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

Abstract

This research intended to outlay the effect of corporate governance on quality of financial reporting of listed firms at the Nairobi Securities Exchange. Corporate governance indicators used were board size, board meetings, board independence and presence of audit committee. Quality of financial reporting was measured using the total accruals to total asset ratio. Additionally, liquidity, leverage and profitability were used as the control variables. The research covered 35 non-financial firms registered at the Nairobi Securities Exchange and a five year period data was analyzed from 2014 to 2018. The research used a descriptive research design using panel data. Secondary nature data was extracted from audited financial statement of the firms under study which was then analyzed using multiple linear regression models in the Scientific Package for Social Sciences so as to unearth whether corporate governance has an effect on Quality of financial reporting of quoted firms at the Nairobi Securities Exchange. The analysis produced an adjusted R squared value of 0.798 which mean that 79.8% of changes in non-financial registered at the Nairobi Securities Exchange can be explained by the seven predictors thus 20.2% of the changes in quality of financial reporting is explained by factors not included in this study. This research also discovered a strong correlation between the predictor variables and quality of financial reporting of the non-financial firms registered at the Nairobi Securities Exchange (R=0.893). The analysis of variance showed that the model was suitable to explain the relationship between the studied variables because the p value was significant at the 5% level (p = 0.001). Results show that corporate governance has insignificant effect on quality of financial reporting of firms registered at the Nairobi Securities Exchange. Board meetings and firm leverage were found to have statistically significant effect on quality of financial reporting of firms quoted at the Nairobi Securities Exchange. Board size, board independence, audit committee presence, firm profitability and firm liquidity were also found to have a negative but statistically insignificant outcome on quality of financial reporting of non-financial firms registered at the Nairobi Securities Exchange. The research thus recommended that the quoted firms should ensure that their boards have reduced number of independent directors, as large number reduce the quality of financial reports. Further the research recommends that quoted firms should ensure that their board meetings should be averaged at 6 meetings per year to facilitate the proper role of the board. As well as management of listed firms should enhance full disclosure on the firms liquidity, leverage and profitability levels as any manipulation affects the quality of financial reporting and distorts the decision making of the users of the financial reports.