EFFECT OF AUDIT QUALITY ATTRIBUTES ON FINANCIAL PERFORMANCE OF MANUFACTURING FIRMS LISTED ON NAIROBI SECURITIES EXCHANGE.

Abstract

Audit quality is fundamental in preserving market integrity and investor trust, particularly in manufacturing firms where financial transparency directly impacts decision-making and performance. This study investigates the effects of specific audit quality attributes—Audit Firm Size, Auditor’s Remuneration, Audit Committee Report Quality, and Auditor Report Quality—on the financial performance, measured by Return on Equity (ROE), of manufacturing firms listed on the Nairobi Securities Exchange (NSE) from 2017 to 2021.Recent cases of financial misreporting have raised concerns about audit reliability among Kenyan firms, revealing a performance gap in audit quality that may compromise transparency and governance. Despite regulatory efforts, questions remain regarding the influence of audit attributes on financial outcomes in Kenya’s emerging market context. This study aims to analyze how audit quality attributes impact financial performance within NSE-listed manufacturing firms, focusing on audit firm size, auditor remuneration, audit committee reporting, and auditor report quality. A correlational research design was employed, using both primary data from surveys and secondary data from firms’ financial reports. Descriptive and inferential analyses, including multiple regression, were conducted to examine the relationships between audit quality attributes and ROE. Key findings were analyzed using SPSS, with statistical tests confirming data normality and reliability. Results revealed a moderate positive correlation between Audit Firm Size and ROE (r = 0.452, p = 0.008), suggesting that larger firms, with their resources and credibility, tend to support higher audit quality and financial outcomes. Auditor Remuneration demonstrated a significant impact on ROE (coefficient = 0.2155, p = 0.038), indicating that fair compensation enhances audit diligence and independence. Audit Committee Report Quality (coefficient = 0.3253, p = 0.004) was also positively linked to ROE, reflecting the role of comprehensive governance oversight. Auditor Report Quality had the strongest positive effect (coefficient = 0.3794, p = 0.001), underscoring the importance of transparency and accuracy in promoting investor trust. The study concludes that audit quality attributes play a significant role in enhancing financial performance. Larger audit firms, fair auditor remuneration, thorough audit committee reports, and high-quality auditor reports collectively contribute to better financial outcomes by reinforcing governance and transparency. It is recommended that firms engage reputable audit firms, ensure competitive remuneration, enhance audit committee oversight, and prioritize transparency in auditor reports. Policymakers are encouraged to support sector-specific audit guidelines to further strengthen audit standards within Kenya’s manufacturing sector. This study contributes valuable insights into the impact of audit quality on financial performance, offering practical recommendations for regulators, corporate leaders, and researchers in emerging markets like Kenya.