Audit Committee Characteristics and Quality of Financial Reporting In State Corporations in Kenya
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Abstract
The study sought to assess the influence of audit committee characteristics on the quality of financial reporting in state corporations in Kenya. Audit committees are created with a sole purpose of affirming the trust towards the company’ integrity in the hearts of the stakeholders in regard to the internal procedures; the exercise by the committee gives the stakeholders’ confidence in matters oversight assigned to the committee. Specifically, the study sought to examine the effect of audit committee expertise and audit committee independence on quality of financial reporting among state corporations in Kenya. An explanatory research design was employed to attain the study's purpose. The study's target population was the 187 government-owned enterprises in Kenya. A sample of 127 firms was selected using a stratified random sampling. A structured questionnaire was utilized to collect data. The data was analysed through descriptive and inferential statistics using the SPSS software. The findings from the study revealed that audit committee expertise has a significant influence on the quality of financial reporting in state corporations. The findings further revealed that the independence of the audit committee had a significant and positive influence on the quality of financial reporting in state corporations in Kenya. The study concluded that through the independence, and expertise of the audit committees, state corporations in Kenya had better quality of the financial reporting. It is therefore recommended that the government through the respective agencies upholds the independence and expertise of the audit committees in order to enhance their ability to deliver appropriate quality of the financial reporting in the corporations.
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References
Alkebsee, R. H., Tian, G., Garefalakis, A., Koutoupis, A., & Kyriakogkonas, P. (2022). Audit committee independence and financial expertise and earnings management and Financial reporting Quality: evidence from China. International Journal of Business Governance and Ethics, 16(2), 176-194.
Atieno, L. V. (2017). The Effect Of Audit Committee Characteristics On Fraud Reduction In State Ministries In Kenya. Nairobi: Unpublished Master Of Science In Finance And Economics, KCA University.
Baxter, P., & Cotter, J. (2019). Audit committees and earnings quality. Accounting & Finance, 49(2), 267-290.
Bedard, J., & Gendron, Y. (2016). Strengthening the Financial Reporting System: Audit Committees Deliver. International Journal of Auditing, 14(2): 174-210.
Bello, S. M., Ayoib, A. C., & Zalina, Y. M. (2017). Relationship Between audit committee Independence on Organisational Performance Of Public Universities In Nigeria. European Journal of Accounting, Auditing and Finance Research, 5(6), 1-23.
Bosse, D. A., & Phillips, R. A. (2016). Agency theory and bounded self-interest. The Academy Management Review, 41(2): 276-297.
Bushman, R. M., & Piotroski, J. D. (2017). Financial reporting incentives for conservative accounting: The influence of legal and political institutions. Journal of Accounting and Economics, 42(1), 107-148.
Evans, S., & Tourish, D. (2016). Agency theory and performance appraisal: How bad theory damages learning and contributes to bad management practice. Management Learning , 48(3), 271-291.
Furqan, A. C., Wardhani, R., Martani, D., & Setyaningrum, D. (2020). The effect of audit findings and audit recommendation follow-up on the financial report and public service quality in Indonesia. International Journal of Public Sector Management, 33(5), 535-559.
Gerayli, M. S., Pitenoei, Y. R., & Abdollahi, A. (2021). Do audit committee characteristics improve financial reporting quality in emerging markets? Evidence from Iran. Asian Review of Accounting, 7(2); 211-219.
Githinji, R. M. (2017). The Role Of The Audit Committee In The Corporate Governance Of State Corporations: A Case Of The Kenya Urban Roads Authority. University of Nairobi: unpublished Project Planning and Management thesis.
Goodwin, J. (2004). A comparison of internal audit in the private and public sectors. Managerial Auditing Journal, 19(5), 640-650.
Habib, A., Bhuiyan, M. B. U., & Wu, J. Y. (2021). Audit committee ownership and the cost of equity capital. Managerial Auditing Journal, 12(9); 103-119.
