Effectiveness of Audit Committees in the Public Sector: A Case of Parastatals in Kenya

Abstract

The paper study the relationship between the characteristics of audit committees and its effectiveness in reducing the number of financial statement restatements for State Corporations in Kenya. It used the following six characteristics of audit committees: independence of directors, committee size, meeting frequency, financial expertise, tenure and multiple directorships for 177 State corporations. The finance theory of agency was used as the theoretical underpinning for the study. The aim was to provide answers to two main research objectives by the use of cross sectional secondary data collected from the audited financial statements of the 177 State corporations in Kenya. The objectives were, first, to find out if the audit committees meet the legislative requirements on audit committee characteristics, and the second was to determine the effect of audit committees’ characteristics on their effectiveness. The sampling frame was state corporations in Kenya consisting of 177 firm year observations for the year 2012 selected using purposive sampling. The logistic regression model was used to test the effect of the characteristics of the committee on its effectiveness. The findings indicate that the most important and influential characteristics of audit committees is multiple directorships and audit committee tenure as they are statistically significant in reducing the number of financial statement restatements. A key recommendation of this study is that the Kenya government should enact legislation that governs audit committees and impose stiff penalties on audit committees that are not effective.

Keywords: Audit Committees, Audit Committee effectiveness, Kenya.