MODERATING ROLE OF INSTITUTIONAL OWNERSHIP ON THE RELATIONSHIP BETWEEN AUDIT COMMITTEE CHARACTERISTICS AND FINANCIAL STATEMENT FRAUD AMONG LISTED MANUFACTURING FIRMS IN EAST AFRICA
Abstract
The purpose of this paper was to investigate the moderating role of institutional ownership on the relationship between audit committee characteristics and financial statements fraud among listed entities in East Africa. The study employed secondary and quantitative data extracted from annual financial reports with the aid of a data collection schedule. The Hausman test was used determine the choice of either the fixed effect or random effect model. The sample consisted of 15 manufacturing companies listed on East African securities exchanges. The results of the logistic regression model were used to test the hypotheses. The study established that audit committee frequency of meeting, audit committee financial expertise, audit committee independence had a negative and significant effect on the likelihood of financial statement fraud and audit committee gender diversity had a positive and significant effect on the likelihood of financial statement fraud. Further, the study found that institutional ownership moderated the relationship between audit committee frequency of meetings, audit committee financial expertise, audit committee independence and audit committee gender diversity. Based on the results, the study concluded that institutional ownership moderated the relationship between audit committee characteristics and the likelihood of financial statement fraud. The findings have several implications. First, listed manufacturing firms should have a higher proportion of outside owners (institutional investors). Secondly, shareholders should consider audit committee characteristics that enhance audit committee effectiveness in mitigating the likelihood of financial statement fraud. To achieve this, audit committee must be independent, hold frequent meetings, and have a high percentage of members with financial expertise. The firm should also consider providing audit committee members with training in subjects like finance and accounting to equip them with the knowledge and skills necessary to spot financial fraud. This study was limited to listed East African manufacturing firms and four audit committee characteristics. Future research may also consider additional audit committee characteristics, unlisted companies, and other institutional settings to shed more light on the connection between audit committee characteristics, institutional ownership and the possibility of financial statement fraud.
Keywords: Audit committee frequency of meeting, Audit committee financial expertise, Audit committee independence, Audit committee gender diversity, Financial statement fraud, Fraudulent financial reporting
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