Hannafey, F. T., & Vitulano, L. A. (2013). Ethics and executive coaching: An agency theory approach. Journal of Business Ethics, 115(3): 599-603.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3(4): 305-360.
Jerubet, S., Chepng’eno, W., & Tenai, J. (2017). Effects Of Audit Committee Characteristics On Quality Of Financial Reporting Among Firms Listed In Nairobi Securities Exchange, Kenya. International Journal of Economics, Commerce and Management , 5(1), 553-569.
Kalabeke, W., Sadiq, M., & Keong, O. C. (2019). Auditors Tenure and Financial Reporting Quality: Evidence from a Developing Country. International Journal of Asian Social Science, 9(5), 335-341.
Kallamu, B. S., & Saat, N. A. (2015). Audit committee attributes and firm performance: Evidence from Malaysian finance enterprises. Asian Review of Accounting, 23(3), 206-231.
Kirui, E. K. (2022). Effect of audit committee characteristics on audit effectiveness in the county government of Kericho, Kenya (Doctoral dissertation, university of kabianga).
Kothari, C. (2011). Research Methodology; Methods and Techniques. New Delhi: New Age International Publishers.
Machini, H. M., Nyaberi, D., & Mugo, R. (2022). Effect of The Size of Audit Committee on Internal Audit Effectiveness in Kericho and Nyandarua County Governments in Kenya. Journal of Academic Research in Business and Social Sciences, 12(3), 1-8.
Malo-Alain, A., Aldoseri, M., & Melegy, M. (2021). Measuring the effect of international financial reporting standards on quality of accounting performance and efficiency of investment decisions. Accounting, 7(1), 249-256.
Maqsad, A. M. (2018). The Impact of Audit Committee Independence on Firm Performance of non-financial firms listed on the Jordanian stock exchange. Academy of Accounting and Financial Studies Journal , 22(5), 85-96.
Mardessi, S. (2021). Audit committee and financial reporting quality: the moderating effect of audit quality. Journal of Financial Crime, 29(1), 368-388.
Mwangi, A. K., Oluoch, J. O., & Muturi, W. (2017). Effect Of Audit Committee Diversity On Quality Of Financial Reporting In Non-Commercial State Corporations In Kenya. International Journal of Academic Research in Business and Social Sciences, 7(6), 288-302.
Nurul, H. M., Nawawi, A., & Salin, A. S. (2018). The Impact of Audit Committee Independence and Auditor Choice on Firms’ Investment Level. Social Sciences and Humanities , 26(3), 1433-1454.
Okeyo, M. O. (2021). Effect of Audit Committee Composition on Earnings Management Among Listed Manufacturing Firms in Kenya. Dissertation, University of Nairobi.
Oyetunji, M. A., & Handayani, W. (2018). Impact Of Audit Committee Expertise And Audit Committee Independence On Internal Audit Function. International Journal of Social Science and Economic Research, 3(3), 950-958.
Pham, Q. T., Ho, X. T., Nguyen, T. P. L., Pham, T. H. Q., & Bui, A. T. (2021). Financial reporting quality in pandemic era: case analysis of Vietnamese enterprises. Journal of Sustainable Finance & Investment, 6(9)1-23.
Public Financial Management Reforms Secretariat – PFMR. (2021). Financial Reporting for the state corporations, Semi-Autonomous Government Agencies, and Public Funds. Retrieved from: https://pfmr.go.ke/wp-content/uploads/2020/11/Unaudited-SCs-and-SAGAs-consolidated-financial-statements-FY-1920.pdf
Raimo, N., Vitolla, F., Marrone, A., & Rubino, M. (2021). Do audit committee attributes influence integrated reporting quality? An agency theory viewpoint. Business Strategy and the Environment, 30(1), 522-534.
Rezaee, Z., Olibe, K. O., & Minmier, G. (2018). Improving corporate governance: The role of audit committee disclosures. Managerial Auditing Journal, 18(16), 530-537.
