Relationship between the composition of the audit committee and earnings quality in Tier One banks in Nairobi City County, Kenya.

Abstract

This study investigates the relationship between audit committee composition and earnings quality in Tier One banks in Nairobi City County, Kenya. The composition of audit committees, particularly the presence of independent directors, financial experts, and industry experts, is hypothesized to significantly influence the quality of reported earnings. Using a sample of six Tier One banks over the period 2016-2021, this study employs a correlational research design to examine this relationship. Data was collected through questionnaires administered to 90 respondents across operational, middle, and lower management levels, with a response rate of 67%. The study utilized descriptive statistics, correlation analysis, and multiple regression analysis to analyze the data. Key findings indicate a positive and statistically significant relationship between audit committee composition and earnings quality. Specifically, the presence of independent directors (r = 0.38, p < 0.05), financial experts (r = 0.29, p < 0.05), and industry experts (r = 0.26, p < 0.05) on the audit committee were all positively correlated with measures of earnings quality. The regression analysis further confirmed these relationships, controlling for other audit committee characteristics such as size and meeting frequency. These findings suggest that the composition of audit committees plays a crucial role in enhancing the quality of financial reporting in Tier One banks in Kenya. The study recommends that regulatory bodies and bank management prioritize the appointment of independent directors with relevant financial and industry expertise to audit committees. This research contributes to the existing literature on corporate governance in the banking sector and provides practical implications for improving financial reporting quality in emerging markets.