The Effect of Corporate Governance on Financial Reporting Quality of Firms Listed at the Nairobi Securities Exchange

Abstract

Earnings “management stems from agency problems, the separation of management and ownership, and information asymmetry, management having comparative information over outsiders. Owing to the widely publicized financial reporting frauds, regulators have reacted to this through making reforms on the corporate governance structures contending that the credibility of financing reporting is immensely improved by having strong corporate governance structures. The probability of manipulation of earning is systematically associated with the weaknesses in the oversight of management such as lack of audit committee, Chief Executive Officer (CEO)-chairperson duality, and insider board membership domination. The financial reporting integrity however depends on other conduct and performance of financial reporting ecosystem member such as the management, auditors, and directors. The overall objective of the study was to establish effect of corporate governance on the financial reporting quality of firms listed on the Nairobi Securities Exchange. It also aimed at reviewing the increasing body of theoretical and empirical studies that have endeavored to examine the range of magnitude and effects of corporate governance on financial reporting quality. The resource dependency, stakeholder, and agency theories guided the current study. The current study utilized the descriptive research design. The target population was all the 64 listed firms at the Nairobi Securities Exchange. The study employed a census and it examined the whole population. The unit period of analysis was annual, and data was collected for the period from 2016 to 2020; the period comprised of five years. The study applied correlation analysis and multiple linear regression model with the technique of estimation being Ordinary Least Squares (OLS) so as to establish the relationship of board independence, audit and risk committee, board size, and firm size with financial reporting” quality. The study findings were that board independence, audit and risk committee, board size, and firm size do not have a significant correlation with financial reporting quality. Further study findings were that the model entailing; entailing corporate governance that include; board independence, audit and risk committee, and board size, as well as firm size, explains financial reporting quality to a very least extent with a coefficient of determination value of 2.04%. Additional study findings were that that the model entailing corporate governance that include; board independence, audit and risk committee, and board size, as well as firm size, does not significantly predict financial reporting quality. Final study findings were that board independence, audit and risk committee, board size, and firm size do not have a significant relationship with financial reporting quality. Policy recommendations are made to the government officials and policy formulators in the financial sector, mainly the regulator, the Capital Markets Authority (CMA), and the Treasury to utilize corporate governance when endeavouring to boost financial reporting quality, and by extension fraud, in order to boost the credibility of the capital markets. Further recommendations are generated to the financial analysts to utilize corporate governance when analysing the financial statements of listed firms when trying to estimate their intrinsic values. Finally, recommendations are generated to consultants and listed firms practitioners to utilize corporate governance when trying to bolster financial reporting quality and minimize the principle-agent conflict.