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

Abstract

Purpose: The purpose of this study was to examine the relationship between corporate governance and modified of audit opinion in commercial state owned enterprises in in Kenya.

Methodology: The study analyzed data from 25 state owned enterprises covering the period 2014 to 2016. The study employed logistic regression to analyze the relationship among the research variables.

Findings: The study established that majority of state owned enterprises received modified audit opinion, accounting for 68% of audit reports issued to commercial state owned enterprises in Kenya. The results on logistic regression indicate that the number of audit committee meetings as proxy for audit committee diligence had a negative and significant effect on the likelihood of a firm receiving modified audit opinion. The result on the effect of board independence was negative but not statistically significant. This result suggests that the contribution of independent directors was not significant.  The results for firm size as control variable were also significant.

Implications: The conclusion that corporate governance mechanisms influenced the quality of financial reporting will interest policy makers, and those charged with corporate governance to reinforce effective mechanisms to promote accountability. 

Value of Study: The study has contributed to literature on how to operationalize and test hypotheses on corporate governance and audit opinion in the public sector where minimal literature was available.