Effect of financial reporting practices on the quality of annual accounts in the public sector in Kenya

Abstract

There have been an increase in demand for public accountability and transparency in the public sector in Kenya. Preparation of transparent and comprehensible financial statements and other annual accounts is an essential approach for public sector to demonstrate accountability to the general public who support them through taxes and development partners who over and over again throw in to the development activities of government. Effective financial reporting practice is important to Kenya’s public sector being in a position to make policy and deliver services to the citizenry. The research design for this study was a descriptive survey method where questionnaires were used to collect information and data. The population of interest was heads of accounting units of the previous 40 ministries and 12 departments which financially reported for the year 2011/2012. Data collected was analyzed using both quantitative and qualitative methods. Quantitative data was analyzed using descriptive analysis while analysis of qualitative data was done using content analysis.The study revealed that there is ownership and dedication in financial reporting practices in Kenya’s public sector. The ministries and departments have adopted excellent financial reporting practices all the way through the year. The study also found that ministries and departments have managed staff and other resources effectively. However, there are challenges in financial statements or annual accounts preparation in the ministries or departments that include lack of generally accepted accounting standards in the public sector and cash accounting instead of using accrual, problems with IFMIS program usage, treatment of old balances and reconciliation of below the line accounts. The regression analysis revealed that budgeting was the only independent variable with a significant effect on quality of annual accounts (β=.557, p<.000) when each and every one of the variables were inserted into regression equation. It was established that the better the budgeting practices, the better the quality of annual accounts. Financial Statements Preparation, Appropriation and Auditing did not attain the required threshold to extensively affect quality of annual accounts, so they played no significant role. The study recommends ways to improve financial statements or annual accounts preparation that include regular training on IFMIS program application, clear guidelines from treasury on treatment of old balances as well as monthly reconciliation of below the line accounts.