Audit Committee Characteristics, CEO Tenure and fraudulent financial reporting in Commercial Banks in Kenya

Abstract

Fraudulent financial reporting is the most expensive forms of fraud among the three forms of fraud. There have been cases of fraudulent financial reporting among banks worldwide which has led to some of them being winded up. The audit committee therefore is responsible for overseeing the financial reporting process in any organization hence preventing the occurrence of financial statement fraud. The purpose of this research was to investigate the effect of Audit committee characteristics on fraudulent financial reporting in commercial banks in Kenya. The General objective of this study was to determine the moderating effect of CEO tenure on the relationship between Audit committee characteristics and fraudulent financial reporting. The research specific objectives were to; determine the effect of Audit committee size, Audit committee independence, Audit committee Financial expertise and audit committee gender diversity on fraudulent financial reporting in Commercial banks in Kenya and to determine the moderating effect of CEO tenure on the relationship between Audit committee size, Audit committee independence, Audit committee Financial expertise and audit committee gender diversity on fraudulent financial reporting in commercial banks in Kenya. The theories used in this study were the Agency theory and Fraud pentagon theory. The research design used was explanatory research design and the year of observation was 2018 to 2022. The target population of the study was all commercial banks in Kenya. Secondary data obtained from the audited financial reports of 39 banks over a period of 5 years were used in the study. The panel data was analyzed using both descriptive and inferential statistics. Descriptive statistical techniques specifically mean, standard deviation, median, minimum and maximum were used. Inferential statistics that is moderated regression analysis and correlation analysis were used to predict and explain the nature and significance of relationships between the independent and dependent variables. The control variables; Firm Size (β=-0.085, p<0.05) and Firm Age (β=- 0.070, p<0.05) had a significant negative relationship on Fraudulent Financial Reporting. Audit committee characteristics were found to have a significant effect on Fraudulent Financial Reporting with its effects moderated by CEO Tenure. The results indicated that Audit committee size (β= -0.43, p<0.05), Audit Committee Independence (β= -0.236, p<0.05) and Audit Committee Gender Diversity (β= -0.42, p<0.05) had a negative and significant effect on fraudulent financial reporting. On the other hand Audit Committee Financial Expertise (β=0.043, p<0.05) had a positive and significant effect on fraudulent financial reporting. The moderating effect of CEO tenure on the relationship between Audit Committee Characteristics and Fraudulent financial reporting indicated that CEO tenure significantly moderates the relationship between Audit Committee Independence (β=0.002, p<0.05, Audit Committee Financial Expertise (β=-0.003, p<0.05) and Fraudulent Financial Reporting while the relationship between Audit Committee Size (β=0.002, p>0.05), Audit Committee Gender Diversity (β=-0.001, p>0.05) and Fraudulent Financial Reporting is not significantly moderated by CEO Tenure. The study findings inform the banking institutions to advocating for larger and diverse audit committees, enhancing independence, and prioritizing financial expertise and gender diversity in Audit committee recruitment. It also encourage robust CEO succession plans to ensure governance stability and reduced fraudulent financial reporting. Further research can be done on other Audit committee characteristics, For instance: Frequency of Audit committee meeting, Audit committee tenure and Audit committee competency.