FACTORS AFFECTING MANAGEMENT OF ROYALTIES WITHIN THE

MUSIC INDUSTRY IN KENYA: A CASE STUDY OF MUSIC COPYRIGHT

SOCIETY OF KENYA

BY
WACHIRA ROY WAWERU

A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF

THE REQUIREMENT FOR THE AWARD OF A DIPLOMA IN BUSINESS
MANAGEMENT TO THE KENYA INSTITUTE OF MANAGEMENT.

APRIL 2017
 DECLARATION
Declaration by the Student
This research project is my original work and has never been presented to any other
examination body. No part of this research should be reproduced without my consent
or that of the Kenya Institute of Management.

Name……………………………..Signature……………………………Date…………
KIM/DBM/19143/15

Declaration by the Supervisor

This project has been submitted for defense with my approval as the Kenya Institute
of Management.

Name………………………………Signature………………………..Date……………
Lecturer supervising

For and on behalf of the Kenya Institute of Management

Name ……………………………..Signature ………………………Date……………..

Manager –Nairobi Branch

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 DEDICATION
This research project is dedicated to my parents Mr. and Mrs. Wachira who supported
me during this period.

iii
 ACKNOWLEDGEMENT
This research study is a result of support from several sources; first I would like to
give praise and honor to the Almighty God for giving me sufficient grace and power
to write this project. I would also like to thank my supervisor Mr. Alexander Katuta
whose comments and advice were very useful to me. I would like to thank the entire
Kenya Institute of Management staff for their continued support and also the
management of Music Copyright Society of Kenya for allowing me to conduct this
study at their premises. Thank you all for it is every ones individual support that has
contributed to my success in finishing the project.

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 ABSTRACT
This research study aimed at factors affecting management of royalties within the
music industry in Kenya with reference to the Music Copyright Society of Kenya. The
specific objectives of the study were to determine the effects of control systems on
Management of royalties within the music industry, government policy, and auditing
and to establish the effect of employee competence on management of royalties
within the music industry in Kenya. This study will be significant to the management
of Music Copyright Society of Kenya and other researchers.

The researcher adopted descriptive research design. The design was preferred because
it is concerned with answering questions such as who, what, which, how, when and
how much. The study covered a population of 74 employees in the organization and
used census where the entire target population formed the sample size. Questionnaires
were used to collect primary data. Both quantitative and qualitative methods were
used for analysis and data was presented in tables and figures.

The findings were that 76% of the population agreed that control systems affect
management of royalties within the music industry while 24% disagreed. Seventy two
percent agreed that technology affects management of royalties within the music
industry while 28% disagreed. A population of 88% of respondents indicated that
government policy affects management of royalties within the music industry while
12% disagreed. Seventy one percent indicated that auditing affects management of
royalties within the music industry while 29% disagreed. A majority of 91% agree
that the employee competence affects management of royalties within the music
industry while 9% of the respondents disagreed.

The researcher recommended that MCSK should report on the effectiveness of their
internal controls and develop a robust digital toolkit to build a premium inventory,
either in targeted and tagged site areas or interest-specific e-newsletters or
registration-driven applications. The government should come up with policies which
encourage and bring morale to artists through effective management of royalties.
They should conduct thorough audit constantly in all departments to induce discipline
in the organization’s workforce and ensure skills and knowledge retention of
specialized skills, thereby helping to manage the music company's employee turnover
better.

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 TABLE OF CONTENTS
DECLARATION………………………........................................................................ii
DEDICATION...............................................................................................................iii
ACKNOWLEDGEMENT.............................................................................................iv
ABSTRACT....................................................................................................................v
TABLE OF CONTENTS...............................................................................................vi
LIST OF TABLES.......................................................................................................viii
LIST OF FIGURES .......................................................................................................ix
LIST OF ABBREVIATIONS.........................................................................................x
OPERATIONAL DEFINITION OF TERMS................................................................xi

CHAPTER ONE
INTRODUCTION OF THE STUDY
1.1 Introduction...........................................................................................................1
1.2 Background of the Study......................................................................................1
1.3 Statement of the Problem......................................................................................3
1.4 Objectives of the Study.........................................................................................4
1.5 Research Questions...............................................................................................5
1.6 Significance of the Study......................................................................................5
1.7 Limitations of the Study........................................................................................6
1.8 Scope of the Study................................................................................................6

CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction ..........................................................................................................7
2.2 Review of Theoretical Literature .........................................................................7
2.3 Critical Review...................................................................................................28
2.4 Summary.............................................................................................................29
2.5 Conceptual Framework.......................................................................................31

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 CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
3.1 Introduction .......................................................................................................33
3.2 Study Design ......................................................................................................33
3.3 Target Population................................................................................................33
3.4 Sample Design....................................................................................................34
3.5 Data Collection Procedures.................................................................................34
3.6 Data Analysis Methods.......................................................................................35

CHAPTER FOUR
DATA ANALYSIS, PRESENTATION AND INTERPRETATION OF
FINDINGS
4.1 Introduction .......................................................................................................36
4.2 Presentation of Findings.....................................................................................36
4.3 Summary of Data Analysis.................................................................................51

CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction…………….....................................................................................53
5.2 Summary of Findings..........................................................................................53
5.3 Conclusions.........................................................................................................54
5.4 Recommendations...............................................................................................55
5.5 Suggestions for Further Study............................................................................56
REFERENCES...........................................................................................................57
APPENDICES
Appendix - I Letter of Introduction
Appendix – II Questionnaire

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 LIST OF TABLES
Table 3.1 Target Population....................................................................................33
Table 3.2 Sample Size.............................................................................................34
Table 4.1 Response Rate.........................................................................................36
Table 4.2 Gender.....................................................................................................37
Table 4.3 Levels of Management............................................................................38
Table 4.4 Years Worked in the Organization …….................................................39
Table 4.5 Highest Level of Education.....................................................................40
Table 4.6 Effect of Control Systems.......................................................................41
Table 4.7 Extent of Effect of Control Systems.......................................................42
Table 4.8 Effect of Technology...............................................................................43
Table 4.9 Extent of Effect of Technology...............................................................44
Table 4.10 Effect of Government Policy..................................................................45
Table 4.11 Extent of Effect of Government Policy...................................................46
Table 4.12 Effect of Auditing...................................................................................47
Table 4.13 Extent of Effect of Auditing....................................................................48
Table 4.14 Effect of Employee Competence............................................................49
Table 4.15 Extent of Effect of Employee Competence.............................................50

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 LIST OF FIGURES
Figure 2.1 Conceptual Framework..........................................................................31
Figure 4.1 Response Rate........................................................................................36
Figure 4.2 Gender...................................................................................................37
Figure 4.3 Levels of Management..........................................................................38
Figure 4.4 Years Worked in the Organization ……...............................................39
Figure 4.5 Highest Level of Education...................................................................40
Figure 4.6 Effect of Control Systems......................................................................41
Figure 4.7 Extent of Effect of Control Systems......................................................42
Figure 4.8 Effect of Technology.............................................................................43
Figure 4.9 Extent of Effect of Technology.............................................................44
Figure 4.10 Effect of Government Policy.................................................................45
Figure 4.11 Extent of Effect of Government Policy.................................................46
Figure 4.12 Effect of Auditing..................................................................................47
Figure 4.13 Extent of Effect of Auditing..................................................................48
Figure 4.14 Effect of Employee Competence...........................................................49
Figure 4.15 Extent of Effect of Employee Competence...........................................50

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 LIST OF ABBREVIATIONS
ARM Audit Risk Model
IAF Internal Audit Function
ICS Internal Control Systems
ICT Information and Communication Technology
IIA Institute of Internal Auditors
IR Inherent Risk
KIM Kenya Institute of Management
MCSK Music Copyright Society of Kenya
MDGs Millennium Development Goals
MFIs Micro Financial Institutions
NRB Nairobi

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 OPERATIONAL DEFINATION OF TERMS
Auditing Is a planned and documented activity performed by
qualified personnel to determine by investigation,
examination, or evaluation of objective evidence, the
adequacy and compliance with established procedures,
or applicable documents, and the effectiveness of
implementation.

Control System is a device, or set of devices, that manages, commands,

directs or regulates the behavior of other device or
system. Water company control systems are used in
water company production for controlling equipment or
a machine.

Employee Competence Employee competence is the ability of an

individual to do a job properly. A competency is
a set of defined behaviors that provide a
structured guide enabling the identification,
evaluation and development of the behaviors in
individual employees.

Government Policy These are the government regulations which govern the
operation of any company in the country. They include
licensing, insurance, employee rights. The company
should comply with government regulations to suit the
law governing the country.
Technology The entire infrastructure necessary for the design,
manufacture, operation, and repair of technological
artifacts

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 CHAPTER ONE
INTRODUCTION OF THE STUDY
1.1 Introduction
This study sought to investigate the factors affecting management of royalties within
the music industry in Kenya. The study consisted of eight sections that is the
background of the study, statement of the problem objectives of the study, research
questions and the significance of the study, scope and limitations of the study.

1.2 Background of the Study

The global music market is dominated by Europe and North America, each
accounting for around one third of total music sales. Asia – dominated by the
Japanese market accounts for a little under a quarter of the global sales of recorded
music. Historically, the industry has been subject to considerable volatility. On the
demand side, the unpredictable nature of the consumer means that non-price factors
such as fashion ability, herd behaviour, and experimentation have had a profound
influence on the music market. Adapting to and channeling these influences has
become a major focus of the leading firms in the music industry and an increasingly
dominant influence on investment strategies. On the supply side, technological
developments have not only allowed better and cheaper ways of delivering music to
the consumer but have also generated new products to enter the market. Such
developments have, periodically, allowed independent firms to enter an industry
which, otherwise, tends towards high levels of concentration through large vertically
integrated firms (Fink, 2009).

Despite the financial leverage of the majors, technological shocks continue to shape
the industry. Owing to the impact of new digital technologies especially Internet
technologies that enable direct downloading of music distribution costs will be
reduced substantially, thus allowing new entrants. These latest technological
developments in the industry threaten to change the balance of power within the
music market, thereby allowing consumers worldwide direct access to their favorite
artists at discounted prices. Consumers will be able to entirely bypass traditional
retailers, with significant implications for the cost structure and configuration of the
present industry. The five major music companies are extremely concerned about the

1
latest developments in entertainment technologies and are already preparing
themselves for Internet’s full impact (Andersen and Howells, 1999).

