Effect of Corporate Governance on Financial Reporting Quality in Non-governmental Organizations: a Case Study of Nairobi County, Kenya

Abstract

Corporate governance has shown to improve financial reporting quality. Following a series of NGOs collapsing due to financial reporting quality issues, corporate governance has recently received a lot of attention in Kenya. The purpose of this study was to evaluate the relationship between governance and financial reporting quality in NGOs in Nairobi County using a descriptive design. The population of the study was 285 registered NGOs in Nairobi County between 2016 and 2020. The sample size consisted of 74 NGOs selected using The Slovin's Formula. Systematic sampling was utilized to choose the appropriate sample size where every 4th NGO was selected limiting sampling bias. The research was based on secondary sources of data from annual reports by NGOs. The published reports were sourced from the NGO board website. Average firm data was used for analysis. Various tests were done to check on the assumptions of the regression model. They included normality, heteroskedasticity, and multicollinearity. The descriptive statistics, correlation and regression analysis were used for analysis generated through SPSS. From the model summary, corporate governance had a strong relationship with FRQ. Corporate governance variables used in this research were found to contribute 64.9% change in FRQ. This shows that corporate governance variables controlled by firm size are major factors in financial reporting quality of NGOs. From the ANOVA, the model fitted the data ass the significance value was less than 0.05. From the descriptive, financial reporting showed a mean of above 60%. This indicates that 60% of the NGOs had their reports signed by auditors on time with the quality differing so much across the NGOs. Board composition averaged at 64% and differed so much across the NGOs. From the regression analysis, board composition showed a positive and significant effect on FRQ. Correlation analysis indicated that a positive and significant relationship exited between board composition and FRQ. From the descriptive statistics, gender diversity showed a mean of 33.9%. From the regression, board diversity showed a positive but insignificant effect on FRQ of NGOs. From the correlation analysis showed a positive relationship between board diversity and FRQ. From the descriptive statistics, board independence showed a mean of 38.45%. Board independence showed a positive effect on FRQ. Correlation analysis showed a positive and significant coefficient. Firm size showed an average log of assets of 14.29. Firm size showed an insignificant positive relationship with FRQ. Findings showed that the ratio of independent to total board members was below 50%. Board independence showed a positive effect on FRQ. Correlation analysis showed a positive and significant coefficient. Firm size showed an insignificant relationship with FRQ. The study concludes that corporate governance variables have a relationship with FRQ of NGOs in Nairobi County. The study recommends that NGOs increase the number of non-executives, female and independent directors in order to enhance FRQ. A similar study in a rural county and adopting primary data is recommended.