Assessing the Mediating Role of Audit Committee on the Relationship between Board Independence and Earnings Quality in the Tanzanian Listed Firms

Abstract

Using balanced panel data of 72 firm year observations from nine (9) listed firms between 2011 and 2018, the paper examines the influence of board independence, and an active audit committee with accounting and finance expertise on earnings quality in Tanzania. The study is centred on the need for control and monitoring mechanisms due to the agency conflict that exists between shareholders and managers. Our analysis results, using SEM, reveal that board independence has no influence on earnings quality. The result is contrary to the proposition of agency theory. Furthermore, the findings suggest a mediating effect of an active audit committee with finance expertise on the relationship between board independence and quality earnings reported. This study, therefore, answers the call of prior studies to examine the inter-relationship between control mechanisms in ensuring earnings quality. This study recommends that codes of corporate governance, specifically the role of independent directors, should be reviewed in the light of institutional and cultural context, together with enforcement effectiveness in Tanzania.

Keywords: Audit committee, Earnings quality, Independent directors, Tanzania, Listed firms