The music business attracts various taxpayers such as songwriters, producers,

entertainers, executives, artists, etc., that present unique problems in an income tax
audit. There is a need to discover how the industry operates, what sources of income
are available to these types of taxpayers, and how the income flows through the
industry. Mechanical royalties are paid for the reproduction of songs in the form of
tapes, records, or sheet music. This also includes synchronization fees for videos and
music for motion pictures and television films. The Harry Fox Agency collected over
$200 million in 1988 and distributed it to over 6,000 publishers. The publishers keep
one-half of the royalties and distribute one-half to the writers. The writers normally
get a payment statement twice a year as well as a Form 1099 from the publisher.
Quarterly accountings and payments are made. Record companies pay from $3,000 to
$150,000 "up front" to produce a record. The record company recovers its full cost
from record sales before the artist gets anything. After costs are recovered, a
percentage is deducted for return of records and the cost of the record jacket. The
artist will get 5 percent to 13 percent of the suggested retail after the above amounts
are deducted. It is suggested that examiners review the contract to determine if it calls
for a percentage of retail or wholesale.

There are a number of special problems in the music industry. The first is the cost that
it takes to generate income. Vast sums are spent for travel, clothes, instruments,
bands, buses, motels, and uniforms. There are periods of feast and famine. There is
extensive bartering activity in the industry. It occurs in the form of swapouts
(advertising for cars, advertising for tickets, etc.). There is a saying in the industry, "If
you don't promote, something awful happens nothing!" The top 10-20 percent of the
artists get 80-90 percent of the industry gross income. The other 80-90 percent get the
remaining portion. There are many checks and balances in the industry on income
reporting, but some activities such as playing small clubs for the door receipts, love
offerings at concerts and churches, and concession sales at the small locations, etc.,
present situations where income may go unreported.

2
Mechanical royalties are fees paid to the copyright owner of a song (usually the
songwriter and/or the music publisher) for the right to reproduce the song on a
recording. The U.S. Copyright Act provides that once a song has been commercially
released, any other artist can record and release their own version of that song in an
audio-only format (CD, cassette tape, vinyl, digital download etc) without the
copyright owner’s permission so long as they pay the copyright owner or the
copyright owner’s publisher the minimum statutory royalty rate for every copy of
their version of the song that is pressed and distributed.

1.2.1 Profile of Music copyright society of Kenya

The Music Copyright Society of Kenya (MCSK) is a copyright collection society for
Kenya. It collects royalties on behalf of authors, composers, arrangers, and publishers
of music. It collects royalties for public performances and mechanical reproductions.
In Kenya, the Kenya Copyright Board supervises the collection and disbursement of
royalties. Related organizations include the Performers Rights Society of Kenya and
the Kenya Association of Music Producers. In 2015, a number of artists including
Elijah Wainaina Mira, Francis Jumba, and Carolyne Wanjiru Ndiba filed suit against
MCSK, the Copyright Board, and other organizations claiming the right to collect
royalties for their own works. The Kenya Copyright Board has also formally
complained that MCSK's disbursement of royalties disbursed to artists has been
decreasing for several years, falling to 58.9% of collected revenue, well below the
70% standard established by the Kenya Copyright Board. The MCSK has had
problems from the Copyright Board in the past; in 2011 it was "deregistered" as an
official collecting society

1.3 Statement of the Problem

Digital music providers have led the way in developing systems to calculate royalty
payments to the various collection agencies and claimants who require a percentage of
the sale of any given song. Aptitude works with digital service providers to implement
systems that can accurately calculate and efficiently report to rights holders and
collection societies about which songs have been sold. In the digital music industry,
existing systems can limit how efficiently suppliers can report sales, reconcile
representation rights and calculate royalty expenses. Inertia in the adoption of global
communication standards (like DDEX) and the lack of universal song identifiers

3
burden this process. Managing cash flow is often a major challenge for digital service
providers who need to accurately forecast outgoing royalty expenses. With new
purpose-built royalty management systems, many providers have cut sales reporting
time from weeks to hours, and can more easily resolve disputes with rights holders,
ensuring that they are paid promptly and correctly.

In many ways, the challenges are the same regardless of whether you’re selling digital
movies, applications, music, news or books. A royalty management system should
automate the process of generating sales reports, ingesting invoices from content
providers, reconciling rights, and generating accruals. An appropriate solution should
be flexible enough to manage new business models and ways of selling content in an
industry that has the potential to do anything but remain static. The current state of the
digital media industry is characterized by complex supply chains, widely distributed
content and varying rights agreements. The arguments rage on about the fairness of
how royalties are calculated and distributed but regardless of their value, they still
need to be accurately reconciled to avoid disputes and potential costs later on. By the
support for and use of supply chain messaging standards and by getting the systems in
place to deal with these and future business processes efficiently, content creators,
distributors and providers can better work together to get great products in front of a
paying audience. This study therefore sought to assess factors affecting management
of royalties within the music industry in Kenya.

1.4 Objectives of the Study

1.4.1 General Objective
The main objective of this study was to investigate the factors affecting management
of royalties within the music industry in Kenya

1.4.2 Specific Objectives

1.4.2 Specific Objectives
i. To examine the effect of control systems on management of royalties within
the music industry in Kenya
ii. To examine the effect of technology on management of royalties within the
music industry in Kenya

4
 iii. To establish the effect of government policy on management of royalties
within the music industry in Kenya
iv. To assess the effect of auditing on management of royalties within the music
industry in Kenya
v. To examine the effect of employee competence on management of royalties
within the music industry in Kenya

1.5 Research Questions

i. How do control systems affect management of royalties within the music in-
dustry in Kenya?
ii. To what extent does technology affect management of royalties within the mu-
sic industry in Kenya?
iii. How does government policy affect management of royalties within the music
industry in Kenya?
iv. To what extent do auditing affect management of royalties within the music
industry in Kenya?
v. How does employee competence affect management of royalties within the
music industry in Kenya?

1.6 Significance of the Research

1.6.1 Management of the Music Copyright Society of Kenya
The study findings will enable the organization establish the various and the best
oligopolistic practices which firms are able to earn the large rents needed to maintain
their leadership role in the industry, and to generate the considerable financial
resources which allow them to carry the risks and costs involved in identifying and
developing artistic talent and marketing a risky final product with very large sunk
costs.

1.6.2 Other Researchers

Researchers who are doing related study will benefit by using this research as their
secondary data. The research will also propose other areas which the researcher can
explore further. They can also do another research in the same way to weight the
trend.

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1.7 Limitations of the Study
1.7.1 Confidentiality
Inadequate assistance may arise as some respondents may not agree to avail docu-
ments deemed as confidential and this will affect the contents of the study. This will
be surmounted by giving surety to the respondents that confidentiality would be en-
sured. The researcher will be able to elaborate the purpose of the research and effec-
tively convince respondents on the importance of the research and how it is going to
be beneficial to them.

1.7.2 Lack of Cooperation

Some of the respondents may resist and fear to give information and elaborate on the
questions which will be posed to them as they may feel that the organization might
victimize them if they give negative information concerning the organization. The re-
searcher will solve the problem by creating convenient time with them so that their
part of response is included in the research.

1.8 Scope of the Study

This research was limited to the factors that affect management of royalties within the
music industry in Kenya with specific reference to Music copyright society of Kenya
offices in Nairobi along Parklands road. Data was collected from a target population
of 74 employees from three levels of management. The study was carried out between
February and April 2017.

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 CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
Literature review entails reading literature related to the topic of research and from
several sources cited by other researchers. It is the analysis of textbooks or
manuscripts and involves the works the researcher conducted in order to understand
and investigate the research problem. The chapter has been structured as review of
past studies, critical review, summary of the literature and conceptual framework.

2.2 Review of Theoretical Literature

2.2.1 Control System
A control system is a device, or set of devices, that manages, commands, directs or
regulates the behavior of other device or system. Water company control systems are
used in water company production for controlling equipment or a machine. There are
two common classes of control systems, open loop control systems and closed loop
control systems. In open loop control systems output is generated based on inputs. In
closed loop control systems current output is taken into consideration and corrections
are made based on feedback. A closed loop system is also called a feedback control
system. The human body is a classic example of feedback control system. Fuzzy logic
is also used in control systems (Tarde, 2009).

According to Russel (2011) the term control system may be applied to the essentially
manual controls that allow an operator, for example, to close and open a hydraulic
press, perhaps including logic so that it cannot be moved unless safety guards are in
place. An automatic sequential control system may trigger a series of mechanical ac-
tuators in the correct sequence to perform a task. For example various electric and
pneumatic transducers may fold and glue a cardboard box, fill it with product and
then seal it in an automatic packaging machine. Programmable logic controllers are
used in many cases such as this, but several alternative technologies exist.

In the case of linear feedback systems, a control loop, including sensors, control algo-
rithms and actuators, is arranged in such a fashion as to try to regulate a variable at a
set point or reference value. An example of this may increase the fuel supply to a fur-
nace when a measured temperature drops. PID controllers are common and effective

7
in cases such as this. Control systems that include some sensing of the results they are
trying to achieve are making use of feedback and so can, to some extent, adapt to
varying circumstances. Open-loop control systems do not make use of feedback, and
run only in pre-arranged ways (Bazerman, 2013).

The control environment includes management’s attitude as to the importance of the

establishment and maintenance of a strong internal control system; having organiza-
tional units clearly defined to perform the necessary functions of the agency; having
qualified and properly trained personnel; delegation of authority or limitation of au-
thority to provide assurances that responsibilities are effectively performed; having
policies and procedures including a code of ethical conduct available to employees;
and requiring background checks on personnel that have access to personal informa-
tion, positions of accounting and financial oversight, and positions of trust. PeopleSoft
payroll and financial systems play a critical role in state agencies’ financial operations
(Bateman et al., 2009).

In addition, agencies have personal computers and many agencies have other com-
puter systems that are essential. Some computer systems have controls built in which
are a benefit to internal controls, such as segregation of accounts payable input and
approval duties. However, agencies need to ensure that their users have the appropri-
ate access and need to ensure that there is no unauthorized access. A control environ-
ment assessment form and computer security assessment form that agencies should
complete as part of their fraud risk assessment can be found at www.nd.gov/fiscal/
forms. Any no answers to the questions on these forms would signal a weakness in the
agencies controls to prevent fraud activity. Agencies that have their own computer
systems will need to do additional assessments of their systems (Bateman et al.,
2009).

Control engineering is based on the foundations of feedback theory and linear system
analysis, and it generates the concepts of network theory and communication theory.
Accordingly, control engineering is not limited to any engineering discipline but is
applicable to aeronautical, chemical, mechanical, environmental, civil, and electrical
engineering. A control system is an interconnection of components forming a system
configuration that will provide a desired system response. The basis for analysis of a

8
system is the foundation provided by linear system, which assumes a cause effect
relationship for the components of a system (Bazerman, 2013).

