Board Structure, Earnings Management, Firm Characteristics and Audit Opinion in Commercial State Owned Enterprises in Kenya

Abstract

To evaluate the state of accountability in commercial state owned enterprises in Kenya this study evaluated the relationship among board structure, earnings management, firm characteristics and audit opinion. This study aimed to address gaps in literature in public sector context on the state of accountability. This study adopted positivism research philosophy as the study relied on existing theories to explain the relationship among the variables of the study and formulate four hypotheses. The population in this study constituted all the (33) commercial and manufacturing sector state owned enterprises in Kenya based on classification by state corporations’ advisory committee (SCAC). Data was analyzed using a multinomial logistic regression to draw conclusions. The study established that majority of commercial state owned entities in Kenya received modified audit opinion based on the auditor general audit reports. Qualified opinion accounting for 64.7 % of the audit opinions on commercial state owned entities, adverse opinion accounting 0.7% and 2.5% disclaimer opinion. Only 32.3% of firms received unqualified opinion or clean reports. Further, majority of firms had not complied with minimum requirements set out in the Mwongozo code on both board size and audit committee activity. The results on the first hypothesis indicate that board structure variables including; audit committee activity, board size, and board independence significantly influenced the odds of an entity receiving qualified opinion and unqualified opinion when compared with disclaimer opinion as reference category. On second hypothesis, the results indicated that earnings management did not mediate on the relationship between board structure and audit opinion. On the third hypothesis, the results revealed that firm characteristics variables firm size, firm age and liquidity significantly moderated on the relationship between board structure and audit opinion. In addition, jointly earnings management, board structure, firm characteristics significantly influenced the audit opinion. The findings will contribute significantly to knowledge in the public sector in Kenya, specifically the role of firm characteristics play in the audit opinion and board structure. Those charged with governance in state owned enterprises will also have to relook on how to improve accountability and effectiveness of state owned enterprises boards due to high percentage of firms receiving modified opinion pointing to low quality of financial information. These findings of both direct and indirect relationship will be useful in development of existing theoretical literature. These will particularly be useful to scholars and academicians interested in the developments on relationships among the research variables. Similarly, of interest will be the measurement and testing of these variables in public sector that has contributed toward research and methodology. The study relied only data from state owned entities in Kenya an emerging economy. Consequently, this study did not address the comparative aspects of governance issues from other emerging and developed economies. It will be important that future studies also cover other state owned enterprises that are not categorized as commercial to establish if the findings hold. In addition, it will be important in future to undertake comparative studies with the private sector entities to establish the differences that manifest between private owned companies and state owned enterprises. Researchers and scholars interested to further research in the in the topic, should consider the signaling effect of audit opinion and effect to; investors, lenders, donors, government funding and even management retention.