Ruhnke, K., & Schmidt, M. (2017). The audit expectation gap: existence, causes, and the impact of changes. Accounting and Business Research, 44(5), 572-601.
Sagitaria, A., & Mita, A. F. (2019). Role of Audit Committee Financial Expertise and Their Status in Reducing Corporate Real Earnings Management. Academy of Accounting and Financial Studies Journal, 23(1), 212-219.
Salehi, M., Mokhtarzadeh, M., & Adibian, M. S. (2021). The Effect of Audit Committee Characteristics and Auditor Changes on Financial Restatement in Iran. Revista de Métodos Cuantitativos para la Economía y la Empresa, 31, 397-416.
Schneider, A. (1984). Modelling external auditors’ evaluations of internal auditing. Journal of Accounting Research, 22(2), 657-678.
Singoei, D. K. (2022). Board Gender Diversity, Audit Committee Activities and Financial Reporting Quality of Firms Listed in Nairobi Securities Exchange, Kenya. Eastern Journal of Economics and Finance, 7(1), 1-13.
Sterck, M., & Bouckaert, G. (2006). International audit trends in the public sector. The Internal Auditor, 63(4), 49-53.
The National Treasury and Planning. (2021). Consolidated financial statement for state corporations and SAGAs - Circular on the revised financial reporting templates Financial Year 2020/2021. Retrieved from: https://www.treasury.go.ke/wp-content/uploads/2021/07/Circular-On-Revised-Financial-Reporting-Templates-Fy-2020-21.pdf
Tran, L. T. H. (2022). Reporting quality and financial leverage: Are qualitative characteristics or earnings quality more important? Evidence from an emerging bank-based economy. Research in International Business and Finance, 60, 101578.
Uddin, N., Cheng, X., Ahmad, B., Sheikh, M. F., Adedigba, O. G., Zhao, Y., & Nazneen, S. (2021). Gender diversity in the audit committee and the efficiency of internal control and financial reporting quality. Economic research-Ekonomska istraživanja, 34(1), 1170-1189.
Velte, P. (2018). Is audit committee expertise connected with increased readability of integrated reports: Evidence from EU companies. Problems and Perspectives in Management, 16(2), 23-41.
World Bank (2021). Core-Kenya PER Kenya State Corporations Review: Corporate Governance and Fiscal Risks of State Corporations. Retrieved from: https://openknowledge.worldbank.org/bitstream/handle/10986/36436/Kenya-State-Corporations-Review-Corporate-Governance-and-Fiscal-Risks-of-State-Corporations.pdf?sequence=1
Zamzulaila, Z., Zarina, Z., & Dalila, M. I. (2007). The role of internal auditors in Malaysian local authorities. The International Journal of Interdisciplinary Social Sciences, 2(2), 237-244.
Atieno, L. V. (2017). The Effect Of Audit Committee Characteristics On Fraud Reduction In State Ministries In Kenya. Nairobi: Unpublished Master Of Science In Finance And Economics, KCA University.
Baxter, P., & Cotter, J. (2019). Audit committees and earnings quality. Accounting & Finance, 49(2), 267-290.
Bedard, J., & Gendron, Y. (2016). Strengthening the Financial Reporting System: Audit Committees Deliver. International Journal of Auditing, 14(2): 174-210.
Bello, S. M., Ayoib, A. C., & Zalina, Y. M. (2017). Relationship Between audit committee Independence on Organisational Performance Of Public Universities In Nigeria. European Journal of Accounting, Auditing and Finance Research, 5(6), 1-23.
Bosse, D. A., & Phillips, R. A. (2016). Agency theory and bounded self-interest. The Academy Management Review, 41(2): 276-297.
Bushman, R. M., & Piotroski, J. D. (2017). Financial reporting incentives for conservative accounting: The influence of legal and political institutions. Journal of Accounting and Economics, 42(1), 107-148.
