Partial fulfillment for award of Master of Commerce

The study aimed at proving that the financial ratios currently computed by Savings and Credit Co-operative Societies (SACCOs) in Kenya may not assist users of the financial reports towards detection of fraudulent financial reports; other ratios can bring in light possible fraud. Unpublished related previous studies in Kenya have dealt with both companies and co=operative movement from different perspectives. The results at different levels of this study indicate that the best financial ratios able to bring to light fraudulent financial statements are : members' shares and deposits dividend return, member's loan schedule balance/loan ledge balance; financial investment/total assets; (liquid investments + liquid assets - short term creditors)/total assets; non-earning liquid assets/total assets; net loans to members/total assets; gross loans to members/total assets, members' deposits/total assets. Second best are : net profit/total assets ratio; total operating expenses/average total assets ratio; and growth in members' loans rate. The results support the general alternative hypothesis that financial ratios can detect fraudulent financial reporting (FFR) by SACCOs in Kenya. Specific ratios not currently in use, in the SACCOs sector have the power to reveal FFR. The sample of 46 SACCOs (23 of them affected by fraud) were deliberately chosen. The analysis of ratios was conducted on 27 covariates, using the following methods: stepwise logistic regression model, discriminant analysis, and Pearson correlation - a method used to measure and confirm the possibility of earnings manipulation. According to the regulator, fraud poses a threat to the future existence of SACCOs in Kenya. The limitations to this study include: existence ofa possibility of having other unidentified ratios that can detect fraud, some financial reports could not be used to to incomplete reporting structures and information, and the sample of fraudulent financial reports and non-fraudulent financial reports were limited to reported cases only. Further study is suggested to determine the extent of earnings management and the power of ratios in detection of FFR using a larger sample of SACCOs, beside the multipurpose cooperatives and marketing co-operatives to complete the results of this study.

Full text available online at :

http://www.e-library.strathmore.edu/xmlui.ezproxy.library.strathmore.edu/handle/123456789/921