Internal control is a process designed to provide reasonable assurance regarding the

achievement of management’s objectives. In addition, internal control is the group of
norms, routines and procedures adopted by each Administrative Unit such as routine
manual, segregation of duties, determination of attributions and responsibilities,
employee training, limitation of access to assets and the limitation of access to
computer systems seeking to prevent mistakes, fraud and inefficiency. Management
typically has three broad objectives in designing an effective internal control system:
Reliability of financial reporting, Efficiency and effectiveness of operations and
Compliance with laws and regulations. Every manager should exercise caution so that
actions carried out, subject to external judgments are safeguarded by controls
beforehand and supported by documents of evidence within pertinent legislation and
with very strict responsibility (Bateman et al., 2009).

Information sustained by internal control speaks about actions undertaken as much as

their impact on results. The important thing for the administrator who decides on and
responds for the decision taken is that internal control offers safety in the decision
prior control. When concerning accounting information these should be appropriate
for both internal and external users. In the same way, once decisions are made and
actions taken it is important to gauge the results with safety and caution. This
attribution is typical of the concomitant internal control managerial. The consequence
of acts undertaken should be assessed periodically by internal auditing subsequent
control (Tarde, 2009).

Internal controls are defined broadly as the measures an organization takes to protect
life and property. Ranging from physical security and access controls to rules of
conduct and procedure, internal controls do not guarantee elimination of the risk of
errors or fraud. The main goal of internal control systems is to reduce the risk to an
acceptable level. This benchmark often is referred to as a reasonable assurance or
expectation that business transactions are reported accurately and honestly. A
secondary goal of internal controls is to have methods in place to detect inaccuracy or
fraud that has occurred. The necessary level of control in the sense of severity versus
laxity depends on the circumstances and attitude of the organization as to how much

9
occupational fraud it is prepared to accept. That is, normatively, the costs of running
an organization’s counter-fraud policies and procedures (prevention, detection,
investigation and prosecution, should be covered by the savings from crimes
prevented, or successfully discovered, and the money recovered. In which case, the
decision to invest in counter-fraud policies and procedures should rest on an
assessment of the level at which the increased running costs of extending them begins
to exceed the associated savings (Tarde, 2009).

The importance of physical access controls for fraud prevention is often overlooked.
The American Institute of Certified Public Accountants notes that physical security
measures can present a physical barrier to prevent convenient access to cash, records
or other accounting data that can be used to conceal a fraud. The absence of physical
security and access control serves as an invitation to a potential fraud perpetrator.
Access logs, video cameras and keyed entries can assist investigators in narrowing the
field of potential suspects of a fraud. The two primary internal controls are
categorized as preventive and detective. Preventive controls serve to stop error or
fraud from occurring, and detective controls are intended to reveal inconsistency,
error or suspicious circumstances. A third type, corrective controls, refers to controls
implemented to mitigate losses or to make changes to existing policy. Segregation of
duties is central to any internal control system (Andrew, 2005).

The basic principle is that all transactions should be broken down into steps, and each
step in the transaction should be completed by a different person. Examples of control
points in transactions where separation of duties should be present include authorizing
transactions, processing sales, custody of cash, preparing deposits, processing
payments or approving purchases and issuing checks. Maintaining internal controls is
an ongoing commitment requiring regular evaluation and assessment of risks in all
areas (Schnatterly, 2013).

Management, not the auditor is responsible for setting up and monitoring of the
internal control system. Internal control system cannot fully be regarded as effective
not even when the design and implementation is properly done; this is because the
effectiveness of an internal control system depends on the competency and
dependability of the people using it. Organization failures and widespread losses over
the past two decades, have clearly pointed out the picture of how fraud has penetrated
10
the financial strength of organizations; it has however, elevated the importance of
effective internal control system within the formal financial sector worldwide.
Organizations set up internal control system most at times because they are required
by law to do so; but then, how many has actually made it a point of duty to train and
educate employees on how to use these internal control system since its effectiveness
depends on the competency and dependability of the people using it. This study
defines internal control, as a means to an end; it is aimed at verifying the conception
that an efficient and effectively implemented internal control system is the best
strategy for preventing and detecting fraud especially in the public sector (Andrew,
2005).

An organization’s susceptibility to occupational fraud should vary according to the

effectiveness of its management controls. However, specific forms of control may
relate to certain organizational vulnerabilities. For example, segregation of duties may
be required to prevent an employee having complete control over a transaction; in the
case of a purchase, from order to payment. A simple relationship may, therefore, not
exist between the amounts of occupational fraud present in an organization and the
overall effectiveness of its controls but on the features of the management control
system. For instance, Schnatterly (2013) found that governance measures do not
appear to act as a deterrent, primarily because, they are largely limited to board level.
However, she did find that operational governance mechanisms (i.e. management
controls) that extend beyond the accounting system, notably clarity of policies and
procedures, formal cross-company communication, and performance-related pay did
significantly reduce the likelihood of reported corporate crime. The rigorous
enforcement of management controls reduced employee misconduct. It has also been
found that lax management attitudes and ineffective written policies may contribute to
its incidence.

A system of accounting and records keeping will not succeed in completely and accu-
rately processing all transaction unless controls known as internal controls are built
into the system. The purposes of such internal controls are to ensure that transactions
are executed in accordance with proper general or specific authorization and again to
ensure that all transactions are properly recorded with the correct amount and in the
appropriate account and in the proper accounting periods so as to permit preparation

11
of financial statement in accordance with relevant legislation and accounting stan-
dards and for informed management decision making (Schnatterly, 2013).

Internal control will ensure that errors and irregularities are avoided or made apparent.
Internal control as a system comprise of the control environment and procedures .It
includes all the policies and procedures adopted by the directors and management of
an entity to assist in achieving their objectives of ensuring as far as practicable the or-
derly and efficient conduct of its business so as to safeguard assets, to prevent and de-
tect fraud and error to ensure accuracy and completeness of accounting records and
the timely preparation of reliable financial information (Andrew, 2005).

Organization failures and widespread losses over the past two decades have elevated
the importance of effective internal control within the formal financial sector world-
wide. In the United States for example, organization failures rose over 200 percent in
the 1980s partly due to fraud and mismanagement. Internationally, the collapse of
Barings Organization and Yamaichi Securities further focused the financial sector’s
attention on internal control. The Basle Committee analyzed the problems related to
these losses and concluded that they probably could have been avoided had the orga-
nizations maintained effective internal control systems. In addition, a review of tradi-
tional organizations affirmed that the implementation of effective internal control sys-
tems played an important role in reducing organization failures. Internal control, the
strength of every organization, has become of paramount importance today in Kenya
organizations. The reasons being that the control systems in any organization are a
pillar for an efficient accounting system as well as achievement of organizational
goals (Schnatterly, 2013).

From the experiences of the last years, it was evident that the protection of critical
infrastructures, energy among them, requires the understanding of the vulnerabilities
of all the elements that have a bearing on the reliability of a particular supply chain.
Nowadays, the wide use of ICT and in particular internal control systems (ICS) in
infrastructures, such as energy, highlights the need to ensure the highest resilience of
such systems. ICS equipment is key element in the safe and secures functioning of
both installations and extended networks. ICS are potentially the object of malicious
attacks that can disturb the normal functioning of CI. Preserving the physical and

12
functional integrity of ICS is therefore crucial to maintaining a high level of safety
and reliability in the related infrastructures (Certo, 2008).

The improvement of ICS security runs necessarily through the understanding of their
vulnerabilities, as well as of the probability for their exploitation, of their effects on
the ICS and, by reflex, on the controlled Critical Infrastructure. The assessment of the
ICS vulnerabilities can be hardly performed on real and operational ICS/CI, and so it
is one of the major challenges to discover vulnerabilities before to go in operation.
Similar considerations can be said for the assessment of security solutions, i.e.
countermeasure used to detect, deter or deny attacks, thus reducing vulnerabilities and
the possibility to exploit them, to be applied on already operating ICS without any
interruption in the provided services (Chandra, 2008).

The main method of assessing the vulnerabilities of a system is the reproduction of an

attack by a malicious user, known as a penetration test. As no system can be
considered invulnerable, the main objective of the penetration test is to determine the
effects of the identified vulnerabilities on system functioning. In general, hackers
perform attacks also with no or few information about the system, using standard
automatic auditing tools that check the presence of active services with known
vulnerabilities. No particular technical skill is required to perform this kind of attack,
but it leads to the identification only of major vulnerabilities. Advanced methods
make use of software to check the system network, firewalls and routers
configurations for new vulnerabilities, as well as of social engineering techniques.
Attackers with highest technical level not only check known vulnerabilities but
analyze all system items checking for new vulnerabilities (Certo, 2008).

2.2.2 Technology
According to Martinich (2007), technology can be defined as the equipment, people
and procedure used to produce its own products and services. The choice of
technology affects every aspect of production process. A company’s technological
capability and the ways in which it uses technology are important strategic issues.
More recent technological advances are dramatically changing the structure of the
modern organization from the assembly line to the executive suites new the public
sector and information processing technologies are revolutionizing life in
organization’s activities. Technology can be grouped into two categories namely;

13
management of royalties within the music industry and competition. The two
categories affect, marketing in one way or another. Bill Gates, chairman of Microsoft
states “the internet is not just another sales channel; it will transform your business.

The future company will operate with a digital nervous system.” Technology has an
impact on the organization as a whole e.g. linking the customers to the system, can
improve efficiently and more effectively by providing better service to customers. The
application of technology has improved the organization’s ability to respond to each
customer or client’s unique products/service needs. Computer systems can help an or-
ganization record, process and keep track of the many details needed to provide cus-
tomers with what they want, when they want it, and in the manner that they want.
Technology will help an organization to answer customer’s queries faster and to keep
on customer’s wants/needs. Technology has enabled the exchange of information be-
tween men and machines through voice, image, data or multimedia which basically
characterizes future management of royalties within the music industry infrastruc-
ture which is driving our society’s dramatic transformation to information based on
economy. The availability of such enables the information that is used or passed to be
simple, secure, reliable and competition effective (Chandra, 2008).

The expansion in business activities and the limitless opportunities provided by the
internet usage have direct implication on the internal control function. This is more
visible in the public sector, as there is a noticeable transformation in traditional
banking services (Mintzberg, 2006). The Kenyan stock trading market is the second
largest in sub-Saharan Africa with only South Africa larger in terms of volume. The
public sector accounts for more than 65 percent of the stock on the Lagos exchange
market. There are mixed results from prior studies on levels of fraud and the apparent
corporate governance problems in the public sector of the Kenyan economy. For
instance, Nashirl (2007) suggested poor internal control as the main reason for
increased level of fraud.

