Board Diversity, Firm Profitability, Internal Controls And Financial Reporting Quality Of Nairobi Securities Exchange-Listed Companies In Kenya

Abstract

Corporate accounting scandals have cast doubt on the accounting profession's integrity and usefulness. To safeguard stakeholders' interests, the government of Kenya has enacted and released several laws, rules, and guidelines over the years. Despite these interventions, several organizations' annual audited financial statements have failed to demonstrate quality financial reporting that promotes accountability and transparency through comprehensive disclosures. Financial reporting primarily provides high-quality financial data on economic entities, essential for making economic decisions. The study examined the relationship between board diversity and financial reporting quality, the impact of firm profitability on board diversity and financial reporting quality, the influence of internal controls on board diversity and financial reporting quality, and the combined impact of board diversity, internal controls, and firm profitability on financial reporting quality of Nairobi Securities Exchange(NSE)-listed firms. To assess the quality of financial reporting, researchers have utilized a variety of measures. However, this study used IFRS disclosure, qualitative characteristics, and auditor type as indicators of financial reporting quality. This research was anchored on agency theory supported by upper echelons theory, resource dependence theory, and social psychology theory. The researcher utilized a positivist research philosophy and a correlation descriptive study design. Secondary data was gathered from NSE-listed companies' audited annual reports from 2014 to 2018. Descriptive statistics, correlation analysis, and panel data model estimations were conducted using fixed effects regression model as Hausman test found it appropriate. Moreover, the study adopted Baron and Kenny’s (1986) model estimation processes in testing for moderation and mediation effects of firm profitability and internal controls respectively on the relationship between board diversity and financial reporting quality of NSE-listed firms. The results revealed a statistically significant relationship between board diversity and financial reporting quality while firm profitability was found not to moderate the relationship between board diversity and financial reporting quality at 5% significant level. Likewise, internal controls did not significantly mediate the relationship between board diversity and the financial reporting quality of NSE-listed firms in Kenya. Lastly, board diversity, firm profitability and internal controls jointly significantly predicted the financial reporting quality of NSE-listed firms in Kenya. The findings complemented the key propositions of agency theory, upper echelons theory, resource dependence theory and social psychology theory. Also, the study made significant contribution to policy and management. On policy, regulators, such as ICPAK may use the research findings to enhance financial disclosure requirements. On management practice implication, the study recommends the need for NSE-listed firms to consider people with more experience and gender diversity while limiting the number of independent board members when constituting boards to improve the quality of financial reports and avert possible collapse. The study had limitations such as failure to consider unlisted firms hence any generalization of the results of this study cannot be made without that caution; study was carried out in a single country context hence likewise inhibiting generalizability of the findings. Finally, the study made suggestions for areas for further study such as the sample size may be enlarged, and non-listed companies may be researched alongside listed companies, hence results may inclusive of all companies, not only to champion but rather facilitate generalization.