The most commonly used Income smoothing practices are attributed to bad corporate governance. Bank managers and bank accountants use strategies that seek to erode profit mechanisms that amount to severe consequences for the entire banking and finance industry. Therefore the purpose of this study was to determine the effect of income smoothing practices on financial performance of Tier II commercial banks in Kenya. The study was based on information theory, agency theory and positive accounting theory. This study adopted an exploratory research design in explaining the relationship between the independent and dependent variables. The target population for the study included10 CBK licensed tier II commercial banks in Kenya where 40 respondents were included: purposive sampling technique was used to select Finance managers, internal auditors and accountants. The researcher obtained sample from all the 10 tier II commercial banks in their head offices in Nairobi, Kenya. Primary data was collected using a structured Questionnaire while complimentary data was collected from published financial statements from CBK Supervisory reports. The data was analyzed using the Statistical Package for Social Sciences (SPSS) version 20, by use of both descriptive and inferential statistics. The study results revealed that Income Smoothing had an insignificant coefficient of 0.296 with the Financial Performance of tier II commercial banks in Kenya.. According to the findings, exclusion of liabilities activities are the source of funds for the banks. Based on these findings, the study recommended that watchdogs of the accounting practices need to exercise strict oversight on the extent to which Commercial bank adopt income smoothing issues. The study findings would form a timely and solid foundation that the banking industry pundits and policy makers would base most of their policy priorities in responding to the volatile accounting situation in Kenya today.
Keywords: Financial Performance, Income Smoothing, Kenya, tier ii commercial banks
