Influence of External Audit Reports on the Financial Stewardship of Public Utility Firms in Kenya: A Survey of Water and Sewerage Firms in Central Rift Region, Kenya

Abstract

Abstract Water and sewerage firms play a critical role in the provision of essential services aimed at enhancing the living conditions of citizens. As public utility entities, these firms are obligated to uphold the principles of financial stewardship outlined in various regulatory frameworks. Article 201(d) of the Constitution of Kenya emphasizes the prudent and responsible use of public resources, while Article 227 underscores the need for fairness, equity, transparency, competitiveness, and cost-effectiveness in financial resource utilization. Additionally, the Public Financial Management Act of 2012 mandates public institutions to manage resources in a lawful, effective, efficient, economical, and transparent manner. In spite of these regulatory expectations, water and sewerage firms continue to face financial stewardship challenges such as the non-disclosure of loan obligations and the absence of debtor aging reports. The general objective of this study was to examine the influence of external auditing on the financial stewardship of public utility firms in Kenya, focusing on water and sewerage companies in the Central Rift Region. The study was anchored on the Principal–Agent Theory and targeted senior management staff across six water sector corporations in the region, comprising a census of 63 officials. A quantitative research approach was adopted, and primary data were collected using structured questionnaires. Descriptive statistics including frequencies, means, and standard deviations were used for initial data analysis. Inferential statistics, specifically multiple linear regression analysis, were employed to establish relationships between external audit dimensions and financial stewardship using IBM SPSS software. The key findings revealed that all four variables audit report quality, external audit findings, past audit actions, and leadership had a positive and statistically significant influence on financial stewardship. Among these, past audit actions had the strongest predictive power (β=0.641, p<.001), emphasizing the critical importance of implementing previous audit recommendations. Audit report quality (β= 0.278, p = .001) and external audit findings (β = 0.219, p = .014) also made significant contributions, while leadership involvement (β = 0.163, p = .043), although moderate, remained significant. The regression model explained 70.7% of the variance in financial stewardship (R² = 0.707) and passed all key diagnostic tests including normality, homoscedasticity, multicollinearity, and autocorrelation. These findings suggest that effective external audit practices, particularly the follow-up and implementation of audit recommendations, play a vital role in enhancing financial accountability in public utility firms. The study recommends greater emphasis on audit implementation mechanisms and leadership engagement to promote sound financial stewardship. Future research may consider exploring the influence of specific leadership styles and internal governance mechanisms on audit responsiveness and financial accountability in the public sector.