Effect of Audit Committee Characteristics on Quality of Financial Reporting among Non-Commercial State Corporations in Kenya

Abstract

The purpose of this study was to establish the effect of audit committee characteristics on quality of financial reporting in non-commercial state corporations in Kenya. Specifically, the study established the effect of audit committee independence, diversity, financial competence and meetings on quality of financial reporting. All the non-commercial state corporations were studied. The study was founded on agency theory, stewardship theory, the policeman theory, lending credibility theory, theory of inspired confidence and stakeholder theory. Empirical evidence on influence of audit committees on quality of financial reporting was reviewed analysed and research gaps identified. The study adopted descriptive research design and the target population of the study was the seventy two non-commercial state corporations that existed subsequent to the introduction of Treasury guidelines in 2005 on formation and operationalization of audit committees in the public sector. The study used census on all 72 state corporations. The study employed purposive sampling to select the respondents from the target population. The study used primary and secondary data. Primary data was obtained from administration of the questionnaires and the secondary data obtained from the Kenya National Audit Office annual reports, Audited Financial statements of state corporations and Finance Bills of the respective financial years. Descriptive statistics used were frequencies, mean and standard deviation, while inferential statistics used are correlation and regression analysis. Regression analysis was employed to measure relationships between dependent and independent variables. The findings from both correlation and regression analysis revealed that audit committee independence, audit committee diversity, audit committee financial competence and audit committee meetings had statistical significant relationship with the quality of financial reporting. The results revealed that audit committee independence, audit committee diversity, audit committee financial competence and audit committee meetings reduced the ratio of queried transactions to annual budget of non-commercial state corporations in Kenya. From the findings, the study concluded that audit committees of non-commercial state corporations must have high level of independence, diversity, financial competence and hold quality meetings in order to enhance the quality of their financial reporting. The study recommended that audit committees in non-commercial State Corporation should be as independent as possible. Independence has been accepted as a good practice in corporate governance. This study also recommended that when constituting audit committees in state corporation consideration should be put on diversity. Audit committees should consist of diversified members. This is because demographic diversity of audit committee influences the quality of firm„s financial reporting. The study also recommended that audit committees should consist of members with knowledge in accounting and finance which provides a good basis for audit committee members to examine and analyse financial information. The limitations of the study included inconsistency in the secondary data sources especially on the quality of financial reporting. The study was also limited by busy schedule of the respondents who were mainly heads of audit department. The study recommended that future studies should focus on establishing the effect of board characteristics on the quality of financial reporting in state corporations