Audit Committee Attributes as Determinants of Financial Reporting Scandals among Firms Listed on the Nairobi Securities Exchange

Abstract

Despite the adoption of the Capital Markets Authority (CMA) Corporate Governance Code (2015), International Financial Reporting Standards (IFRS), and strengthened corporate governance reforms, financial reporting scandals continue to persist among companies listed on the Nairobi Securities Exchange (NSE), undermining investor confidence and weakening the credibility of Kenya’s capital markets. Imperial Bank, CMC Holdings, Uchumi Supermarkets, Chase Bank are just some of the high-profile firms that had been exposed in scandals that point to common audit oversight and financial governance shortcomings. The current work conducted studies the individual audit committee attributes and their effect on the financial reporting scandals with emphasis on the Kenyan context, as other pieces of work focus on the audit committee attributes individually. The study thus looked at the influence of the audit committee attributes on financial reporting scandals in NSE listed companies in Kenya. In particular, the study examined the impact of the composition of the audit committee (independence, financial expertise, committee size, and frequency of committee meetings) on financial reporting scandals. Agency Theory and Fraud Diamond Theory were used as the theoretical underpinning for the study. The research design used is the explanatory research design and the data used for the research work is the primary data which was collected from the Finance officers, internal auditors and company secretaries of the 62 listed companies on NSE as at February 2025.  The hypotheses were tested by using bivariate regression analysis. The results indicated that audit committee independence (β = −2.38, p < 0.01), financial expertise (β = −1.74, p < 0.05), and frequency (β = −0.62, p < 0.05) of audit committee meetings significantly decreased the odds of financial reporting scandal, and audit committee size did not have a statistically significant impact. The regression model accounted for 37.2% of the variation in the occurrence of financial reporting scandals (R² = 0.372), suggesting that the audit committee attributes are important predictors of financial reporting integrity in NSE-listed companies. The study finds that substantive audit committee quality specifically independence and financial expertise is important in enhancing financial reporting integrity in emerging markets. The findings have implications for the literature on corporate governance as the authors attempt to add Agency Theory and Fraud Diamond Theory in weak institutional setting, while the policy implications cover the audit committee composition and corporate governance reforms for the CMA, NSE, ICPAK, and corporate boards in Kenya.