Bazerman (2013) identified a mismatch between supervisory skills of employees and

the explosion in the numbers of banks and acquisitions of information technology. In
order to have effective fraud prevention and detection, ensure accountability and good
corporate governance practices, the instrument of internal control must be effective to
identify and isolate illegal and fraudulent transactions. Developments in ICT have

14
made business transactions and marketing much more accessible than envisaged
throughout the world. Nonetheless, it has also brought with it problems of control
associated with the use of the internet. A number of studies have so far been carried
out on the impact of ICT on auditing or accounting in developed countries but
research work on the impact of ICT on the effectiveness of internal control systems in
prevention and detection of electronic fraud in developing countries is scarce.

One of such developing countries is Kenya, where the public sector appears to have a
compelling need to examine the impact of ICT on internal control systems. This is
necessary in view of recent government desires to attract more foreign direct
investments to invigorate the economy through improved financial operations, which
in turn necessitated benchmarking the effectiveness (Andrew, 2005) of internal
control against best practices. The development of ICT and its adoption by internet-
based businesses is growing rapidly in developing countries such as Kenya. Equally,
internet-based fraudulent activities are growing across all business segments in Kenya
but much more in the public sector. It is therefore pertinent to examine the efficacy of
the use of ICT in IC for prevention and detection of electronic fraud. ICT tools and
procedures are becoming increasingly inseparable in daily running and control of
business enterprises’ activities worldwide. For instance, in a survey conducted by
Certo, (2008), it was found that Internal Auditors are increasingly using ICT tools and
techniques for control of their functions.

This is as a result of increasing use of ICT for conducting and recording transactions
in the public sector, while at the same time opening up opportunities for fraud. Hence
it is imperative to examine the effectiveness of ICT-based tools and techniques as
being used by Internal Auditors in internal control (Certo, 2008). The functions of key
stakeholders in internal control are now known to be affected by ICT tools and
techniques usage. ICT tools and techniques usage in internal control has some level of
direct impact on Internal Auditors (in terms of performance of their function and
role), top management (in terms of reports and decision making), audit committee (in
terms of reports and decision making), regulatory authorities (in terms of monitoring
and ensuring public trust), accountants (in terms of their job functions and
performance), and External Auditors (in terms of scope, quality and audit fees)

15
The observation made by Lipsey (2004) has been proven quite accurate in more than
two decades since it was made. For instance, Lewicki (2006) discussed the growing
rate of internet fraud in electronic business enterprises. The upward increase in the
level of electronic fraud appears to be proportional with the increased expansion of
legitimate internet use, which points to the fact that electronic fraud is becoming
worldwide in scope and impact as it is now visible for fraudsters to plan and execute
fraudulent schemes from anywhere in the world irrespective of their physical
residence.

It is important to explain the concept of internal control in order to develop an

understanding of the impact of Information and Communication Technology (ICT)
tools and techniques on internal control effectiveness in the prevention and detection
of electronic fraud. The internal control system of an organization is a structure laid
down by executive managers for effective control of the entity’s activities. It is
closely linked with corporate governance. The Public Company Accounting Reform
and Investor Protection Act (2002), otherwise generally referred to as the Sarbanes-
Oxley Act, (2002), introduced in the United States, made it mandatory for
management to initiate good internal control and provide assessment of its
effectiveness. Most regulatory authorities worldwide are adopting the Sarbanes-Oxley
Act control concept to prevent a repeat of the scandals which reverberated across the
world as experienced with the likes of WorldCom or Enron.

The concept of internal control (IC) is very important for proper management of an
organizations’ risk, which may constitute barriers to the attainment of its set
objectives if neglected. Budgeted profitability and achievement of set objectives may
be impossible without a properly laid down control. This view is supported by Kuul
(2008) thus a number of control models have influenced the practice of internal
control worldwide, models such as that of The Committee of Sponsoring
Organizations (COSO),which was a product of professional endeavour of the
Committee of Sponsoring Organizations developed after literature review on internal
control as well as the Criteria of Control (CoCo), which is a contribution of the
Canadian Institute of Chartered Accountants to international standards on internal
control, and the Control Objectives for Information and Related Technology (CobiT),

16
a framework for control of information technology (IT). Internal auditors are the most
conversant with organizations’ internal control systems.

The Internal Auditor is regarded as the “custodian” of internal control -internal audit
is part of the internal control system put in place by the management of an
organization. It is an aid to management; it ensures that the financial operations are
correctly carried out according to the law and also in accordance with the wishes of
the board or shareholders. Internal Audit Function (IAF) is regarded as a significant
aspect of corporate governance structure in organizational settings in order to
complement the oversight activities undertaken by the board of directors and audit
committee to ensure the integrity of the financial reporting process. Similarly, Kaoka
(2008) and the Blue Ribbon Committee (1999) identified external auditing, internal
auditing, and board of directors as monitoring mechanisms for business organizations,
while the Institute of Internal Auditors (IIA), (2013) identified the fourth mechanism
as the audit committee. A further major governance activity performed by Internal
Auditors is control assessment. Reliance is placed on the experienced judgment of
Internal Auditors by the audit committee to ensure that sufficient threat responses are
implemented, and to identify if internal controls’ structures are adequate to
proficiently support strategic, operational; reporting and compliance objectives. This
process is significant because an effective internal control system is a sine qua non for
a reliable Enterprise Risk Management.

The IAF is considered central to effective performance of management and the board
of directors’ duties. The board of directors has a critical role to play in showcasing
good internal control. The satisfactory discharge of the board's and its audit
committee’s responsibilities rested squarely on effective internal audit function, which
also relies on internal control that is capable of prevention and detection of errors and
fraud. Lyson (2007) defines internal audit thus: “Internal auditing is an independent,
objective assurance and consisting activity designed to add value and improve an
organization’s operations.

From the definition of Internal Audit by the IIA, it is clear that independence and
objectivity are central for effective performance of those functions. The use of ICT
does not change the internal control objective and the obligation of Internal Auditors
to assess risks. The independence and objectivity of those who are trusted with the

17
usage of ICT in internal control are important in evaluating the effectiveness of such
ICT tools and equipment. It is the motivation of this study to explore the impact of
ICT on Internal Auditors’ independence and objectivity. Assessing the impact of ICT
on Internal Auditors’ (users of ICT) independence validated the result of the impact of
ICT on internal controls’ prevention and detection of fraud (Lipsey, 2004).

2.2.3 Government Policy

Thompson (2008) policies refer to the legal operating framework within a country. It
covers the setting of laws and or statutes that deny or allows the country or institution,
freedom to do the activities they were set up for. Positive laws are those that assist the
firm to conduct business without restrictions or those laws that protect the operation
of the firm. These include such laws as provision of grants by government and giving
concessions. Negative laws refer to those laws that place restrictions on the activities
on the firm. These include all kinds of licenses, import regulations, taxes and mini-
mum wage laws. Governments worldwide have recognized the importance and impact
of policies on their economies. Policies lead to set up of minimum standards, which
have significant pro-competitive effects such as increasing competition, solving issues
such as product compatibility and consumer safety.

Countries that are leaders in developing standards are at a competitive advantage and
internationally accepted standards are fundamental to the expansion of international
trade. While the benefits of standard are widely recognized, so are the potential
downsides. By their very nature, standards setting activities that are improperly
conducted can discover age or even eliminate competition, giving rise to antitrust
concerns. In their role as regulators, governments there have a duty to police policy
setting in order to prevent abuse of the setting process. It requires little experience to
recognize the extent of policy influence upon sale of cigarette activities and it is
widely accepted that many of the Kenya economic problems may be attributed to the
radically different policy philosophies that have governed the country since the
introduction of multi-party politics. Government policies are inevitably made
mandatory through legislation (Thompson, 2004).

According to Thompson (2004), a public entity shall provide the authority with
information relating to procurement as the director general may require in writing or
may order an investigation of procurement proceedings for the purpose of determine

18
whether there has been a breach of this act, the regulations or any directions of the
Authority. An investigation shall be appointed by an investigator appointed for the
purpose by the Director General; the investigators shall have powers to access to all
books, records, reports and other documents of procurement proceedings. The
investigator may remove or make copies of any document he has access to; the
powers of an investigator are subjected to such conditions and limitations as are
prescribed. After completing the investigation an investigator shall prepare and
submit a report there on to the director general. After considering the report of an
investigator, the DG is satisfied that there has been a breach of this act, the regulation
or any directions, the DG may by order do any or more by directing the procuring
entity to take such actions as are necessary to rectify the contravention, cancel the
procurement contract if any, or terminate the procurement proceedings or prepare and
submit summary of the investigations findings and recommendations to the procuring
entity.

According to Thompson (2004), policies are rules or procedures put aside by an

organization, department or the government in carrying out specific functions. It is a
deliberate plan of action to guide decision and achieve rational outcome. The term
may apply to government, private sector organizations and individuals. Public
hospitals can limit or even bar entry by requiring licenses and permit. Also stringent
public hospitals are mandated by government policies to follow procurement
procedures as they are set. Thompson added that Government policies also
encourages or foster procurement procedures. The contents of the policies include a
purpose statement, outlining why the organization is issuing the policy and what is
desired effect of the policy should be effective date which indicates when the policy
comes into force. The public procurement oversight board was established as an
incorporated body which consisted of nine members appointed by the minister and
approved by the parliament from persons who are nominated by prescribed
departments and director general. Most of organizations that received funding are
likely to be affected by European procurement legislation such organizations include
central government department and local authority among others. The legislation
covered most contracts for supplies, goods and services.

19
Lyson (2006) cited out that MF1’S rules and regulation are intended to ensure that
institution maintain a specified level of capital to promote public, ensure adequate
capital is maintained and the safety of depositors funds in order to absorb advance
event either within their control or due to external factors. This included minimum
capital requirement for deposit taking. Treasury bills and bonds which are freely
marketable and re-discountable, such as assets may be specified even though statutory
prescribed minimum is 20% liquidity requirements will vary from institution to
institution depending on the cash flow requirement and each institution shall therefore
identify its unique. MF1’S while in place mechanism that will play out potential
funding problem in order to explore ways and means of raising additional funds of the
right mix and amount.

Highlights of the regulatory frequency and reporting MF1’S will be required to

reviews loans advances attached a month and report to the CBK monthly. This is
different from the requirement for banks where review and reporting is on a quarterly
basis. Classification of loans and advances include normal, watch, substandard,
doubtful and loss. Unlike in commercial banks where classification is based on the
day a facility is in areas, microfinance institution will be required to classify their
facilities based on the no of installment in arrears. The Internet and E-Commerce have
created new situations that have generated sweeping Project for fundamental changes
in contract law. A government is an organization that has the power to make and
enforce laws for a certain territory. To govern means the power to administrate
whether over an area of land, a set of group of people or an association. This author
also emphasized that the growing business should be aware that the government
intervenes in the operation of E-Commerce (Lipsey, 2008).

