Audit Firm Characteristics and Audit Quality for Firms Listed at the Nairobi Securities Exchange in Kenya.
Mugo, Eliud Munene
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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.