Effect of Audit Committee Characteristics on Financial Reporting Quality of Deposit- Taking Savings and Credit Cooperative Societies in Kenya

Abstract

Reporting financial quality is a critical aspect of governance in financial institutions, ensuring transparency, accuracy, and reliability in the information provided to stakeholders. The rising complexity of financial operations and regulatory obligations have put the responsibility of audit committees in ensuring that deposit-taking Savings SACCOs in Kenya continue to disclose their finances in a high and transparent manner on the rise. This study was motivated by the desire to understand how audit committee qualities, such as independence, size, financial understanding, and meeting frequency, affect the quality of financial reporting for SACCOs. Resource dependency theory, agency theory, and stakeholder theory provide the theoretical basis of the research. These theories, when combined, offer a framework for understanding the dynamics of SACCO governance. The main objective of the study was to investigate the effects of various audit committee qualities on the credibility of financial reports produced by deposit-accepting SACCOs in Kenya. The study used secondary data from 176 regulated deposit-taking SACCOs during a five-year period (2019–2023) and employed a causal research technique. A fixed-effects model panel regression analysis, descriptive statistics, and correlation analysis were used to scrutinize the data. With an R-squared value of 0.582, the independent variables in the regression model explained 58.2% of the variance in reporting financial quality among SACCOs. Independent (coefficient = 0.0965, p < 0.000), large (coefficient = 0.0151, p < 0.000), knowledgeable in financial matters (coefficient = 0.0924, p < 0.000), and meeting frequency (coefficient = 0.0246, p < 0.000) audit committees were found to have a positive and significant effect on reporting financial quality. Furthermore, capital adequacy (coefficient = 0.0880, p < 0.000), firm size (coefficient = 0.0060, p < 0.000), and liquidity (coefficient = 0.0013, p = 0.017) were the control variables that positively affected the quality of financial reporting. The research found that SACCOs' financial reporting is much improved when audit committees are well-organized, have suitable size, have financial knowledge, meet often, and are fully independent. Furthermore, SACCOs are able to provide high-quality financial reports since their financial stability is shown by factors such as capital adequacy, business size, and liquidity. In order to ensure accountability and transparency inside SACCOs, these results highlight the need of strong governance systems. Based on these conclusions, the study recommends that policymakers and regulators, such as SASRA, strengthen guidelines on audit committee composition, particularly focusing on enhancing independence and financial expertise. SACCOs should also be encouraged to ensure that their audit committees meet regularly and are appropriately sized to balance diversity with efficiency. Moreover, SACCOs should focus on maintaining strong financial health to support effective governance structures. Possible directions for future research include looking at the impacts of audit committee traits in other types of financial institutions, delving into the qualitative components of a successful audit committee, and extending the study period to account for long-term effects.