Firm Characteristics And Quality Audit Of Firms Listed At The Nairobi Securities Exchange In Kenya

ABSTRACT

There have been numerous financial scandals and audit reporting failures in both public and

private organizations some of which are listed in the NSE which has led Companies in various

sector of the economy to experience financial distress; that is circumstances in which a

company cannot meet its current obligations using operating cash flows and it is therefore

faced with the need to employ corrective measures. Such distresses have been occasioned by

professional misconduct while handling financial accounts and consequently raising doubts on

auditing profession. Consequently, a lot of questions have been raised about the auditing

profession in Kenya. Much of the concerns are about reduced quality audit and independence

of auditors and especially the Big 4. This study therefore sought to establish the effect of audit

firm characteristics on audit quality of firms listed in the Nairobi Securities Exchange. This

study aimed to investigate the joint effect of audit firm tenure, auditor reputation, auditor

independence and auditor professional competence and due care on quality audit of firms listed

in the Nairobi Securities Exchange in Kenya. The study was anchored on the agency theory,

role theory and audit expectation gap and the signaling effect theory. A descriptive research

design was used. The researcher used primary and secondary data for a period of five years

between 2011 and 2015. Primary data was collected using structured questionnaires issued to

selected respondents and secondary data was derived from audited and published financial

statement for the listed companies in the Nairobi Securities Exchange and the NSE, CMA and

other relevant websites and recorded in a data collection sheet. A population of 67 listed firms

was the object of study out of which 33 firms were selected using purposive sampling

technique. This sample was approximately 50%. Inferential statistics like correlation analysis

and multiple regression analysis were used to measure and analyze the results of the study

which was analyzed and presented in form of statements and tables. The researcher applied

high ethical standards to ensure no information is misrepresented and citations made

accordingly. SPSS package version 7.0 was used to analyze the data. The findings and

conclusions focused on effects the independent variables have on quality audit for selected

firms listed in the NSE in Kenya. The recommendations thus enables audit firms, clients, all

users of financial information and investors to have in-depth knowledge of firm characteristics

that allow objective financial reporting and sound investment decision making. The study

found that firms allowed quality audit work to be carried out because of strong commitment

and dedication to management role and profession in the organization, that management

ensured that there was no personal relationship with the auditors that would lead to familiarity

threats and compromise their independence, that duration in years and rotation of auditor or

lead partner greatly affect quality audit for firms and that auditors have the required academic

qualifications to be professional auditors. The study concluded that audit tenure activities had

the greatest effect on the influence of stakeholder activities on audit quality, followed by

auditor reputation, then auditor independence then auditor professional competence while

disciplinary measures had the least effect on audit quality. The study recommends that there is

need to increase the proportion of independent auditors since an increase in their number

reduces the chances of financial misreporting and leads to positive perception by investors and

that there should be high level of professionalism by the audit firms.