The effect of firm size and financial stability on the audit independence of audit firms in Nairobi county

Abstract

This research sought to establish if there is any significant relationship between firm size, financial stability and audit independence. Audit independence refers to the probability that the auditor will refuse to support detected misstatements. Similar research on this topic is rare in Kenya. Empirical research on firm size effect on Audit Independence in Barbados recommended that it could be studied in developing countries such as Kenya. The research design was mainly quantitative in nature by using a questionnaire to gather primary data to help in establishing the extent of relationship between the variables. Secondary data on the other hand was uploaded from the internet. The source of data was solely drawn from ICPAK‟s website because it is the only institution with audit firms‟ records in the country besides depending on the nature of the problem that was being sought by the researcher. The period of study was sufficient enough for a plausible research, 5 years ranging from 2009-2013. 32 Audit firms out of 620 firms registered with ICPAK in Nairobi county as at August 2014 were stratified Sampled into large and small, each 50% and accessed from ICPAK Website. Simple random sampling method was used to capture the 16 firms from each stratum. The respondents were 13 small firms and 8 large firms giving a 65% response rate. Multiple regression analysis and correlation analysis were used to analyze the data so as to test the research objective. The coefficient of correlation (R) is 0.818 and coefficient of determination (R2) is 0.669. This implies that 66.9% of the variation in AI can be explained by the independent variables while 33.1% of the Audit independence is explained by the error term and other factors not under study. Therefore the model is statistically significant as indicated by the F value of 18.2 significant value 0.000. The results of the study show that there is a relationship (an association) between Firm size, financial stability and Audit independence, thus the function is strong and reliable. This resonates well with the researcher expectations and previous studies, though the results did show a negative relationship between financial stability and audit Independence. The negative relationship according to the researcher was perhaps due to low response from large firms who considered some information in the questionnaire particularly on their liquidity and profitability as confidential information. ICPAK should ensure audit firms file annual financial statements with it in order for the public, researchers and other interested parties to be able to access their financial operations. This is likely to bring accountability, thereby enhancing independence plus giving ICPAK teeth to monitor proactively the operations of Audit firms in Kenya.