Abstracts
Earnings management has
received considerable attention in recent times. This is due to its linkage
with the reliability of published accounting reports. Indication from the
academic literature has shown that the practice of earnings management is quite
extensive among publicly traded firms. In response to the demand for greater
proportion of independent directors on corporate boards and the need for financial
sophistication of audit quality, this study examines the role of independent
board of directors, audit quality and board effectiveness in preventing
earnings management in Nigeria. Secondary data were extracted from annual
reports of the sample firms for the period between 2002 and 2011 and univariate
OLS multiple regression was used as a tool for data analysis. Using an
experimental research design, the study finds that board dominated by
independent non-executive directors brings a greater breadth of experience to
the firm and are in a better position to monitor and control managers, thereby
reducing earnings management. Also, it was observed that audit quality reduces
the likelihood of earnings management. It earnings management and hence, help
to reduce earnings management tendencies. The study recommends that the
financial reporting council of Nigeria should strengthen its role in ensuring
higher quality financial reporting. Also, certain measures should be put in
place to reduce the tendencies for reporting accountants to outfox the
reporting principles for their private benefits. Finally, corporate governance
code should be given wider applicability across companies in different sectors.
TABLE OF CONTENTS
Title
Page i
Certification ii
Dedication iii
Acknowledgements iv
Abstract v
Table
of Contents vi
CHAPTER ONE: INTRODUCTION
1.1
Background to the Study 1
1.2
Statement of Problem 3
1.3
Research Questions 5
1.4
Objectives of the Study 5
1.5
Statement of Research Hypotheses 6
1.6
Significance of the Study 7
1.7
Scope of the Study 8
1.8
Limitations of the Study 8
1.9
Definitions of Terms 9
CHAPTER TWO: REVIEW OF RELATED
LITERATURE
2.1
Introduction 11
2.2
Earnings Management 14
2.3
Corporate Governance 19
2.4
Earnings Quality and Corporate
Governance 23
2.5
Board Composition 26
2.6
Audit Quality and Earnings Management 29
2.7
Board Effectiveness and Earnings
Management 34
CHAPTER THREE: RESEARCH METHOD AND
DESIGN
3.1
Introduction 38
3.2
Research Design 38
3.3
Description of Population of the Study 39
3.4
Sample Size 39
3.5
Sampling Techniques 39
3.6
Sources of Data Collection 39
3.7
Method of Data Presentation 40
3.8
Method of Data Analysis 40
CHAPTER FOUR: DATA PRESENTATION,
ANALYSIS AND INTERPRETATION
4.1
Introduction 42
4.2
Presentation of Data 42
4.3
Data Analysis 43
4.4
Hypotheses Testing 65
CHAPTER FIVE: SUMMARY OF FINDINGS,
CONCLUSION AND RECOMMENDATIONS
5.1
Introduction 68
5.2
Summary of Findings 68
5.3
Conclusion 68
5.4
Recommendations 70
References
73
CHAPTER
ONE
INTRODUCTION
1.1
Background to the Study
Earnings management is an area of
accounting research that elicits attention from across a wide spectrum of
management and other stakeholders. The Financial Accounting Standard Board
(FASB 1990) refers to earnings management as the distortion of the reliability,
relevance and predictive value of information presented in financial statement.
Schipper (2009) defined earnings management as ‘the process of taking
deliberate steps within the constraint of Generally Accepted Accounting
Principles (GAAP) to bring about a desired level of reported income. Healy and
Wahlen (2009) saw earnings management as when managers use judgment in
financial reporting in structuring transactions to alter financial reports,
either to mislead some stakeholders or to influence contractual outcomes that
depend on reported accounting about the underlying economic performance of the
company.
The
connection between corporate governance and earnings management has been the
subject of an ongoing debate. It is believed that the diffuseness of a firm’s
ownership structure plausibly serves the firm’s shareholders better than a
concentrated ownership structure. The users of financial information are of the
notion that managers of organizations utilize earnings management
opportunistically for selfish reasons rather than for the benefit of the
stakeholders. This misalignment of stakeholders and manager’s interest has
cited a basis for the occurrence of earnings management as managers could use
the latitude provided by accounting standards to manage income opportunistically therefore, creating a
distortion in reported earnings. The very nature of accounting accruals gives
managers a great deal of discretion in determining the earnings a firm reports
in any given period because of the information asymmetry between managers and
owners. Accounting earnings are more reliable and more informative when
managers opportunistic behaviours are controlled through a variety of
monitoring systems (Dechow, Sloan & Sweeney, 2006).
As
a result of this misalignment of interest between managers and shareholders,
there has been an international trend towards developing and implementing
corporate governance to fight against the opportunistic behaviours that have
undermined investors’ credibility in
financial report. Corporate governance attributes help investors by aligning
the interest of managers with the interest of shareholders and also by
enhancing the reliability of financial information and integrity of
the financial reporting process (Watts, 2011).
It
is against this background that this study is undertaken to exploratively examine
the relationship between corporate governance and earnings management in
Nigeria.