Evans, S., & Tourish, D. (2016). Agency theory and performance appraisal: How bad theory damages learning and contributes to bad management practice. Management Learning , 48(3), 271-291.
Furqan, A. C., Wardhani, R., Martani, D., & Setyaningrum, D. (2020). The effect of audit findings and audit recommendation follow-up on the financial report and public service quality in Indonesia. International Journal of Public Sector Management, 33(5), 535-559.
Gerayli, M. S., Pitenoei, Y. R., & Abdollahi, A. (2021). Do audit committee characteristics improve financial reporting quality in emerging markets? Evidence from Iran. Asian Review of Accounting, 7(2); 211-219.
Githinji, R. M. (2017). The Role Of The Audit Committee In The Corporate Governance Of State Corporations: A Case Of The Kenya Urban Roads Authority. University of Nairobi: unpublished Project Planning and Management thesis.
Goodwin, J. (2004). A comparison of internal audit in the private and public sectors. Managerial Auditing Journal, 19(5), 640-650.
Habib, A., Bhuiyan, M. B. U., & Wu, J. Y. (2021). Audit committee ownership and the cost of equity capital. Managerial Auditing Journal, 12(9); 103-119.
Hannafey, F. T., & Vitulano, L. A. (2013). Ethics and executive coaching: An agency theory approach. Journal of Business Ethics, 115(3): 599-603.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3(4): 305-360.
Jerubet, S., Chepng’eno, W., & Tenai, J. (2017). Effects Of Audit Committee Characteristics On Quality Of Financial Reporting Among Firms Listed In Nairobi Securities Exchange, Kenya. International Journal of Economics, Commerce and Management , 5(1), 553-569.
Kalabeke, W., Sadiq, M., & Keong, O. C. (2019). Auditors Tenure and Financial Reporting Quality: Evidence from a Developing Country. International Journal of Asian Social Science, 9(5), 335-341.
Kallamu, B. S., & Saat, N. A. (2015). Audit committee attributes and firm performance: Evidence from Malaysian finance enterprises. Asian Review of Accounting, 23(3), 206-231.
Kirui, E. K. (2022). Effect of audit committee characteristics on audit effectiveness in the county government of Kericho, Kenya (Doctoral dissertation, university of kabianga).
Kothari, C. (2011). Research Methodology; Methods and Techniques. New Delhi: New Age International Publishers.
Machini, H. M., Nyaberi, D., & Mugo, R. (2022). Effect of The Size of Audit Committee on Internal Audit Effectiveness in Kericho and Nyandarua County Governments in Kenya. Journal of Academic Research in Business and Social Sciences, 12(3), 1-8.
Malo-Alain, A., Aldoseri, M., & Melegy, M. (2021). Measuring the effect of international financial reporting standards on quality of accounting performance and efficiency of investment decisions. Accounting, 7(1), 249-256.
Maqsad, A. M. (2018). The Impact of Audit Committee Independence on Firm Performance of non-financial firms listed on the Jordanian stock exchange. Academy of Accounting and Financial Studies Journal , 22(5), 85-96.
Mardessi, S. (2021). Audit committee and financial reporting quality: the moderating effect of audit quality. Journal of Financial Crime, 29(1), 368-388.
Mwangi, A. K., Oluoch, J. O., & Muturi, W. (2017). Effect Of Audit Committee Diversity On Quality Of Financial Reporting In Non-Commercial State Corporations In Kenya. International Journal of Academic Research in Business and Social Sciences, 7(6), 288-302.
Nurul, H. M., Nawawi, A., & Salin, A. S. (2018). The Impact of Audit Committee Independence and Auditor Choice on Firms’ Investment Level. Social Sciences and Humanities , 26(3), 1433-1454.
Okeyo, M. O. (2021). Effect of Audit Committee Composition on Earnings Management Among Listed Manufacturing Firms in Kenya. Dissertation, University of Nairobi.
