Human Capital Efficiency, Board Audit Committee Expertise and Financial Reporting Quality: Evidence from Listed Firms on the Nairobi Securities Exchange, Kenya

Abstract

In emerging markets such as Kenya, the efficient utilisation of human resources directly influences the integrity of corporate reporting. This study investigated the effect of human capital efficiency (HCE) on the financial reporting quality (FRQ) of firms listed on the Nairobi Securities Exchange (NSE), and further examined the moderating role of board audit committee expertise (BACE) on this relationship. The study was anchored in the human capital theory and adopted an explanatory panel research design using secondary data extracted from the audited annual reports of 195 listed firms over the period 2020 to 2024, yielding a balanced panel of 195 firm-year observations. The human capital components were measured using Pulic’s Value Added Human Coefficient (VAIC) model, BACE was measured as the proportion of financially literate audit committee members, and FRQ was operationalised inversely through discretionary accruals estimated using the Modified Jones Model. Data were analysed by means of descriptive statistics, diagnostic tests, correlation analysis, and hierarchical panel multiple regressions, with the random-effects GLS estimator selected on the basis of the Hausman test; the full model explained approximately 99.1% of the variation in FRQ. The findings revealed that HCE (β = 0.267, p < .05) had a positive and statistically significant effect on financial reporting quality; BACE exerted a positive and significant direct effect on FRQ (β = 0.130, p < .05) and significantly moderated the effect of human capital efficiency (β = −0.492, p = .008). The study concludes that knowledge-based resources substantially enhance reporting integrity among NSE-listed firms and that audit committee expertise operates both as a direct governance safeguard and as a selective moderator, complementing relational capital while partially substituting for human capital and capital employed. The study recommends that managers prioritise human capital development, codify organisational knowledge, and leverage relational networks; that boards calibrate audit committee expertise to the firm’s resource profile, concentrating expert oversight where relational intensity is high; and that regulators, notably the Capital Markets Authority and the NSE, strengthen audit committee financial expertise requirements and develop human capital measurement and disclosure guidelines.