The effect of audit committees on major disclosures and other non-financial characteristics of companies listed at the Nairobi stock exchange

Abstract

Disclosure and accountability are the corner stones of corporate governance. There has been a growing number of earnings manipulation which has only recently begun to receive the attention of regulators. A director's greatest virtue is his independence that allows him to challenge management decisions and evaluate corporate performance from a completely free and objective perspective. Audit committee comprising independent directors assist the board in fulfilling its responsibility to the shareholders and investing public by facilitating transparent and objective disclosures in company financial statements. There is however another school of thought that challenges the value added by independent directors which is that although such directors may perform some functions better than other directors they could perform other functions worse resulting in no net advantage for the company if its board has a high proportion of independent directors. This study therefore sets out to determine whether audit committees and their composition of independent and non-executive directors have an effect on major disclosures and other nonfinancial characteristics of companies listed at the Nairobi Stock Exchange. The objectives of the study were to determine major disclosures and other non-financial characteristics of companies listed at the Nairobi Stock Exchange before and after the establishment of audit committees; to determine the perceived value of audit committees by management of such companies; and to assess the achievement ofthe objectives of audit committees in such compames. In categorizing major non-financial disclosures, the annual reports were analyzed to determine the value added information and disclosures in these reports which included information on achievements, targets, corporate governance standards, social responsibility, risk management, compliance with regulatory standards, explanations and related party transactions. To determine the perceived value of audit committees by management of listed companies in Kenya a questionnaire was developed which included queries on the composition, mandate and reporting obligations of audit committees. It also sought to determine management perception to the various attributes of audit committees based on best international market practices and the recommendations of the Blue Ribbon Committee (1999). From the analysis of the data it was observed that audit committees were mandated to ensure efficiency and effectiveness of operations, reliability of financial and other management information and to safeguard assets. These mandates howe-v.er were not reviewed annually. It was noted that the audit committees reported to the Board and not the shareholders, contrary to best international market practices and the Blue Ribbon Committee (1999). It was also noted that, although management perceived audit committees to add value to the company, it had reservations on the attributes of audit committees, in particular the necessity of independence and the expertise of the members of the audit committees. It was also noted that only 23% of the companies responded that their audit committees had successfully achieved their objectives. The analysis determined that although audit committees have a significant effect on the major disclosures and other non-financial characteristics of companies listed at the Nairobi Stock Exchange, it was apparent that the essence of audit committees in listed companies in Kenya is yet to be appreciated and understood by both the Board and the management.