Audit committee characteristics, firm size and fraudulent financial reporting among listed firms in East Africa community

Abstract

Corporate accounting scandals involving firms such as Enron, WorldCom, Mumias, Uchumi, among others, have demonstrated managerial motive in fraudulent financial reporting and the effectiveness of audit committee in mitigating fraud. Despite the contributions of prior studies that sought to determine the effect of audit committee characteristics on fraudulent financial reporting, the findings are incongruent. Studies have also reported that firm size play an important role on fraudulent financial reporting and that the audit committee also plays a crucial role in enhancing audit quality and eliminating fraudulent financial reporting. Therefore, this study sought to examine whether firm size moderates the relationship between audit committee characteristics and fraudulent financial reporting among listed firms in East Africa Community partner states. The specific objectives examined the effect of audit committee gender diversity, expertise, size, and frequency of meetings on fraudulent financial reporting. The study further examined whether firm size moderates the relationship between audit committee gender diversity, frequency of meetings, expertise, size and fraudulent financial reporting. The study was anchored on the agency and fraud pentagon theories. The study adopted the longitudinal and explanatory research design. The target population for this study consisted of all non-final firms listed firms in East Africa Community partner states stocks/securities exchanges from the period 2012-2023. The study employed an inclusion/exclusion criterion to arrive at a final sample size of 33 firms. The study employed secondary and quantitative data 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 the logistic regression and multiple hierarchical regression model. The results of the logistic regression model were used to test the hypotheses. The study established that audit committee gender diversity (β = -2.177, ρ value <0.05) and audit committee expertise (β= -2.961, ρ<0.05) had a negative and significant effect on fraudulent financial reporting while audit committee frequency of meeting (β = 3.951, ρ -value <0.05) and audit committee size (β= 1.620, ρ<0.05) had a positive and significant effect on fraudulent financial reporting with an R-square of 31.44 percent. Further, the study found that firm size moderated the relationship between audit committee gender diversity (β= -3.506, ρ<0.05), audit committee frequency of meeting (β= -2.840, ρ<0.05), audit committee expertise (β= -3.015, ρ<0.05) and audit committee size (β= -1.664, ρ<0.05) with an R-squared of 48.18 percent. Based on the results, the study concluded that firm size moderated the relationship between audit committee characteristics and the fraudulent financial reporting. The findings have several implications. Regulators may provide clear guidance on the optimal size of audit committees based on firm size and industry dynamics. Moreover, firms should actively recruit more women to join their audit committees. This inclusion brings diverse perspectives and promotes ethical decision-making. Additionally, companies should foster an inclusive environment where female members feel encouraged to contribute actively. The frequency of audit committee meetings needs careful optimization. The results suggest that more frequent meetings can sometimes increase the likelihood of fraud, possibly due to reactionary rather than proactive measures. The main limitation was found on F-score model. Future research may use other models of measuring the likelihood of fraudulent financial reporting such as the M-score and Beinish Model. Additionally, the study recommend that future research may also consider employing other moderator variables such as board activity to evaluate their effect on fraudulent financial reporting.