Board Audit Committee Effectiveness Variables and Financial Performance of Commercial Banks in Kenya

Abstract

Over the past three decades, the world has experienced high profile cases of corporate failures. Consequently, there has been increasing attention being paid to corporate governance and to the effectiveness of boards, internal controls, audit committees, disclosures, and the independence of directors and auditors. Indeed, the Basel Committee on Banking Supervision has called attention to the need to study, understand, and improve the corporate governance of financial entities. In Kenya, the Central Bank of Kenya has established corporate governance mechanisms within the CBK Prudential Guidelines. The Board of Directors is the main custodian of prudent corporate governance in organizations including the commercial banks. This is executed either directly or through its various sub committees. The Board Audit Committee (BAC) is key in ensuring adherence to set guidelines and standards. The findings contained in the CBK supervisory reports of 2010 and 2011 on incidences of non compliance to set guidelines may be an indicator of ineffective corporate governance and audit committees. The study seeks to establish the relationship between board audit committee effectiveness variables and financial performance of commercial banks in Kenya over the period 2007 to 2011. It examines specific structural and operational characteristics of Audit Committees (ACs) for the banks; these banks have strived to adhere to the Central Bank of Kenya’s regulations and prudential guidelines. The research design for this study was a cross sectional survey employing multiple regression analysis. The design was formalized and structured with clearly stated investigative questions. The target population of interest was all registered commercial banks operating in Kenya. There are 43 commercial banks in Kenya. All the banks were considered for this study, of which data for five year financial periods between 2007 and 2011 was obtained for 25 banks. Both primary and secondary data was used for this study. The main findings are as follows: there is a significant positive correlation between percentage of BAC members with financial expertise and ROE; the percentage of Independent Non Executive Directors in the BAC has a significant positive correlation with ROE; changes in the BAC membership do not affect ROE; the attendance rate for BAC meetings has a significant positive correlation with ROE; there exists a significant positive correlation between size of the BAC and ROE; and the number of BAC meetings in a financial year has a significant effect on ROE. The key limitation of this study is the use of a quantitative approach, not supplemented by in-depth case studies, that leads to generalization without investigating specific factors typical of a qualitative study. A key implication of this study to the commercial banks and regulators is that they should pay attention to board audit committee effectiveness particularly emphasizing on competence, commitment and independence as this is highly correlated to financial performance. This is an empirical study about the practices and compliance of ACs among the commercial banks in Kenya.