Abstract
The aim of this study was to examine the effect of audit committee independence (ACI) on the financial performance of insurance firms in Kenya. The study analyzed data from the 55 insurance firms licensed by the Insurance Regularity Authority (IRA) in Kenya. ACI was operationalized by the number of independent directors serving in the boards of insurance firms operating in Kenya. Primary data was collected from a sample of 412 board directors, Chief Executive Officers (CEOs), Chief Finance Officers (CFOs), Audit Committee members (AUDIND) and Internal Auditors (INAUD) using a questionnaire instrument while secondary data was retrieved from audited financial reports of year 2017. Data was analyzed using descriptive and inferential statistics. Firm performance was measured by the two accounting-based measures Return on Assets (ROA) and Return on Equity (ROE). The findings from the regression analysis indicate that audit committee independence significantly and positively affects the financial performance of insurance firms in Kenya.
Highlights
Corporate governance has become a major subject of discussion for researchers, policy makers and private sector leaders alike because of the critical role it plays in the management of both public and corporate affairs (Foo & Witkowska, 2011; Momoh and Ukpong (2013)
The study findings indicated that more independent directors in the audit committee negatively influenced firm performance
On the question of whether more independent directors in the audit committee leads to better firm performance, 82.9% of the respondents were positive while 15.6% were either against or uncertain (11.4%)
Summary
Corporate governance has become a major subject of discussion for researchers, policy makers and private sector leaders alike because of the critical role it plays in the management of both public and corporate affairs (Foo & Witkowska, 2011; Momoh and Ukpong (2013). The unexpected collapse of some of the most respected firms such as Enron and WorldCom in 2001 (Davies & Schlitzer, 2008) and the 2008-2009 global financial crisis that saw corporate failures on an unprecedented scale rekindled the need and impetus for strengthening governance structures (Foo & Witkowska, 2011). A number of sources (Okeahalam, 2004; Luhman & Cunliffe, 2013; Price, Roman & Rountree, 2010; Braga-Alves & Shastri, 2011) explain the critical role good corporate governance plays in the improvement of firm financial performance, creating an enabling investment environment and protecting investor and stakeholder rights and encouraging overall economic development. In majority of developing countries, financial malpractice in many firms has increasingly necessitated the need for improved corporate governance practices (Baydoun, Maguire, Ryan & Willet, 2013)
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