Lyson (2006), the government sets the rules of conduct and enforce them to control
and regulate the conduct of people to protect their property and contractual rights with
an access to security justice. The government sought more socially acceptable
objectives some of them being to achieve accepted standard of equity, to protect
individuals form others and from themselves not forgetting to stabilize the economy
against income and price level fluctuation. Government interventions usually involve
both direct competition of administration and indirect competition associated with
interface with the price mechanism. Policy tries to focus everyone in an organization

20
to a common goal priority by translating corporate strategy into measurable objectives
throughout the various function and levels of the organization. As a result everyone in
the organization understands the strategic plan and is able to drive several goals from
the plan and determines how each goals lies into their own deadly activities. Period
up to 1900, European and America industries system developed in its French system
of economics such systems implied production and distribution of goods and services
without government regulations.

The rule by government determines the performance of the organization with well
regulated rules by the government and some restrictions by the same. Like rules
concerning E –Commerce development brings success of the business to the hand of
business owners. The set rules by the government help to work in accordance worth
the formulated rules. These formulated rules by the government helps the managers
to set clear rules to govern their organizations which leads to its success meaning of
the same information. Keynesians, who based their work on the ideas of John
Maynard Keynes, believes that market failure is a common occurrence. They also
believe it causes serious problems (Grant, 2008).

Grant (2008) stated that in this regard, cases where the amount of due is guaranteed to
the members of the group. Only the portion in arrears will be accounted for as past
due and the group members will be expected to pay up for the guarantee. In order to
prevent MF1’S from having evergreen facilities, credit facilities will only be
restructured not more than twice over the life of the original facility. The principal of
restricting is consisted with the one of commercial Bank except that of MF1’S; there
is a limit on the number of times a facility can be restructured. All interest on non-
performing loans and advance will be suspended and should not be treated as income.
Provision for loan accounts MF1 will be required to use a provisioning criterion based
on assigned classification i.e. losses are likely to be more than these minimum amount
large provision are made. Given higher risk micro-loans should be moved more
rapidly from one category to a higher category.

2.2.4 Auditing
Internal audit is an important part of the corporate governance structure within an
organization. Corporate governance includes those oversight activities undertaken by
the board of directors and audit committee to ensure the integrity of the financial

21
reporting process (Public Oversight Board 2005). Three monitoring mechanisms have
been identified in the corporate governance literature. They are external auditing,
internal auditing and directorships. The Institute of Internal Auditors (IIA) adopted a
perspective that explicitly included a fourth cornerstone of corporate governance – the
audit committee (Certo, 2008).

In recent years, high profile corporate collapses have focused attention on corporate
governance and also emphasized internal auditing as part of the governance process.
The objective of internal auditing according to the IIA is an independent, objective
assurance and consulting activity designed to add value and improve an
organization’s operations. It helps an organization accomplish its objectives by
bringing a systematic, disciplined approach to evaluate and improve the effectiveness
of risk management, control and governance processes. The objective of internal
auditing not only includes involvement in governance but also highlights the
importance of evaluating and improving risk management and control. Governance,
these changes should therefore enhance the role and value of internal audit in the
Australian environment (Nashirl, 2007).

Despite the increasing importance of internal audit, academic research on the value of
internal audit has been limited. Studies have used an agency cost framework to
illustrate the value relevance of the internal audit function. While the common agency
variables of size, debt or agency are not associated with the presence of an internal
audit function in Australian family owned companies, internal and external audit are
used as monitoring substitutes by these companies. In another Australian study,
Goodwin and Kent (2004) found the existence of internal auditing to be positively
associated with firm size, asset composition, the presence of an independent board
chair, and presence of an audit committee. This study provides some evidence that
firms with good corporate governance are more likely to have an internal audit
function. They also unsurprisingly found that the number of internal audit staff is
positively associated with total assets. A limitation of both of these studies is that they
simply try to predict the existence of internal audit and did not examine the number of
staff or size of the internal audit budget, likely predictors of audit quality (Zhul,
2004).

22
A more recent study did examine the size of internal audit budgets in a US study and
found that they were positively related to company size; leverage; financial, service,
or utility industries; inventory; operating flows; and audit committee review of the
internal audit budget. They found that internal audit budgets were negatively related
to the percentage of internal auditing that was outsourced. Their overall conclusion
was that companies facing higher risk will increase their organizational monitoring
through internal audit, providing evidence of the value of the internal audit function
(Zhul, 2004).

The role of internal audit in corporate governance has been analyzed using the
following categories: external auditors’ evaluation of the quality of a client’s internal
audit function (IAF); determinants of the IAF reliance decision; extent and nature of
the IAF work relied on by the external auditors; and other aspects of the external audit
affected by the IAF’s involvement. As can be concluded from these categories, the
majority of the research on internal audit has related to perceptions of the external
auditor and whether the external auditor utilizes the internal auditor’s work (Zhul,
2004).

Another way of evaluating the work of the internal auditor is to examine how well
they detect or prevent actual errors within an organization and there has been limited
research on this topic. The number and magnitude of errors requiring adjustment by
the external auditor have been found to be substantially lower for entities that had an
internal audit department compared to those that did not have an internal audit
department. This finding highlights the important role internal auditor’s play in error
detection. In recent times the role of auditors in detecting fraud as well as errors has
received greater emphasis. In Australia additional requirements have been imposed on
external auditors under AUS 210 ‘The Auditor’s Responsibility to Consider Fraud in
an Audit of a Financial Report’ (AARF 2004). It is reasonable to expect that this
increased emphasis on fraud awareness and detection has affected the internal
auditors’ duties as well. Even back in 1999, there is evidence that this was occurring
in Australia (Nashirl, 2007).

While outsourcing the internal audit function does not significantly affect users’
perceptions of auditor independence or financial statement reliability or their
perception of protection from financial statement fraud, companies that decide to

23
outsource perceive that external providers are technically more competent. However,
a limitation with these prior studies is that they were performed by measuring
perceptions not actual performance. Given that many organizations make decisions
about whether to NiSource or outsource their internal audit function the quality of
performance of these respective functions is an issue that warrants further research
(Nashirl, 2007).

Although fraud usually is concealed and management's intent is difficult to determine,

the presence of certain conditions may suggest to the auditor the possibility that fraud
may exist. For example, an important contract may be missing, a subsidiary ledger
may not be satisfactorily reconciled to its control account, or the results of an
analytical procedure performed during the audit may not be consistent with
expectations. However, these conditions may be the result of circumstances other than
fraud. Documents may legitimately have been lost or misfiled; the subsidiary ledger
may be out of balance with its control account because of an unintentional accounting
error; and unexpected analytical relationships may be the result of unanticipated
changes in underlying economic factors. Even reports of alleged fraud may not
always be reliable because an employee or outsider may be mistaken or may be
motivated for unknown reasons to make a false allegation planning (Tarde, 2009)

Sweeney (2009) suggest that the collection of external audit evidence may improve
the likelihood of detecting fraud. This would result in a shift in the persuasiveness
(nature) of audit evidence. Based on prior literature and auditing standards, we
hypothesize that the persuasiveness aspect of the nature of audit evidence will be
affected by going concern and fraud risk. Standard on audit evidence was issued with
the intent to improve the link between assessed risk and audit testing by requiring
auditors to document the purpose of audit tests and how the test relates to an assessed
audited risk. This association between the risk being addressed and the purpose of the
test implies that audit procedures should be chosen by auditors to specifically test
assertions relevant to specific risks. This does not necessarily imply that auditors will
perform more substantive procedures when faced with pervasive client business risks,
but will perform procedures targeted directly to address the risks. Although prior
literature on audit effort has sometimes found significant links between risk and the

24
extent of testing, the majority of these risks are related to specific risks at the assertion
level, not pervasive risk.

Typically, management and employees engaged in fraud will take steps to conceal the
fraud from the auditors and others within and outside the organization. Fraud may be
concealed by withholding evidence or misrepresenting information in response to
inquiries or by falsifying documentation. For example, management that engages in
fraudulent financial reporting might alter shipping documents. Employees or members
of management who misappropriate cash might try to conceal their thefts by forging
signatures or falsifying electronic approvals on disbursement authorizations. An audit
conducted in accordance with GAAS rarely involves the authentication of such
documentation, nor are auditors trained as or expected to be experts in such
authentication (Nashirl, 2007).

In addition, an auditor may not discover the existence of a modification of

documentation through a side agreement that management or a third party has not
disclosed. Fraud also may be concealed through collusion among management,
employees, or third parties. Collusion may cause the auditor who has properly
performed the audit to conclude that evidence provided is persuasive when it is, in
fact, false. For example, through collusion, false evidence that controls have been
operating effectively may be presented to the auditor, or consistent misleading
explanations may be given to the auditor by more than one individual within the entity
to explain an unexpected result of an analytical procedure planning (Tarde, 2009).

As another example, the auditor may receive a false confirmation from a third party
that is in collusion with management. Although fraud usually is concealed and
management's intent is difficult to determine, the presence of certain conditions may
suggest to the auditor the possibility that fraud may exist. For example, an important
contract may be missing, a subsidiary ledger may not be satisfactorily reconciled to its
control account, or the results of an analytical procedure performed during the audit
may not be consistent with expectations. Documents may legitimately have been lost
or misfiled; the subsidiary ledger may be out of balance with its control account
because of an unintentional accounting error; and unexpected analytical relationships
may be the result of unanticipated changes in underlying economic factors. Even
reports of alleged fraud may not always be reliable because an employee or outsider

25
may be mistaken or may be motivated for unknown reasons to make a false allegation
(Zhul, 2004).

Auditing standards indicate that the planning and performance of an audit should be
related to the risks present in the audit. These risks include not only the inherent and
control risk identified in the Audit Risk Model (ARM), but also the client’s business
risk. Most client business risks eventually have consequences to the financial
statements, and authoritative guidance specifically states that the auditor should
consider the effect of client business risk in planning the audit. Thus, the association
between client business risk and evidential planning is important to both standard
setters and practitioners (Russel, 2011).

Two assessments of client business risk specifically mentioned in the audit standards
are the auditor’s consideration of a client’s ability to continue the going-concern
assessment and the auditor’s consideration of the likelihood of fraud. Although the
ARM is widely used by practitioners as a guideline for audit planning, it does not
specifically account for assessments of auditor or client business risks outside of the
assessments of inherent risk (IR) and control risk (CR). Thus, as auditors identify
risks in the audit, they must impound these risks in their assessment of control risk,
inherent risk, or both (RMM). Because of this, the ARM has been criticized as not
comprehensively representing the factors auditors consider in audit planning (Tarde,
2009).

