Detective Internal Controls and Earnings Quality of Firms Listed at the Nairobi Securities Exchange
DOI:
https://doi.org/10.53819/81018102t70116Abstract
This study examined the effect of detective internal controls on the earnings quality of firms listed at the Nairobi Securities Exchange (NSE). Guided by the Policeman Theory and Agency Theory, the study adopted a descriptive causal research design and targeted a population of 63 companies listed on the NSE. Following a pilot study involving 6 firms (10% of the population), primary data were collected from the remaining firms, achieving an 80.7% response rate (46 firms). Detective internal controls were measured using a Detective Controls Indicator Ratio (DCIR), while earnings quality was proxied by earnings persistence (EPER). Data were analyzed using descriptive statistics, correlation analysis, and bivariate regression. The results revealed that detective controls recorded a moderate implementation level (mean DCIR = 0.5833). Correlation analysis showed a significant positive relationship (r = 0.55767) between detective controls and earnings persistence. Furthermore, the bivariate regression confirmed that detective controls have a statistically significant positive effect on earnings quality (R2 = 0.283$, p < 0.001). The study concludes that strengthening detective internal controls, such as internal audits, surprise inspections, and reconciliation procedures, can substantially enhance the reliability and quality of reported earnings for NSE-listed firms..
Keywords: detective controls, earnings quality, earnings persistence, financial reporting lag, Nairobi Securities Exchange.
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