Relationship Between Audit Tenure and Earnings Management of Deposit Taking Sacco’s in Nairobi County

Abstract

The intention of the study was to interrogate the linkage between the auditor tenure and level of earnings management practices of deposit taking Sacco’s in Nairobi County during the 5-year period between January 2012 and December 2016. Discretionary accruals were used as proxies and measured using the modified Jones model. The study employed a descriptive research design and used multiple regression analysis. The dependent variable was discretionary accruals and audit tenure, return on assets, growth, firm size, firm age and cashflow from operations as the independent variables in defining the relationship that existed among audit tenure and earnings management of deposit taking Sacco’s in Nairobi County. The study used secondary data from proxy financial information for the 5-year period with the statistical population consisting of 41 DTS’s operating in Nairobi County as Licensed by SASRA. The study concluded that all DTS’s had complied with the Sacco societies regulatory authority term limit of 3 years for which an audit firm may be on record after which DTS’s are required to change auditors and showed that audit tenure had no influence on earnings management practices of DTS’s however, a significant relationship existed with return on assets, firm growth and cashflows from operating activities. The study recommends DTS’s to consider engaging a wide variety of firms within the existing pool, use of the Big-4 audit firms by DTS’s with a large asset base and coming up with measures of detecting earnings management by the audit firms.