Audit committee attributes, firm characteristics, internal control framework and financial reporting quality of the State-owned Commercial enterprises in Kenya

Abstract

There is very limited information available on the effect of audit committee attributes, firm characteristics and internal control framework on financial reporting quality of stateowned commercial enterprises in Kenya with majority of evidence on financial reporting quality obtained from public listed and private companies, locally and internationally. The government from time to time has enacted various laws and regulations and issued guidelines with the aim of strengthening financial reporting quality and internal controls to safeguard stakeholder’s interests. Notwithstanding these intercessions, innumerable state-owned commercial enterprises have failed to demonstrate quality financial reporting in the annual reports and audited financial statements. The primary objective of the study was to establish the relationships among audit committee attributes, firm characteristics, internal control framework and financial reporting quality of state-owned commercial enterprises in Kenya. Distinctively, the study explored to establish the relationship between audit committee attributes and financial reporting quality; to determine the effect of firm characteristics on the relationship between audit committee attributes and financial reporting quality; determine the effect of internal control framework on the relationship between audit committee attributes and financial reporting quality and to establish the joint effect of audit committee attributes, firm characteristics and internal control framework on financial reporting quality of SOCEs in Kenya. Numerous measures have been used in examining financial reporting quality by researchers. However, this study used accrual quality, qualitative characteristics and timeliness of reporting as indicators of financial reporting quality. The research was anchored on agency theory supported by institutional, power and actor-network theories and guided by positivism research philosophy and used correlational and descriptive research design. The study used secondary data for a period of eleven years (2008-2018) to construct amalgamated data on study variables with a study population of 122 state-owned commercial enterprises as of 31st May 2018. The study employed correlation and panel regression analysis model in the achievement of the study objectives. Further, the study adopted Baron and Kenny (1986) approach in testing for moderation and mediation effect of firm characteristics and internal control framework respectively on the relationship between audit committee attributes and financial reporting quality of SOCEs while panel regression analysis model was used to examine the joint effect of audit committee attributes, firm characteristics and internal control framework on financial reporting quality. The results revealed that a statistically significant relationship existed between audit committee attributes and financial reporting quality while firm characteristics except for firm liquidity were found not to moderate the relationship between audit committee attributes and financial reporting quality at 5% significant level. Further, internal control framework did not mediate the relationship between audit committee attributes and financial reporting quality. Audit committee attributes, firm characteristics and internal control framework jointly significantly predicted financial reporting quality of state-owned commercial enterprises in Kenya. The study recommends standard setters, boards and management and other stakeholders in state-owned commercial enterprises design and implements internal controls that enhance financial reporting quality. Secondly, audit committee members appointed possess the right qualification and expertise to ensure that quality information is disclosed in audited financial statements and annual reports augment and improve financial reporting quality.