routine Activity Theory, confirming that internal controls reduce fraud opportunities and strengthen organizational guardianship. The study recommends strengthened regulatory oversight by the Central Bank of Kenya, continuous professional training in fraud detection, investment in technology-driven fraud detection systems, and the adoption of dynamic, integrated risk management frameworks to enhance fraud mitigation among commercial banks in Kenya.