The Effect of Voluntary Disclosures on the Quality of Financial Reporting for Companies Listed at the Nairobi Securities Exchange

Abstract

Timely information that can be relied on is the most powerful tool in the hands of any stakeholder within the business environment. This is because the availability of relevant and reliable information at the right time can cause a stakeholder to make a prudent, efficient and informed decision and reap returns from having that timely information. Access to such is, however, a far-fetched illusion to stakeholders following the persistent problems of agency conflicts and information asymmetry. As a result, availing of some information concerning an organization’s performance is made mandatory by law and regulation. Even with this mandatory provision, there is at times a need for an organization to go beyond the set-out thresholds and avail additional information to its stakeholder in a bid to enhance the quality of its reports. Such voluntary disclosures are important and as such, an evaluation of whether they have any effect on the quality of financial information reported is called for. This study investigated the effect that such voluntary disclosures have on the quality of financial reports by looking at the yearly reports of organizations listed on the Nairobi Securities Exchange over a five-year period between 2011 and 2015. This data was coded, cleaned and analysed using the Statistical Package for Social Sciences version 20. The data was evaluated and analysed using a linear regression model. The results of the study were a confirmation that there does exist a relationship between voluntary disclosures and the quality of financial reporting as measured by the extent of earnings management. This has informed recommendations for policy and practice to preparers of financial reports and regulators concerning what voluntary disclosures ought to be made mandatory overtime owing to their great significance. This study recommends that organizations should have voluntary disclosure over and above the statutory prerequisites set by the administrative bodies, especially those identifying with Environmental Policy, Cost of Quality and Corporate Social Responsibility. The government should also exert the same efforts it is putting in encouraging firms to make corporate governance disclosures to all the other forms of voluntary disclosures.