Corporate Governance Practices And Quality Of Financial Reporting Of Companies Listed On Nairobi Securities Exchange In Kenya

ABSTRACT

Financial reporting communicate to outside world about a corporate’s financial performance and position, and represents managements’ accountability to shareholders on stewardship role of resources entrusted to them. In the recent past there have been instances of financial reporting misrepresentation leading to lack of confidence in financial reporting credibility and loss of investors’ wealth. In response to corporate financial reporting scandals, regulators have responded by legislating corporate governance reforms to restore credibility of financial reporting and protect investors’ wealth. The objective of the study was to determine the relationship between corporate governance practices and quality of financial reporting of companies listed on the NSE. The corporate governance practices considered within the study were board of directors, audit committee, internal audit function, external auditor and enterprise risk management. Financial reporting quality was based on qualitative characteristics of financial reporting. The study targeted all of the 66 companies listed on the NSE as at end of year 2016, but managed a response of 40 companies which was a response rate of 61%. The researcher used a descriptive correlation research design, and purposively sampled heads of internal audit function of listed companies. Primary data on study variables was collected using structured questionnaires. The primary data from the field was analyzed by use of descriptive and inferential statistics and presented in tables for ease of understanding. Correlation analysis and multiple regression were used to study the relationship between the variables. The study established a positive and significant relationship between all the corporate governance practices and quality of financial reporting of companies listed on NSE at a 5% significance level. The study concluded that board composition, audit committee, internal audit, external auditor and enterprise risk management explain the quality of financial reporting of listed companies. The study therefore recommends for strengthening of corporate governance practices as there is evidence of a relationship between corporate governance practices and quality of financial reporting. Strong and effective corporate governance practices will translate into high quality financial reporting which will promote decision usefulness of financial reports to investors and other stakeholders.