2.2.5 Employee Competence

Employee competence is the ability of an individual to do a job properly. A
competency is a set of defined behaviors that provide a structured guide enabling the
identification, evaluation and development of the behaviors in individual employees.
Employee competence as a combination of knowledge, skills and behavior used to
improve performance; or as the state or quality of being adequately or well qualified,
having the ability to perform a specific role. For instance, management competency
might include systems thinking and emotional intelligence, and skills in influence and
negotiation (Mark, 2004).

26
Competency is also used as a more general description of the requirements of human
beings in organizations and communities. Supplier competency is sometimes thought
of as being shown in action in a situation and context that might be different the next
time a person has to act. In emergencies, competent people may react to a situation
following behaviors they have previously found to succeed. To be competent a person
would need to be able to interpret the situation in the context and to have a repertoire
of possible actions to take and have trained in the possible actions in the repertoire, if
this is relevant. Regardless of training, competency would grow through experience
and the extent of an individual to learn and adapt (Shippmann, 2009).

Employee competency has different meanings, and continues to remain one of the
most diffuse terms in the management development sector, and the organizational and
occupational literature. The process of competency development is a lifelong series of
doing and reflecting. As competencies apply to careers as well as jobs, lifelong
competency development is linked with personal development as a management
concept. And it requires a special environment, where the rules are necessary in order
to introduce novices, but people at a more advanced level of competency will
systematically break the rules if the situations require it (Kotler, 2006).

This environment is synonymously described using terms such as learning

organization, knowledge creation, self-organizing and empowerment. Within a
specific organization or professional community, professional competency, is
frequently valued. They are usually the same competencies that must be demonstrated
in a job interview. But today there is another way of looking at it: that there are
general areas of occupational competency required to retain a post, or earn a
promotion. For all organizations and communities there is a set of primary tasks that
competent people have to contribute to all the time (Chapman, 2013).

Employee competencies required for a post are identified through job analysis or task
analysis, using techniques such as the critical incident technique, work diaries, and
work sampling. A future focus is recommended for strategic reasons. Competencies
refer to skills or knowledge that leads to superior performance (Mark, 2004). These
are formed through an individual/organization’s knowledge, skills and abilities and
provide a framework for distinguishing between poor performances through to
exceptional performance. Supplier competencies can apply at organizational,

27
individual, team, and occupational and functional levels. Competencies are individual
abilities or characteristics that are key to effectiveness in work. Supplier competencies
are the characteristics of a manager that lead to the demonstration of skills and
abilities, which result in effective performance within an organizational area.

Employee competency mapping is a process through which one assesses and

determines one's strengths as an individual worker and in some cases, as part of an
organization. It generally examines two areas: emotional intelligence or emotional
quotient and strengths of the individual in areas like team structure, leadership, and
decision-making. Large organizations frequently employ some form of competency
mapping to understand how to most effectively employ the competencies of strengths
of workers. They may also use competency mapping to analyze the combination of
strengths in different workers to produce the most effective teams and the highest
quality work (Lyson, 2006).

2.3 Review of Critical Literature

The absence of physical security and access control serves as an invitation to a
potential fraud perpetrator (Lipsey, 2007). Access logs, video cameras and keyed
entries can assist investigators in narrowing the field of potential suspects of a fraud.
The two primary internal controls are categorized as preventive and detective.
Preventive controls serve to stop error or fraud from occurring, and detective controls
are intended to reveal inconsistency, error or suspicious circumstances. The authors
therefore failed to establish the impact of control and therefore this study sought to fill
this gap by studying the impact of control systems on management of royalties within
the music industry in Kenya

According to Thomas and Scott (2004) today a company cannot succeed without in-
corporating into its strategy the astonishing technologies that exist and continue to
evolve. Technology advance create new products, advanced production techniques
and better ways of managing and communicating. They also provide new ways to
manage and communicate computerized management information systems make in-
formation available when needed. This author however has failed to link management
of royalties within the music industry to the technology. This study sought to fill this
gap by establishing the impact that technology has on management of royalties within
the music industry.

28
According to Zhul, (2004), government sets the rules of conduct and enforces them to
control and regulate the conduct of people to protect their property and contractual
rights with an access to security justice. Policies are rules or procedures put aside by
an organization, department or the government in carrying out specific functions. The
rule must be followed careful and be understood so that they can be followed.
However the author failed to show us how government policies affect management of
royalties within the music industry. Due to this reason the study was conducted to find
out the extent to which it affects management of royalties within the music industry.

According to Schein (2008), management has a unique ability to perpetrate fraud

because it frequently is in a position to directly or indirectly manipulate accounting
records and present fraudulent financial information. Fraudulent financial reporting
often involves management override of controls that otherwise may appear to be
operating effectively. Management can either direct employees to perpetrate fraud or
solicit their help in carrying it out. However the author has failed to show us how
auditing affects management of royalties within the music industry in Kenya. Due to
this reason the study will be conducted to find out the extent to which it affects
management of royalties within the music industry in Kenya.

According to Cole (2009) social and human skills are the interpersonal relationship
with and through other people and excuse judgment. According to Levi (2010) from
management perspective the obvious definition of team performance does not
completely cover its definition. Important value of team work is building skills and
capabilities of team work. In an organization this is fueled by good internal and social
relations, performing in team should encourage participants to work in team in future.
Whereas this is true, the author has failed to show us how employee competence
affects management of royalties within the music industry in Kenya and therefore
conducting a study will be important in filing the gap.

2.4 Summary
Through various oligopolistic practices these firms are able to earn the large rents
needed to maintain their leadership role in the industry, and to generate the
considerable financial resources which allow them to carry the risks and costs
involved in identifying and developing artistic talent and marketing a risky final
product with very large sunk costs.

29
But despite the financial dominance of the majors, the industry still contains a galaxy
of smaller independent firms characterized by an enormous heterogeneity and offering
a diverse range of services and products. Independent record companies have been
able to survive often by specializing in market niches although increasingly these
companies have only been able to continue by establishing “alliances” with the
majors. There also exists a highly complex system of subcontracting on the
production side among firms of different sizes. Most recording studios are
independent and many producers subcontract their services to the majors. The
presence of independent companies, particularly at the interface with artists, is
probably a reflection of the limits of large firms with respect to creativity and
experimentation, which remain essential ingredients of a flourishing music sector.

Despite the financial leverage of the majors, technological shocks continue to shape
the industry. Owing to the impact of new digital technologies especially Internet
technologies that enable direct downloading of music distribution costs will be
reduced substantially, thus allowing new entrants. These trends are likely to
fundamentally alter the economics of the entire industry.

These latest technological developments in the industry threaten to change the balance
of power within the music market, thereby allowing consumers worldwide direct
access to their favorite artists at discounted prices. Consumers will be able to entirely
bypass traditional retailers, with significant implications for the cost structure and
configuration of the present industry. The five major music companies are extremely
concerned about the latest developments in entertainment technologies and are
already preparing themselves for Internet’s full impact.

30
2.5 Conceptual Framework
Figure 2.1 Conceptual Framework
Independent Variables Dependent Variable

Control Systems

Technology
Management of
Royalties within the
Government Policy Music Industry in Kenya

Auditing

Employee Competence
Source: Author (2017)

2.5.1 Control Systems

Control systems is the Procedures designed and established to check, record,
regulate, supervise, authenticate, and (if necessary) restrict, the access to an asset,
resource, or system. The absence of physical security and access control serves as an
invitation to a potential fraud perpetrator
2.5.2 Technology
These latest technological developments in the industry threaten to change the balance
of power within the music market, thereby allowing consumers worldwide direct
access to their favorite artists at discounted prices. Consumers will be able to entirely
bypass traditional retailers, with significant implications for the cost structure and
configuration of the present industry.

2.5.3 Government Policy

There is an increasing desire among legislators to take the initiative in controlling
bribery, fraud, and corruption. This is a difficult challenge, particularly for legislators
who lack the institutional support, knowledge, and experience to achieve the
conditions necessary to hold their governments to account. The supreme audit
community cannot remain indifferent to the special difficulties faced by legislators
laboring within the context of corrupt, and often ruthless, regimes.

31
2.5.4 Auditing
Is a planned and documented activity performed by qualified personnel to determine
by investigation, examination, or evaluation of objective evidence, the adequacy and
compliance with established procedures, or applicable documents, and the
effectiveness of implementation. The primary responsibility of an auditor is to verify
whether the financial statements exhibit a true and fair view of state of affair of the
business and their secondary responsibility is the prevention and detection of errors
and frauds.

2.5.5 Employee Competence

This is the knowledge and ability to work with people that staff acquires both when
been trained and one that is within. An organization with adequately skilled staff is
very effective in terms of adherence to procurement auditing, this is because the
employees have the theoretical knowledge, and experience and competence hence are
effective.

32
 CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
3.1 Introduction.
This chapter specifies the nature of the research design and the population to be
studied. The chapter adopted the following structure; research design, target
population, sampling technique, data collection technique and data analysis method
that was in the research process.

3.2 Study Design.

A research design is a frame work for conducting the business research project. It
entails the procedure necessary for obtaining the information needed to structure or
solve the research problem. Descriptive research design was be used for the study. It
was appropriate because of its specific nature and the fact that it facilitates a general
understanding and the interpretation of the problem. The design describes the state of
affairs as it is in that particular time. It was used to obtain information concerning
state of the phenomenon to describe what exists with respect to variables or
conditions in a situation. Agree that in a descriptive research, the problem is
structured and well understood. The major purpose of descriptive study design was to
provide information on characteristics of a population or phenomenon.

3.3 Target Population.

Mugenda & Mugenda (1999) describes target population as a complete set of
individual cases or objects with some common characteristics to which researchers
want to generalize the result of the study. The population that is actually surveyed in
the study population. The study was being carried out at Music Copyright Society of
Kenya with a target population of 74. This composition is tabulated as follows.

Table 3.1 Target Population

Category Target Population Percentage

Top Level Management 2 3
Middle Level Management 4 5
Operational Staff 68 92
Total 74 100
Source: Author (2017)

33
3.4 Sample Design
Kothari (2004) defines a sample as a definite plan for obtaining a sample from a given
population. Sampling is a procedure by which some elements of the population are se-
lected as representatives of the total population through the use of probability to ac-
quire a representative degree of reliability in the selected area. The researcher used
census to come up with the right sample size where the entire population was se-
lected. This method was applied because the target population of the study was very
small.

