Survey of the extent of compliance to international accounting standards disclosure requirements for listed companies at the Nairobi Stock Exchange

Abstract

In 1998 the council of Institute of Certified Public Accountants of Kenya (lCP AK) adopted international accounting standards for financial reporting in Kenya and required companies to prepare their financial statements in accordance with IAS and the financial statements to be audited in accordance with international standards on auditing. Since 1999, auditors opinion in the financial statement states that the financial statements are prepared in accordance with the IAS. One may however ask whether in reality the financial statements fully comply with the requirements of IAS. This study attempted to answer some key questions on the extent of compliance to IAS requirements on disclosure by listed companies in Kenya. The specific objectives of the study were; a) To determine the extent of compliance to IAS disclosure requirements among companies in Kenya. b) To identify set of factors that may have an impact on the level of compliance to IAS disclosure requirements in Kenya. This study looked at the 47 companies quoted at the Nairobi Stock Exchange whose financial statements for year ending any month of 2004 had already been filed with the NSE. The study used the disclosure index method and a percentage calculated as the total number of items disclosed divided by the total number-.of items that should have been disclosed. A data collection instrument was compiled by bringing together the disclosure requirements of seventeen IAS. To test whether various factors had an impact on levels of disclosure, the study divided the population into various groupings and using t test of significance at 5% level of confidence tested whether the means between various groups were significantly different. The conclusion of the study is that the overall level of compliance among quoted companies at the Nairobi Stock Exchange was 71.95% with the highest level being 81.72% by a big company and the lowest being 55.56% by a small company. This results are disappointing in the sense that one would expect higher levels of compliance among quoted companies and especially so as most of them are audited by the big 4 auditing firms. Its apparent therefore that level of compliance is low in Kenya as one would expect much lower compliance among smaller companies and especially those audited by the very small firms. The t-score analysis results showed that the firm size as measured by its annual turnover and the type of the auditor as factors that have significant impact on the levels of compliance to IAS disclosure requirements in Kenya. Though companies in the finance sector were found to comply more than companies in other sectors, the difference in the means for various industry categories were found not to be statistically significant thus the industry does not have a significant impact on the level of compliance. More profitability companies were found to comply more than those less profitable as is the case with less geared companies. T test analysis however showed the difference between the means not to be significant thus the conclusion that profitability and gearing are factors that do not have significant impact on the levels of compliance to IAS disclosure requirements in Kenya. The findings of this study confirms the findings of previous other studies such as Kinya (1993), Street and Gray (2001) and Elsalam and Weetman (2002) who all found that the type of the auditor has a significant impact on the levels of compliance to IAS disclosure requirements. The study also confirms the findings of Street and Gray in as far as profitability and the industry as factors that do not have significant impact on levels of compliance. The findings of this study are however different from those of Kinya (1993) and Street and dray (2001), who found company size as not having a significant impact on the levels of compliance. This study found company size as measured by annual turnover to have a significant impact on the levels of compliance to IAS disclosure requirements in Kenya.