Oyetunji, M. A., & Handayani, W. (2018). Impact Of Audit Committee Expertise And Audit Committee Independence On Internal Audit Function. International Journal of Social Science and Economic Research, 3(3), 950-958.
Pham, Q. T., Ho, X. T., Nguyen, T. P. L., Pham, T. H. Q., & Bui, A. T. (2021). Financial reporting quality in pandemic era: case analysis of Vietnamese enterprises. Journal of Sustainable Finance & Investment, 6(9)1-23.
Public Financial Management Reforms Secretariat – PFMR. (2021). Financial Reporting for the state corporations, Semi-Autonomous Government Agencies, and Public Funds. Retrieved from: https://pfmr.go.ke/wp-content/uploads/2020/11/Unaudited-SCs-and-SAGAs-consolidated-financial-statements-FY-1920.pdf
Raimo, N., Vitolla, F., Marrone, A., & Rubino, M. (2021). Do audit committee attributes influence integrated reporting quality? An agency theory viewpoint. Business Strategy and the Environment, 30(1), 522-534.
Rezaee, Z., Olibe, K. O., & Minmier, G. (2018). Improving corporate governance: The role of audit committee disclosures. Managerial Auditing Journal, 18(16), 530-537.
Ruhnke, K., & Schmidt, M. (2017). The audit expectation gap: existence, causes, and the impact of changes. Accounting and Business Research, 44(5), 572-601.
Sagitaria, A., & Mita, A. F. (2019). Role of Audit Committee Financial Expertise and Their Status in Reducing Corporate Real Earnings Management. Academy of Accounting and Financial Studies Journal, 23(1), 212-219.
Salehi, M., Mokhtarzadeh, M., & Adibian, M. S. (2021). The Effect of Audit Committee Characteristics and Auditor Changes on Financial Restatement in Iran. Revista de Métodos Cuantitativos para la Economía y la Empresa, 31, 397-416.
Schneider, A. (1984). Modelling external auditors’ evaluations of internal auditing. Journal of Accounting Research, 22(2), 657-678.
Singoei, D. K. (2022). Board Gender Diversity, Audit Committee Activities and Financial Reporting Quality of Firms Listed in Nairobi Securities Exchange, Kenya. Eastern Journal of Economics and Finance, 7(1), 1-13.
Sterck, M., & Bouckaert, G. (2006). International audit trends in the public sector. The Internal Auditor, 63(4), 49-53.
The National Treasury and Planning. (2021). Consolidated financial statement for state corporations and SAGAs - Circular on the revised financial reporting templates Financial Year 2020/2021. Retrieved from: https://www.treasury.go.ke/wp-content/uploads/2021/07/Circular-On-Revised-Financial-Reporting-Templates-Fy-2020-21.pdf
Tran, L. T. H. (2022). Reporting quality and financial leverage: Are qualitative characteristics or earnings quality more important? Evidence from an emerging bank-based economy. Research in International Business and Finance, 60, 101578.
Uddin, N., Cheng, X., Ahmad, B., Sheikh, M. F., Adedigba, O. G., Zhao, Y., & Nazneen, S. (2021). Gender diversity in the audit committee and the efficiency of internal control and financial reporting quality. Economic research-Ekonomska istraživanja, 34(1), 1170-1189.
Velte, P. (2018). Is audit committee expertise connected with increased readability of integrated reports: Evidence from EU companies. Problems and Perspectives in Management, 16(2), 23-41.
World Bank (2021). Core-Kenya PER Kenya State Corporations Review: Corporate Governance and Fiscal Risks of State Corporations. Retrieved from: https://openknowledge.worldbank.org/bitstream/handle/10986/36436/Kenya-State-Corporations-Review-Corporate-Governance-and-Fiscal-Risks-of-State-Corporations.pdf?sequence=1
Zamzulaila, Z., Zarina, Z., & Dalila, M. I. (2007). The role of internal auditors in Malaysian local authorities. The International Journal of Interdisciplinary Social Sciences, 2(2), 237-244.