Table 3.2 Sample Size

Category Target Sample Size Percentage
Population

Top Level Management 2 2 3

Middle Level Management 4 4 5

Operational Staff 68 68 92

Total 74 74 100

Source: Author (2017)

3.5 Data Collection Methods and Instruments.

The researcher used the questionnaire to collect the data. The questionnaires are
commonly used to obtain important information about the population. Each item in
the question developed to address a specific objective, research question or hypothesis
of the nature of information required and that it may leave out important information
required in the study the respondents one given an opportunity to think more about the
requirements in the questionnaires which respondents .Structured or close- ended
questions was to be in the questionnaire with a list of all possible alternatives from
which the respondents select the answer that best describes their situation. They were
easier to analyze since they were in an immediate form and was economical to use in
terms of time and finance. Unstructured or open- ended questionnaires are the
question which gives the respondents complete response of response. The free
responses permitted an individual to respond to his or her own words. They permit a
greater depth of response. They were simpler to formulate mainly because the
researcher had a labor to come up with appropriate response categories.

34
3.5.3 Validity and Reliability.
Validity refers to whether the research measures what it was intended to. Reliability
can be identified as the extent to which the measurement of a test remains consistent
over repeated tests of the same subject under identical conditions. A pilot study was
done to identify elements of study population and unit of analysis. During the study,
draft questions will be pre-tested on ten respondents and these respondents were not
included in the study sample. The objective of pilot testing will remove ambiguity
and achieve high degree precision. On the other hand, questions which will not yield
the required data would be discarded.

3.5.3 Administration of the Questionnaire

The researcher got the permission from the authorities from the bank management by
explaining the purpose of the study in an order to access to the relevant information
from the bank. The questionnaires was self-administered by the researcher to the
respondent in that respondents will fill them in their own convenient time and
collected later for analysis. The types of question that were asked are both closed and
open ended. Open ended questions were availed and space left for filing in the
relevant explanations.

3.6 Data Analysis Methods

According to Gay, (2008) data analysis is the process of developing answers to
questions through the examination and interpretation of data. The basic steps in the
analytic process consist of identifying issues, determining the availability of suitable
data, deciding on which methods are appropriate for answering the questions of
interest, applying the methods and evaluating, summarizing and communicating the
results. Data which was collected from respondents were edited to delete errors and
detail the viral facts. This ensured that uniformity applied. The data was then analyzed
using qualitative and quantitative techniques whereby content analysis and evaluation
use of table diagrams is used respectively. After analysis the data was presented
tables, pie charts and graphs.

35
 CHAPTER FOUR
DATA ANALYSIS, PRESENTATION AND INTERPRETATION OF FIND-
INGS
4.1 Introduction
In this chapter the researcher carries out an analysis of data using both quantitative
and qualitative methods. The analysis process is done on the basis of the variables of
the research objectives. The analysis and interpretation of data is done by the help of
analyzed tools such as graphs, pie charts and through judgment due to observations
made.
4.2 Presentations of Findings
4.2.1 Response Rate
Table 4.1 Response Rate
Category Frequency Percentage
Response 65 87
Non Response 9 13
Total 74 100
Source: Author (2017)

Figure 4.1 Response Rate

Source: Author (2017)

From the analysis in table 4.1 and figure 4.1 indicates the response rate for the actual
representation of the population. Out of 74 questionnaires distributed 65 were re-
turned, that is 87% of the total population and 9 which is 13% were not returned.

36
4.2.2 Gender Analysis
Table 4.2 Gender
Category Frequency Percentage

Male 44 68

Female 21 32

Total 65 100

Source: Author (2017)

Figure 4.2 Gender Analysis

Source: Author (2017)

Analysis from the table 4.2 and figure 4.2 shows that 68% of the respondents were
male while 32% were female. This can be interpreted that majority of the respondents
were male.
4.2.3 Levels of Management
37
Table 4.3 Levels of Management
Category Frequency Percentage

2 3
Top Level Management
4 6
Middle Level Management
59 91
Operational Staff
Total 65 100

Source: Author (2017)

Figure 4.3 Levels of Management

Source: Author (2017)

Table 4.3 and figure 4.3 indicate the response of the levels of management which
filled the questionnaires. Top level management respondent by 3%, middle level man-
agement by 6%, while the response of support staff being 91%.

4.2.4 Number of Years of Service

38
Table 4.4 Number of Years of Service
Category Frequency Percentage
Less than 2 years 15 25
2 – 3 years 10 15
3 – 4 years 11 16
4 – 5 years 19 29
Above 5 years 10 15
Total 65 100

Source: Author (2017)

Figure 4.4 Numbers of Years of Service

Source: Author (2017)

Table 4.4 and figure 4.4 indicates the analysis of work experience. Twenty five per-
cent had worked for less than 2 years, 15% had 2-3 years’ experience, 16% 3 – 4
years, 29% represented those within 4 – 5 years and 15% had above 5 years of experi-
ence.
4.2.5 Highest Level of Education

39
Table 4.5 Highest Level of Education
Category Frequency Percentage

Primary 2 3

Secondary 16 25

College 36 55

University 11 17

Total 65 100

Source: Author (2017)

Figure 4.5 Highest Level of Education

Source: Author (2017)

Table 4.5 and figure 4.5 indicated that 17% of the respondents were graduates, 55%
of respondents had college education, 25% had secondary education while 3% of re-
spondents had primary education. This indicates therefore that most of the respon-
dents were learned, hence well informed of the organization expectations.
4.2.6 Control systems

40
Table 4.6 Whether Control systems affects Management of royalties within the
music industry
Category Frequency Percentage

Yes 50 76

No 15 24

Total 65 100

Source: Author (2017)

Figure 4.6 Whether Control systems affects Management of royalties within the
music industry

Source: Author (2017)

Table 4.6 and figure 4.6 shows the response on the effect of control systems on Man-
agement of royalties within the music industry. It was established that 76% of the re-
spondents said control systems affect Management of royalties within the music in-
dustry while 24% said there is no effect. It can be concluded therefore that control
systems is a significant factor that affects Management of royalties within the music
industry.
4.2.7 Control systems

41
Table 4.7 Extent of Which Control systems Affect Management of royalties
within the music industry
Category Frequency Percentage

Very Great 16 25

Great 23 35

Average 11 17

No effect 15 23

Total 65 100

Source: Author (2017)

Figure 4.7 Extent of Which Control systems Affect Management of royalties

within the music industry

Source: Author (2017)

Table 4.7 and figure 4.7 shows the extent to extent to which control systems affects
Management of royalties within the music industry. Twenty five percent of respon-
dents indicated the extent as very great, 35% said the effect is great, 17% indicated
the effect as average whereas only 23% said there is no effect. It can therefore be con-
cluded that control systems affects Management of royalties within the music industry
greatly.
4.2.8 Technology

42
Table 4.8 Whether Technology affects Management of royalties within the music
industry
Category Frequency Percentage

Yes 47 72

No 18 28

Total 65 100

Source: Author (2017)

Figure 4.8 Whether Technology affects Management of royalties within the mu-
sic industry

Source: Author (2017)

From the table 4.8 and figure 4.8 above, the study revealed the effect of technology on
Management of royalties within the music industry. It was established that 73% of the
respondents said technology affect Management of royalties within the music industry
while 27% said there is no effect. Based on this finding it can be inferred that technol-
ogy is a key factor affecting Management of royalties within the music industry.
4.2.9 Technology

43
Table 4.9 Extent of Effect of Technology on Management of royalties within the
music industry
`Category Frequency Percentage

Very Great 14 21
Great 10 15

Average 17 26

Low 6 9
No Effect 18 28

Total 65 100

Source: Author (2017)

Figure 4.9 Extent of Effect of Technology on Management of royalties within the

music industry

Source: Author (2017)

The table 4.9 and figure 4.9 indicates the effect of technology on Management of roy-
alties within the music industry. Twenty one percent of respondents indicated the ef-
fect as very great, 26% said the effect is average, 15% said it is great, 9% said it is
low, whereas 28% said there is no effect. It can therefore be concluded that technol-
ogy affects Management of royalties within the music industry greatly.
4.2.10 Government policy

44
Table 4.10 Whether Government policy affects Management of royalties within
the music industry
Category Frequency Percentage

Yes 57 88

No 8 12

Total 65 100

Source: Author (2017)

Figure 4.10 Whether Government policy affects Management of royalties within

the music industry

Source: Author (2017)

From the table 4.10 and figure 4.10, the study revealed the effect of government pol-
icy. It was established that 85% of the respondents said government policy affects
Management of royalties within the music industry while 15% said there is no effect.
Based on this finding it can be deduced that government policy is a key factor affect-
ing Management of royalties within the music industry.
4.2.11 Government policy

45
Table 4.11 Extent of Effect of Government policy on Management of royalties
within the music industry
Category Frequency Percentage

Very great 15 23

Great 21 32

Average 9 14

Low 12 18

No effect 8 12

Total 65 100

Source: Author (2017)

Figure 4.11 Extent of Effect of Government policy on Management of royalties

within the music industry

Source: Author (2017)

From the table 4.11 and figure 4.11, government policy effect on management of roy-
alties within the music industry was cited to be very great by 23% of the respondents,
14% said the effect is average, 32% said it is great, 18% said it is low, whereas 12%
said there is no affect. It can therefore be concluded that government policy affects
management of royalties within the music industry greatly.
4.2.12 Auditing

46
Table 4.12 Whether Auditing affects Management of royalties within the music
industry
Category Frequency Percentage

Yes 46 71

No 19 29

Total 65 100

Source: Author (2017)

Figure 4.12 Whether Auditing affects Management of royalties within the music
industry

Source: Author (2017)

Table 4.12 and figure 4.12 shows the response on the effect of auditing on Manage-
ment of royalties within the music industry. It was established that 70% of the respon-
dents said auditing affects management of royalties within the music industry while
30% said there is no effect. It can be concluded therefore that auditing is a significant
factor that affects management of royalties within the music industry.
4.2.13 Auditing

47
Table 4.13 Extent at Which Auditing Management of royalties within the music
industry
Category Frequency Percentage

Very great 12 18

Great 17 26

Average 5 8

Low 12 18

No effect 19 29

Total 65 100

Source: Author (2017)

Figure 4.13 Extent At Which Auditing Affect Management of royalties within

the music industry

Source: Author (2017)

Table 4.13 and figure 4.13 established that the extent of which auditing affect Man-
agement of royalties within the music industry was said to be very great by 18% re-
spondents, 8% said it is average, 26% said it is great, 18% said it is low, whereas 29%
said there is no effect. It can therefore be concluded that there is no great effect of au -
diting on Management of royalties within the music industry.
4.2.14 Employee competence

48
Table 4.14 Whether Employee competence affects Management of royalties
within the music industry
Category Frequency Percentage

Yes 59 91

No 6 9

Total 65 100

Source: Author (2017)

Figure 4.14 Whether Employee competence affects Management of royalties

within the music industry

Source: Author (2017)

