Corporate Governance and Modification of Audit Opinion: Evidence from State Owned Enterprises in Kenya

Abstract

State owned enterprises lack comprehensive legal framework policy to safeguard sound operations and performance. This is evidenced by over relying on the Mwongozo (2015) as a major guideline for its operations. This policy brief recommends that SOEs adopt other laws or high-level policy document that can help in enhancing corporate governance mechanisms with a view to reduce modified audit opinion among SOEs.  This is due to the increasing trend in the reporting of modified audit opinion in SOEs in Kenya which has a greater impact on the stakeholders’ decision making and level of integrity among the SOEs management. Modified audit opinion is caused by various factors but not limited to corporate governance mechanisms, hence, seriously need a comprehensive legal and institutional framework policy that can handle the negative trend in the modification of the audit opinion that may affect the investors’ decisions negatively.

Modified audit opinion has greater impact on stakeholder’s reaction to investment decisions and upholding the integrity of the senior management and directors of these entities. The modified audit opinion is issued under the three forms; qualified, adverse and disclaimer opinions. All these forms show that the financial statements have discrepancies ranging from minor to pervasive ones. Hence, the research examined the relationship between board structure and audit opinion in commercial state-owned enterprises in Kenya with a view of coming up with comprehensive policy frame work for safe guiding reporting in the SOEs.