The Mediating effect of corporate governance quality on the association between audit report lag and earnings quality in NSE
Nyangweso, Mercy Atieno
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The purpose of this research is to establish the mediating effect of corporate governance on the association between audit report lag and earnings quality. The research aims at addressing two main research questions. First, how earnings quality influence audit report lag and second, what mediating role does corporate governance quality play on the association between earnings quality and audit report lag in non-financial companies listed on the Nairobi Securities Exchange? In this study, both primary and secondary data were used. The secondary data were obtained from companies’ audited annual reports, while a closed-ended research questionnaire was used to collect primary data. The data was analyzed in two stages. In the first stage, an association test between the audit report lag (which was measured as the number of days from the financial year-end to the date of signing the audit report) and earnings quality (which was measured as discretionary accruals as per the discretionary accruals model) was carried out. In the second stage, a mediation test to examine the mediating effect of corporate governance qualities on the association above was conducted. The association test was analyzed based on the significance of the independent variables. Although the model was significant, the t-statistic for the discretionary accruals was statistically insignificant despite there being a negative correlation between earnings quality and audit report lag, which could be interpreted as an increase in the earnings quality leads to a decrease audit report lag. For the mediation test, the R-squared, F-statistics and the t-statistics were significant. This justifies that there is a mediating effect of corporate governance quality on the association between audit report lag and earnings quality. To corroborate these findings from the secondary data, the findings from the primary data with valid Cronbach’s Alpha, provided additional evidence on the importance of the quality of corporate governance in mediating earning quality and audit report lag. While audit report lag can be easily identified, there are still difficulties in detecting earnings management. As such, these findings may act as a red flag for detecting earnings management in non-financial firms listed on the NSE. This study will be of interest to investors in identifying earnings management, regulatory bodies for detecting gaps in reporting and policymakers who would set up corporate governance policies to improve companies’ management.