ASSESSING THE RELATIONSHIP BETWEEN INTERNAL AUDIT FUNCTIONALITY AND ACCOUNTING QUALITY IN SELECTED FIRMS AT THE NAIROBI SECURITIES EXCHANGE, KENYA
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Date
2017-06
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Abstract
In view of sudden collapse of some reputable companies, this study examines whether
the internal audit departments in selected companies listed at the Nairobi Securities
Exchange are functional and assesses the level of accounting quality in the financial
statements of the selected companies. Finally, it explores the relationship, if any,
between the functionality of internal audits and accounting quality. The indicators of
internal audit functionality are identified as internal audit structure, internal audit
independence and management support. Questionnaires were purposively administered
to ten selected companies to evaluate perception of internal audit functionally while on
accounting quality; Healy Model of earnings management was used. The weakest
perceived indicator of internal audit functionality was found to be internal audit
independence where political pressure was perceived as the greatest barrier to internal
audit functionality. On accounting quality three of the ten selected companies showed
undesirable levels of accruals hence poor accounting quality. It is recommended that
corporate governance report of listed companies should include a signed statement on
internal auditor independence. Finally accounting bodies should also explore ways of
managing discretionary accruals to improve on accounting quality.