Audit Quality, Audit Firm Size And Financial Performance Of Listed Commercial Banks In Kenya

International Journal of Research and Innovation in Social Science (IJRISS) | Volume VI, Issue II, February 2022 | ISSN 2454–6186

Audit Quality, Audit Firm Size And Financial Performance Of Listed Commercial Banks In Kenya

Ayora Oscah Edward, Ogeto Evans Joseph
University of Nairobi, Kenya

This study is out to determine the influence of audit quality on financial performance of commercial banks in Kenya. The objectives are to determine; the influence of audit quality on financial performance and to ascertain the influence of capital structure on financial performance. A theoretical and conceptual framework is formed on the basis of previous research. The theories that were reviewed include; agency theory and resource based theory. The study adopts a descriptive research. The study population ‘comprises; of “all the 11 commercial banks enlisted at NSE. The data was mined from financial statements for the period 2014-2019. Both descriptive and inferential statistical analysis is applied. Descriptive statistics is used to summarize the observable characteristics of the group in question using metrics such as means standard deviations and variance while inferential statistics such as multiple linear regressions is used in testing the constructed statistical study hypothesis. The results indicate that the independent variables Capital structure and audit quality can be used to explain and can therefore predict financial performance of commercial banks listed in the NSE. The study concludes that audit quality leads to improved financial performance of commercial banks listed in the NSE and thereby can be generalized to the whole banking industry. The study findings indicate that capital structure and audit quality when strategically aligned in combination they will all result in improved performance.

Key words: Capital structure, audit quality, financial performance

Introduction

Audit quality plays a very significant role in efficient running of any business venture by improving transparency, financial reporting integrity, boost investors’ confidence and accountability in allocation of resources to maximize shareholders wealth. Since the emergence of global and local corporate scandals like Enron, Tyco, World Com and famous chase bank in Kenya which resulted to decrease in firm’s value and loss of investors’ confidence, audit function as a business monitoring tool has gained traction over time (Yahya, Abdullah, Hanim, and Ebrahim, 2012). As pointed out by Jensen and Meckling (1976) in their agency theory, decoupling of management control from firms ownership results to principal-agent conflicts where firm agents act for their interests and give little attention to maximize shareholders wealth. This phenomenon has resulted to huge loss of company resources, poor performance and loss of investors’ confidence. Many stakeholders have expressed their concerns on firm’s performance and the application of audit has been recognized as one of the ways to enhance firm’s value (Sayyar, Basiruddin, Abdulrasid, and Elhabib, 2015).
The study will be anchored on the following theories; agency theory, stewardship theory and resource based theory. Agency theory is founded on the belief of Jensen and Meckling (1976) that unless managers are closely monitored by the shareholders, they will not act in the best interest of the shareholders. The theory posits that separation of firm ownership from managerial control often results to agency conflicts in which manager’s act in their best interest and do little if any to maximize the wealth of the firm. This situation diminishes firm’s value and lower shareholders wealth. To counter this situation, the theory suggests that management should closely be observed by the shareholders. Audit plays a sacrosanct role in monitoring the activities of the management by checking how shareholders’ funds have been expended over a given stint of time. Resource based theory opines that board provides critical resources that are required for well-functioning of any firm while stewardship theory assets that people are always pro organization and endeavor to work tirelessly towards accomplishment of its objectives. Because of this belief, the theory regard audit function as unnecessary service that adds to organization costs and diminish the firm value (Donaldson and Davis, 1989).

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