The Effect Of Audit Committee Characteristics On The Financial Performance Of Manufacturing Firms Listed At The Nairobi Securities Exchange In Kenya

Abstract

Audit committees are established by regulations to help stem financial irregularities in corporates thus enhancing the financial performance of firms. However, financial crises experienced by listed firms, poor performance and collapses of others have raised concerns about the role of audit committees on financial performance. As a result, this study's major objective was to evaluate the effect characteristics of the audit committee had on the financial performance of manufacturing firms listed on the Nairobi Securities Exchange in Kenya. Guided by the agency theory as the anchoring theory and stakeholder, stewardship, and resource-based theories as to the other guiding theories, the study examined the effects of; audit committee independence, the expertise of audit committee members, audit committee gender diversity, audit committee meetings, and audit committee size on the financial performance of manufacturing firms listed at the NSE. The study adopted a mixed research design combining descriptive research design and longitudinal research design. The target population of the study is all the 17 manufacturing firms listed in the manufacturing and allied, construction and allied, agricultural and commercial and services sectors of the Nairobi Securities Exchange. As the target population was small, the study did not result in sampling but carried out a census. Secondary data used in the study was collected from published financial statements using a data collection sheet. STATA statistical software was used to test the model as well as carry out diagnostic tests. To analyse the data, this study utilized pooled ordinary least squares regression on 127 firm years of observations. The findings of the study revealed that jointly, audit committee characteristics accounted for a 22 per cent change in financial performance. nevertheless, mixed findings concerning each specific influence of each disaggregated variable was reported. Findings revealed that individually the size, expertise and independence all had a positive and statistically significant association with firms financial performance. The negative but statistically significant effects were found on the relationship between audit committee meetings and financial performance. However, audit committee gender diversity was found to have a statistically insignificant association with financial performance. This research study offers useful insights to the regulator of listed firms, investors and managers of the manufacturing companies. They may find the findings in this study useful and hence look for ways to enhance the effectiveness of the audit committees and eventually financial performance. Policymakers and regulators should make recommendations to manufacturing firms to develop efficient governance structures in audit committees that fit with the unique features of such entities.