Internal Audit Function's Independence and Financial Reporting Quality in Deposit-Taking Saccos in Kenya
DOI:
https://doi.org/10.53819/81018102t3160Abstract
Financial reporting quality remains a critical concern for deposit-taking savings and credit cooperative societies (SACCOs) in Kenya, with recent scandals highlighting significant deficiencies in financial disclosure and transparency. This study examined the effect of internal audit function's independence on financial reporting quality in deposit-taking SACCOs in Kenya. Grounded in agency theory, the research adopted a cross-sectional design targeting 176 deposit-taking SACCOs regulated by SASRA. Simple random sampling was employed to select 122 respondents from finance, accounting, and internal audit departments. Data was collected using structured questionnaires and analyzed using descriptive statistics, correlation analysis, and multiple regression analysis. The study achieved a 76% response rate with 93 usable questionnaires. Findings revealed that internal audit function's independence had a moderate positive correlation (r=0.458) with financial reporting quality. Regression analysis demonstrated that IAF independence significantly predicted financial reporting quality (β=0.335, p<0.05, t>1.96), explaining 58.2% of the variance in financial reporting quality. The study concluded that strengthening the independence of internal audit functions is crucial for enhancing financial reporting quality in deposit-taking SACCOs. The study recommends that senior managers of deposit-taking SACCOs should remain committed to strengthening the independence of the internal audit function through clear organizational structures, adequate resource allocation, and protection of internal auditors from managerial interference. This research contributes to the understanding of governance mechanisms in cooperative financial institutions and provides practical insights for regulators and SACCO management.
Keywords: Internal Audit Independence, Financial Reporting Quality, Deposit-Taking SACCOs, Agency Theory, Kenya
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