Board Diversity, International Financial Reporting Standards Adoption, Legal Enforcement and Accounting Quality of Listed Firms at the East African Community Securities’ Exchanges

Abstract

In the recent past globally there has been a push to ensure diversity in representation across gender, age, nationalities among other diversity traits. For corporates, board diversity ensures heterogeneity of thoughts in boards enhancing the monitoring roles of a board which is expected to improve firm outcomes including accounting quality through financial reports. Financial reporting quality is likely to increase if financial reporting standards are adopted in an environment with strong enforcement measures. However, studies on board diversity, IFRS adoption and accounting quality have returned mixed findings. The main objective of the study was to evaluate whether there is association between diversity of boards, the application of IFRS, legal enforcement, and the accounting quality of companies quoted on East African equity markets. Accounting quality was assessed using indicators such as earning management, financial reporting value relevance, and financial information’s fundamental qualitative qualities. IFRS adoption was assessed using an IFRS compliance score sheet developed from IFRS disclosure checklist. Legal enforcement was assessed using WGI measures of regulatory quality and the rule of law. Blau Index and covariance were used to determine board diversity. Theoretically, the study was anchored on the upper echelon’s theory, which establishes the impact of senior executives’ traits on firm outcomes, agency theory highlights the monitoring responsibility of directors and information asymmetry theory which provides mechanisms guiding finance disclosures by firms. The study was conducted using a descriptive research approach and the positivist research philosophy. 53 listed firms provided secondary data drawn from Kenya, Uganda, Tanzania and Rwanda for a period of 8 years from 2013 to 2020. Descriptive statistics was utilized to gain insights from the research data. Diagnostics tests were conducted and the models used were found to be robust. Research models were tested using regression analysis. Baron and Kenny's (1986) mediating and moderating tests were applied. The findings show that board diversity significantly influenced the quality of accounting information. IFRS adoption mediated the association of board diversity and the accounting quality. Legal enforcement significantly moderated the relationship between board diversity and accounting quality. The study established a joint significant effect of IFRS adoption and legal enforcement on the accounting quality of listed firms in the East Africa securities exchanges. The research contributes to the existing body of knowledge on board diversity, adoption of IFRS, and quality of accounting, specifically it documents findings for East African nations which had been given minimal attention by prior studies. The study recommends that the financial markets and the accounting profession regulators need to develop guidelines such as allocation of specific quotas to women and youth to enhance board diversity during board composition and enhancement of financial disclosures by listed firms in East Africa. In addition, East African countries need to enhance adherence to the rule of law and improve on the quality of their regulations by developing strict punishment mechanisms for non-compliance to the laid rules.