Corporate Sustainability disclosures, audit committee financial expertise and earnings management among firms listed In East Africa Community

Abstract

Earnings managements have been rampant among listed firms in East Africa such as NBK, Uchumi limited, Kakuzi, CMC, Tanga cement company limited, Tanzania Cigarette company, New vision group Uganda, Equity bank Uganda, Uganda Clays Limited, Heritage Oil and Gas Ltd. Studies also show that managers could engage in corporate sustainability disclosures practices to gain the trust of both internal and external stakeholders by satisfying their interests and fostering long-term relationships. Studies that have reported relationship on corporate disclosures such as sustainability reporting and earnings management in their firms are inconclusive and mixed. Therefore, this study sought to investigate whether audit committee financial expertise moderates the relationship between corporate sustainability disclosures and earnings management among listed firms in East Africa. The specific objectives were to examine the effect of; economic, social and environmental disclosures on earnings management. Additionally, the study determined whether audit committee financial expertise moderates the relationship between economic, social and environmental disclosures on earnings management. The study was anchored on the positivism paradigm. The study was grounded on agency theory, stakeholder theory, and legitimacy theory. This study adopted both explanatory and longitudinal research design. The target population consisted of all 122 listed firms in East Africa partner states. Panel data for the period 2013 -2023 was used. The study employed secondary and quantitative data that were extracted from annual financial reports with the aid of a data collection schedule. Data was analyzed using both inferential and descriptive statistics. The study adopted multiple hierarchical regression model. The results of the multiple regression model were used to test the hypotheses. The study established that the economic disclosures (β = 0.082, ρ -value <0.05) and environmental disclosures (β= 0.066, ρ<0.05) had a positive and significant effect on earnings management while social disclosures (β = 0.084, ρ -value <0.05) had a negative and significant effect on earnings management with an R-square of 94.99 percent. Further, the study found that audit committee financial expertise moderated the relationship between economic disclosures (β = 1.125, ρ -value <0.05) and social disclosures (β = 0.775, ρ -value <0.05) with an R squared of 94.98 percent. Based on the results, the study concluded that audit committee financial expertise moderated the relationship between corporate sustainability disclosures and earnings management. The findings have several implications. Practitioners should focus on strengthening internal controls to ensure that economic and environmental disclosures are not used for earnings management. Given the study's findings, practitioners should place a greater emphasis on social disclosures. Companies can adopt global reporting standards, such as the Global Reporting Initiative guidelines, to ensure consistency and comparability in their social responsibility reporting. Practitioners should facilitate regular training sessions for audit committee members to keep them updated on the latest developments in financial reporting and governance.