1.2
Statement of Problem
Several
studies on earnings management such as the study carried out by Olayinka
(2012), Shehu (2012) and other researchers have highlighted the presence of
earnings management practice in Nigeria at different times. These practices
include: profit overstatement, account falsification, price manipulation, etc
which have led to the distortion of the credibility of financial reports. To
mitigate these financial reporting improprieties and enhance the decision
usefulness of financial statements, corporate governance emerged as a veritable
mechanism to stifle the windows of earnings management. Corporate governance is
a mechanism that is employed to reduce the agency cost that arises as a result
of the conflict of interest that exist between managers and shareholders
Due
to the incessant practice of earnings management in Nigeria, the problem of
whether corporate governance variables such as board composition, audit
quality, audit committee, board effectiveness, etc. can be used in curbing
earnings management arises. This research is embarked upon to critically
ascertain the extent to which these governance variables mitigate the existence
of earnings management in Nigerian organizations.
1.3 Research
Questions
The
following are the following questions raised.
1.
Is there a significant relationship
between board composition and earnings management?
2.
Is there a significant relationship
between audit quality and earnings management?
3.
Is there any relationship between
board effectiveness and the level of earnings management?
1.4
Objective of the Study
The
broad objective of this study is to investigate the relationship between
earnings management and corporate governance as well as the effect of corporate
governance on earnings management. The following are the specific objectives:
1.
To ascertain if there is a significant
relationship between board composition and earnings management.
2.
To determine if there is a significant
relationship between audit quality and earnings management.
3.
To find out if there is a significant
relationship between board effectiveness and earnings management.
1.5
Statement of Hypotheses
The
following are the hypotheses that will be tested in the course of the study and
they are stated in their null and alternate forms.
Hypothesis
One
HO: There is no significant
relationship between the proportion of independent board of directors and
earnings management.
HI: There is significant
relationship between the proportion of independent board of directors and
earnings management.
Hypothesis Two
HO:
There is no relationship between audit quality
and earnings management
HI:
There is relationship between audit quality
and earnings management
Hypothesis Three
HO:
There is no significant relationship
between the board effectiveness and earnings management.
HI:
There is significant relationship
between the board effectiveness and earnings management.
1.6
Significance of the Study
1. The research
work is relevant to investors in carrying out investment decisions in relation
to organizations as the variables affecting earnings management can be used to
detect the presence of opportunistic earnings management in an organization and
also whether to invest in such organization or not.
2.
The work will enlighten financial
analyst about the likelihood of the occurrence of earnings management in
organizations. It will also serve as a guide to financial analyst in making
recommendations to its client about investment decisions with respect to the
reported earnings of firms.
3.
It will assist managers in knowing the
consequent effect of the practice of earnings management on the goodwill of the
organization and the investing public.
4.
It will assist policy makers in
formulating policies that will enable organizations adopt a more rigid
corporate governance hence, reducing the practice of earnings management.
5.
Subsequent researchers and
academicians will find the research work useful by using it as a guide and
reference point in carrying out further studies.
1.7
Scope of the Study
This
study basically seeks to investigate the relationship between earnings
management and corporate governance among quoted companies on Nigerian Stock
Exchange. Hence, the population of the study is the total 210 companies listed
on Nigerian Stock Exchange while the sample consist of twenty selected
companies listed on Nigerian Stock Exchange between 2006 and 2015.
1.8
Limitations to the Study
The
population is not adequately represented as a result of the smallness of the
sample size and the sample period covered. Also, the limited number of
variables used for the research work poses a limitation to the study as a
larger number would help elucidate the significance of corporate governance in
curbing earnings management. Finally, inability to use a wider geographical
scope as the study is limited to companies operating in Nigeria.
1.9 Definition
of Terms
Earning Quality: Earning
quality simply mean the degree to which management’s choices of accounting
estimate can affect imported income (thus choice occurs every period) some of
such estimate may be difficult quantify given the company the lee way
(opportunity) to report a wide range of periodic earnings.
Corporate Governance: Corporate governance is a combination of laws,
regulations, listing rules and voluntary private sector practices that enable
the corporation to attract capital, perform effectively, generate profit and
meet both legal obligation and general societal expectation. It is all the
corporation relationship among capital, product, services and even society at
large.
Performance Management: This is a process for establishing a shared
workforce understanding about what is to be achieved in an organization level.
It is about aligning the organization objectives with the employees agreed
measures, skills, competency requirements, development plans and the delivery
of results. The emphasis is on improvement in order to achieve the overall
business strategy and create a high performance workforce.
Management:
Is a distinct process consisting of planning, organizing, starring, directing,
coordinating, reporting and budgeting, performed to determine and accomplished
stated objectives with the effective use of human and other resources.
Firm:
A business concern, especially one involving a partnership of two or more
people. It’s a business organization, such as a corporation, Limited Liability
Company. Firms are typically associated with business organizations that
practice law, but the term can be used for a wide variety or business operation
units.
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