Examining Factors That Are Associated With Financial Quality of Listed Commercial Banks in Kenya

Abstract

There is very limited information available on the e ect of board diversity and internal controls on Financial Reporting Quality (FRQ) of listed commercial banks in Nairobi Securities Exchange (NSE) in Kenya. To safeguard stakeholders’ interests, the government of Kenya has from time-to-time enacted numerous laws and regulations and issued guidelines. Notwithstanding these intercessions, various organizations have failed to demonstrate quality nancial reporting in the annual reports and audited nancial statements. Financial reporting quality promotes accountability and transparency through comprehensive disclosures. Primarily, it provides high-quality nancial reporting information concerning economic entities, mainly nancial in nature, useful for economic decisionmaking. The broad objective of this study was to establish the linkage amongst board diversity and internal controls on Financial Reporting Quality (FRQ) of commercial banks listed in NSE. Speci cally, the study determines the e ect of board diversity on FRQ of NSE listed commercial banks; to examine the in uence of internal controls on the relationship between board diversity and FRQ of NSE listed commercial banks, and evaluate the joint in uence of board diversity and internal controls on FRQ of NSE listed commercial banks. The study used IFRS Disclosure, and qualitative characteristics as indicators of nancial reporting quality. The study was anchored on agency theory. Correlational descriptive research design was adopted. The study population consisted of 11 commercial banks in NSE as at 31st December 2019. Secondary panel data was collected from the audited annual reports of NSE listed commercial banks for ve years from 2015 to 2019. Descriptive statistics, correlations analysis, panel data model estimations were conducted. From the ndings, results from the investigation of the rst hypothesis revealed that board diversity indicators or parameters, jointly had a signi cant e ect on quality of nancial reporting. Speci cally, age and gender of the board members had individual positive and signi cant e ect on FRQ whereas quali cation of board members board independence and FBM were statistically not signi cant. The second objective indicate that internal controls have signi cant intervening impact on the association between board diversity and FRQ of rms registered on the NSE. The third objective revealed that board diversity and internal controls have signi cant joint impact on FRQ of rms registered on the NSE. Based on the ndings, there is need to embrace board diversity with proper internal control systems, which acts as an internal governance mechanism put in place by the rms that are focused towards countering managerial opportunistic behaviours. On the other hand, the policy initiatives are to use the ndings for their applicability such that some NSE listed commercial banks had not in the past received best governance at the board level and yet they are key to the overall performance of the industry as well as the contribution to growth of the economy