From the table 4.14 and figure 4.14, the study revealed the effect of employee compe-
tence on Management of royalties within the music industry. It was established that
91% respondents said employee competence affect Management of royalties within
the music industry while 9% said there is no effect. Based on this finding it can be in-
ferred that employee competence is a key factor affecting Management of royalties
within the music industry.
4.2.15 Employee competence

49
Table 4.15 Extent of Effect of Employee competence on Management of royalties
within the music industry
`Category Frequency Percentage
Very great 14 22
Great 17 26
Average 19 29
Low 9 14
No effect 6 9
Total 65 100

Source: Author (2017)

Figure 4.15 Extent of Effect of Employee competence on Management of royal-

ties within the music industry

Source: Author (2017)

The table 4.15 and figure 4.15 indicates the effect of employee competence on man-
agement of royalties within the music industry. Twenty two percent of the respon-
dents indicated that the effect is very great, 29% said the effect is average, 26% said it
is great, 14% said it is low, whereas only 9% said there is no effect. It can therefore be
concluded that employee competence affects Management of royalties within the mu-
sic industry greatly.
4.3 Summary of Data Analysis

50
4.3.1 General Information
Out of 74 questionnaires distributed 65 were returned, that is 87% of the total popula-
tion and 9 which is 13% were not returned. Gender response shows that 68% of the
respondents were male while 32% were female. Top level management respondent by
2%, middle level management by 6%, while the response of support staff being 91%.
Seventeen percent of respondents were graduates, 55% of respondents had college ed-
ucation while 25% had secondary education. 3% of respondents had primary educa-
tion. Twenty five percent had worked for less than 2 years, 15% had 2-3 years’ expe-
rience, 16% 3 – 4 years, 29% represented those within 4 – 5 years and 15% had above
5 years of experience.

4.3.2 Control Systems

The study revealed the effect of control systems on Management of royalties within
the music industry in Kenya. It was established that 76% of the respondents said that
control systems affects Management of royalties within the music industry in Kenya
while 24% said that there was no effect on Management of royalties within the music
industry in Kenya.

4.3.3 Technology
Technology is one of the most important factors in enhancement of Management of
royalties within the music industry in Kenya. Based on the finding majority of the
respondents at 72% agreed that technology affects Management of royalties within
the music industry in Kenya while the remaining 28% said technology has no effect
on Management of royalties within the music industry in Kenya.

4.3.4 Government Policy

The study showed the effect of government policy on Management of royalties within
the music industry in Kenya where majority of the respondents at 88% agreed that
government policy affects Management of royalties within the music industry in
Kenya whereas 12% said government policy has no effect on Management of
royalties within the music industry in Kenya a.

4.3.5 Auditing
The study revealed the effect of auditing on Management of royalties within the
music industry in Kenya. It was established that 71% of the respondents said that

51
Auditing affects Management of royalties within the music industry in Kenya while
29% said that there was no effect.

4.3.6 Employee Competence

The study revealed the effect of employee competence on Management of royalties
within the music industry in Kenya. It was established that 91% of the respondents
said that Employee competence affects Management of royalties within the music
industry in Kenya while 9% said that there was no effect.

CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction

52
This chapter presents a brief report on the summary of findings, answers to research
questions, conclusion, recommendations, and suggestion for further studies.

5.2 Summary of Findings

5.2.1 What Is The Effect Of Control systems On Management of royalties within
the music industry In Kenya?
Control systems effect was cited to be very great by 25% respondents, 35% said the
effect is great, 17% said it is average, whereas 23% said there is no affect. From the
study it was concluded that control systems had an effect on Management of royalties
within the music industry in Kenya.

5.2.2 In What Ways Does Technology Affect Management of royalties within

the music industry In Kenya?
Technology effect on Management of royalties within the music industry was felt to
be very great by 21% respondents, 15% said the effect is great, 26% said it is average,
9% said it is low, whereas 28% said there is no affect.

5.2.3 How Does Government policy Affect Management of royalties within

the music industry In Kenya?
Government policy effect was cited to be very great by 37% respondents, 21% said
the effect is great, 18% said it is average; 15% said it is low, whereas only 9% said
there is no affect.

5.2.4 What Are The Effects Of Auditing On Management of royalties within

the music industry In Kenya?
Auditing effect was cited to be very great by 18% respondents, 26% said the effect is
great, 8% said it is average, 18% said it is low, whereas 29% said there is no affect.
From the study it was concluded that auditing had an effect on management of royal-
ties within the music industry in Kenya.

5.2.5 In What Ways Do Employee competence Affect Management of royalties

within the music industry In Kenya?

53
Employee competence effect on management of royalties within the music industry
was said to be very great by 22% respondents, 26% said the effect is great, 29% said
it is average; 14% said it is low, whereas only 9% said there is no affect.

5.3 Conclusions
Majority of the respondents showed that control systems had an effect on
management of royalties within the music industry in Kenya. The study therefore
concludes that control systems affects management of royalties within the music
industry in Kenya. When releasing a record, labels want to have control or ownership
of the ‘sound recording’ of a track. This is normally in the hands of the performing
artist and producer. They assign these rights to the label in exchange for royalty
payments, which are called the artist royalties and in cases where a producer is also
owed monies there are producer royalties.

Majority of the total respondents indicated that technology had an effect on manage-
ment of royalties within the music industry in Kenya. The study draws a conclusion
that technology affects management of royalties within the music industry in Kenya.
An efficient CoE facilitates creation of a single version of truth, resulting in better de-
cision support. Unified tools and technology platforms ensure common data structures
to help the music company improve productivity, reduce duplication effort and cost of
operations, and increase strategic and business focus.

The study concludes that government policy affects management of royalties within
the music industry in Kenya as majority of the respondents indicated. Regulatory re-
quirements give rise to challenges around internal / external audit, demand for in-
creased transparency in financial matters, and strict timelines for transaction process-
ing.

The findings indicated that auditing affected management of royalties within the
music industry. The study therefore concludes that auditing affects management of
royalties within the music industry in Kenya. Internal audit is an effective tool in
management of royalties within the music industry because internal auditors are
employees of MCSK hence they are better placed to understand the accounting
systems, the control procedures and the control environment.

54
Employee competence was rated high by most of the respondents and hence the
researcher concludes that employee competence affects management of royalties
within the music industry in Kenya. The foregoing problem is attributed to with
insufficient administrative staff with requisite skills, and high level of illiteracy
among artists and administration.

5.4 Recommendations
5.4.1 Control Systems
When releasing a record, labels want to have control or ownership of the ‘sound
recording’ of a track. This is normally in the hands of the performing artist and
producer. They assign these rights to the label in exchange for royalty payments,
which are called the artist royalties and in cases where a producer is also owed monies
there are producer royalties. Every manager should exercise caution so that actions
carried out, subject to external judgments are safeguarded by controls beforehand and
supported by documents of evidence within pertinent legislation and with very strict
responsibility. MCSK should report on the effectiveness of their internal controls over
financial reporting as part of an overall effort to reduce fraud and restore integrity to
the financial reporting process.

5.4.2 Technology
A music company should focus more on providing users with a multi-channel access
across different formats. Music companies need to develop a robust digital toolkit to
build a premium inventory, either in targeted and tagged site areas or interest-specific
e-newsletters or registration-driven applications. New strategies combining content
and applications offer significant value across traditional and digital media.

5.4.3 Government Policy

Regulatory requirements should give rise to challenges around internal / external au-
dit, demand for increased transparency in financial matters, and strict timelines for
transaction processing. The government should come up with policies which encour-
age and bring morale to artists through effective management of royalties.

5.4.4 Auditing

55
MCSK should be more aware of the threat of fraud and the need to be vigilant when
searching for instances of fraud following the well-publicized corporate collapses
earlier this decade. Internal audit is an effective tool in management of royalties
within the music industry because internal auditors are employees by MCSK hence
they are better placed to understand the accounting systems, the control procedures
and the control environment. MCSK should conduct thorough audit constantly in all
departments to induce discipline in the organization’s workforce. Risk resulting from
failure to safeguard assets from theft and failure to maintain adequate controls to
ensure adequate accounting records are mitigated or reduced consequently.

5.4.5 Employee Competence

Employee competence was rated high by most of the respondents and hence the re-
searcher concludes that employee competence affects management of royalties within
the music industry in Kenya. The management should ensure Skills and knowledge
retention of specialized skills, thereby helping to manage the music company's em-
ployee turnover better.

5.5 Suggestions for Further Studies

This study was on factors affecting management of royalties within the music industry
in Kenya. The research was only carried out using five variables; employee
competence, technology, auditing, control systems and government policy. The
researcher suggests that a further study to be carried out to investigate the effects of
organization policy and political influences on management of royalties within the
music industry.

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 APPENDIX II
QUESTIONNAIRE
Tick Where Appropriate and For Explanation, Please Be Brief

SECTION A: PERSONAL INFORMATION

1. Which gender are you?
Male
Female

2. Which is your level in the organization?

Top Level Management
Middle Level Management
Operational Staff

3. How many years have you worked in the organization?

Less than 2 years
2-3 years
3-4 years
4-5 years
Above 5 years

4. Which is your highest level of education?

Primary
Secondary
College
University Level

SECTION B: CONTROL SYSTEMS

5 Does control systems affect Management of royalties within the music industry in
Kenya?
Yes
No

61
Explain
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………

6. To what extent does control systems affect Management of royalties within the
music industry in Kenya?
Very great
Great
Average
No effect
Explain
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………

SECTION C: TECHNOLOGY
7. Does technology affect Management of royalties within the music industry in
Kenya?
Yes
No
Explain
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
……………………
8. To what extent does technology affect Management of royalties within the music
industry in Kenya?
Very great
Great
Average
Low
No effect

62
Explain
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………

SECTION D: GOVERNMENT POLICY

9. Does government policy affect Management of royalties within the music industry
in Kenya?
Yes
No

Explain
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………

10. To what extent does government policy affect Management of royalties within the
music industry in Kenya?
Very great
Great
Average
Low
No effect

Explain
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
………………………..
SECTION E: AUDITING
11. Does auditing affect management of royalties within the music industry in Kenya?
Yes
No
Explain
63
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………….

12. To what extent does auditing affect management of royalties within the music
industry in Kenya?
Very great
Great
Average
Low
No Effect
Explain
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………

SECTION F: EMPLOYEE COMPETENCE

13. Does employee competence affect management of royalties within the music
industry in Kenya?
Yes
No
Explain your answer
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
14. To what extent does employee competence affect management of royalties within
the music industry in Kenya?
Very great
Great
Average
Low
No effect

64
Explain your answer
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
…………..

Thank You for Your Cooperation

65