Internal Audit Function Quality and Financial Reporting Scandals Evidence from Nairobi Securities Exchange Listed Companies
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Abstract
Internal audit functions are critical oversight mechanisms in corporate governance, yet their effectiveness in preventing financial reporting scandals remains underexplored, particularly in emerging markets. This study examines the relationship between the quality of the internal audit function (IAF) and financial reporting scandals among companies listed on the Nairobi Securities Exchange (NSE) in Kenya. Using a census approach encompassing all 62 NSE-listed companies, data were collected from 155 respondents through structured questionnaires administered to accountants, internal auditors, finance officers, and company secretaries. The study employed descriptive statistics, correlation analysis, and regression analysis to investigate the relationship between IAF quality and financial reporting practices. Results revealed a moderate positive correlation (r = 0.556, p < 0.001) between internal audit function quality and financial reporting quality. Regression analysis showed that IAF quality explains 30.9% of the variance in financial reporting practices (R² = 0.309, F = 68.291, p < 0.001), with a standardized coefficient (β = 0.556, p < 0.001). The findings indicate that higher-quality internal audit functions are significantly associated with better financial reporting practices and a reduced likelihood of financial reporting scandals. However, implementation gaps were identified, particularly in management responsiveness to audit recommendations and professional certification requirements. The study concludes that while internal audit functions play a crucial role in financial reporting governance, their effectiveness depends on management support, adequate resources, and professional competence.
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