Effect of Audit Committee Characteristics on Budgetary Compliance of Commercial State Corporations in Kenya

Abstract

Audit committee characteristics have been associated with numerous benefits including reducing the agency conflicts among stakeholders of a firm. An ideal audit committee would aid in guaranteeing budgetary compliance. In Kenya, it has been established that some Commercial State Corporations spend more funds than allocated by the national government and their internally generated revenues. This is in complete disregard of the PFM Act of 2012. Having an effective audit committee in place, would go a long way in ensuring budgetary compliance among the commercial state corporations. The main intention of this research was to examine audit committee characteristics influence on budgetary compliance of commercial state corporations in Kenya. Agency theory, stakeholder theory and stewardship theory were adopted to anchor the study. A descriptive research design was used in this research. The target population was the 54 commercial state corporations in Kenya. Secondary data was obtained from the Office of the Auditor General and individual CSCs annual reports for a 5 year period (2017 to 2021). Upon collection of the data, inferential as well as descriptive statistics generated included frequencies and percentages and correlation and panel linear regression respectively. The regression results produced an R square of 0.2259 which implies that 22.59% of the changes in budgetary compliance among commercial state corporations can be explained by the six selected variables for this study. The overall model was found to be statistically significant as exhibited by a p value of 0.000 which was less than 0.05. The study further revealed that audit committee independence, audit committee size and firm size had a positive and significant effect on budgetary compliance of CSCs in Kenya while financial leverage has a significant negative effect. Audit committee tenure and meetings frequency had no significant effect on budgetary compliance. This study concluded that audit committee characteristics are essential for CSCs to use in their endeavor to improve on their budgetary compliance. The study recommends that management of commercial state corporations should ensure their audit committees are independent and audit committee assumes the recommended characteristics and adequacy as this will enhance budgetary compliance. It is further recommended that policy makers should come up with sound policies to guide commercial state corporations on audit committee characteristics.