The Effects of External Audit Quality on the Financial Performance of Commercial Banks in Kenya

Abstract

The objective of this study was to find out the correlation between external audit quality and financial performance of commercial banks in Kenya. The specific objectives were: to evaluate the effect of auditor independence on financial performance of banks; to assess the effect of auditor’s professional competence on the financial performance of banks; to examine the effects of providing non-audit services on the financial performance of banks and to determine the influence of auditor’s compliance with auditing standards on financial performance of banks. The study was conducted among the 41 registered commercial banks in Kenya and since the sample size is small the researcher conducted the survey in all the banks. Three theories were reviewed to explain the need for audit including agency theory, lending credibility theory and inspired confidence theory. The study used descriptive research design. A structured questionnaire was administered to the sample to gather primary data. Secondary data was obtained from books and other relevant publications, annual financial reports and prior researches conducted in the area. The data was analyzed using statistical package of social sciences (S.P.S.S). The conclusion of this study is that the relationship between financial performance and audit quality is positive and substantial. Specifically, the study established that there is an affirmative correlation between financial performance and compliance with auditing standards, auditor independence, auditor professional competence and experience and a negative relation with provision of non-audit services. The study recommends that commercial banks should pay attention to the quality of audit they receive from external auditors since the findings showed that it influences financial performance. The study suggested further research to determine a universally acceptable definition and measure of audit quality.