Audit committee and financial reporting fraud: the moderating role of firm size

Abstract

Purpose The purpose of this study was to examine whether firm size moderates the relationship between audit committee (AC) characteristics and financial statements fraud (FFR) among listed firms in the East African Community (EAC). Design/methodology/approach This study analyzed a sample of 33 nonfinancial firms listed in the EAC member countries securities/stock exchanges over the period 2012–2023. FFR was measured using the F-SCORE model (Dechow et al. , 2011). This study used the logistic regression to test the hypotheses. In addition, the ordinary least square, the generalized method of moments and an alternative measure of FFR, the modified Jones discretional accruals model (Dechow et al. , 1995), were used to validate the baseline results. Findings This study found that AC gender diversity and financial expertise had a negative effect on FFR. However, AC size and frequency of meeting had a positive effect. Finally, the results revealed that firm size moderated the relationship between AC characteristics and FFR. Research limitations/implications This study found that AC gender diversity and financial expertise had a negative effect on FFR. However, AC size and frequency of meeting had a positive effect. Finally, the results revealed that firm size moderated the relationship between AC characteristics and FFR. Practical implications The findings of this study not only extend the extant empirical literature on AC and FFR in developing countries but also help corporate owner, board chairs and policymakers in making more informed decisions. For instance, policymakers may device corporate governance codes in light of firm attributes such as size. In addition, these results may be useful to equity owners in structuring their AC. Originality/value This study contributes to the growing literature on AC and FFR in several folds. First, it examines the relationship between AC characteristics and FFR from a developing region, the EAC. Second, it extends the literature by assessing whether firm size moderates the link between AC characteristics and FFR.