ABSTRACT
Earnings Management has become an international phenomenon with the harmful impacts on firms and has created an increased concern among academics and scholars. Aggressive earnings management practices have led to the occurrence of a number of corporate scandals like Enron and WorldCom. The effect of corporate governance on earnings management of listed goods in Nigeria was studied. The ex post facto research design was applied. The population is the forty-nine (49) listed manufacturing companies in Nigeria as at 31st December 2019 on Nigeria Stock Exchange (NSE). A sample size twenty-six (26) firms were selected using the stratified random sampling technique and the period under review is 2010-2019 (10 years). Data used in the research were obtained from annual reports of the sampled companies. Data was analyzed using both Descriptive and Inferential statistics. The study revealed that corporate governance has no significant effect on earnings management of listed manufacturing companies in Nigeria (Adj.R2= -0.005781, F(4)= 0.627844, p>0.05); there is no significant effect of board meeting frequency on earnings management (β = 0.010544; R2= 0.005122, t(1)= 1.153890, p>0.05); board gender diversity has no significant effect on earnings management (β = 0.000765; R2= 0.002453, t(1)= 0.795011, p>0.05); and board size has no significant effect on earnings management of listed companies in Nigeria (β = 0.001132; R2= 0.000395, t(1)= 0.319628, p>0.05). The study concluded based on statistical results that corporate governance does not significantly affect earnings management of listed firms in Nigeria. It is however recommended that companies should adhere strictly to corporate governance code in order to increase positive perception among investors and other users that a company's earnings and overall financial is reliable.
CHAPTER ONE INTRODUCTION
1.1.Background to the Study
Earnings Management has become an international phenomenon with harmful impacts on firms and has created heightened concern among academics, scholars, and industry professionals. Investors analyze companies by the actual earnings in the financial statement or ratios that are based on these earnings (Kouaib & Almulhim, 2019). The weak control of shareholders over the activities of management has resulted in fraudulent earnings management activities (Dong, et al., 2020). This accounting technique has culminated in infamous frauds by several firms, such as Enron, WorldCom. A variety of studies have been conducted to explain the trend of managers and several businesses from across the world to fabricate or falsify the financial statements (Harris, et al., 2019; Fan, et al., 2019). The deliberate effort of management to distort financial statements, limits the accuracy and integrity of the accounts and in essence, impacts decision making by firm’s stakeholders (Kurawa & Ahmed, 2020).
Management of earnings has also been a cause for concern for regulatory authorities and accounting practitioners for many years (Wasan & Kalyani, 2020). The consider earnings to be give a significant overview of the financial performance of an enterprise and are frequently utilized in company assessment. Leuz et al., (2003) states that income management is essentially defined as the changes in economic performance of companies reported by insiders to deceive or affect the contractual results of stakeholders. In essence, the actual performance of companies is concealed, and information obscured that the parties involved should know (Ezekiel & Patrick, 2018). In principle, however, earnings management occurs when managers exercise personal judgement and opinion in financial reporting and accounting structuring to alter financial reports with the aim of misleading stakeholders about the company's actual economic performance (Healy & Wahlen, 1999). Kurawa & Ahmed, 2020 highlighted that many factors can motivate directors to engage in earnings management. Some of these factors include increasing stock market price, taking advance of performance-based bonuses, avoid taxes or influence contractual agreements. Managers may manipulate or influence earnings to promote their own interests or to communicate their private knowledge and therefore impact earnings information (Olayiwola, 2018). While earnings management does not violate the provisions of the financial reporting laws and regulations like the International Financial Reporting Standard (IFRS) or the GAAP, it has become excessive over the past years such that it has called the attention of many.
On the other hand, corporate governance describes a framework that encompasses laws, procedures, and processes that governs how companies are guided and regulated (Raut, 2003). Many controversies, discussions and research across the world have arisen due to an increased occurrence of profit smoothening of many companies and it has resulted to greater emphasis on corporate governance by emerging economies (Peterson, 2021). The notion of corporate governance (CG) incorporates a complex range of practices about what should contribute to optimizing accountability and cohesiveness within an organization. The international community recognizes corporate governance relevance (Wasan & Kalyani, 2020). Logically, as per the observations by OECD (1999), the framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders. Corporate governance is a highly topical subject in the present time, which concerns the management structure of large companies and the way in which they use their power and influence in society today in such a way as to create value for all stakeholders especially the shareholders. It encompasses a wide range of issues extending from company law to business ethics. The complex three-way relationship among shareholders, boards, and top management has been the subject of a large literature (Adams et al., 2009).
Research reveals those managers with little or no supervision are freer to engage in opportunistic profits management (Dechow et al., 1996.). In addition, weaker management companies enable management to have more discretion and authority inside the Management Board (Asogwa et al., 2019). They are thus more likely to be involved in profit management. Active monitoring by members of the board and the audit committee and savvy shareholders' organizations substantially restricts the flexibility of management for misrepresenting financial figures (Davidson et al., 2003). The General Accepted Principles for Accounting (GAAP) permit alternate accounting information presentation. Alternate accounting methods provide the company freedom to maintain alternative books. Without false reporting, management may modify the reported income by selecting an accounting technique in order to raise or reduce reported income (Buniamin et al., 2012). This choice may lead to incorrect and distorted financial information presented in alternative accounting practice.
Earnings management practice requires judgmental advice to change or manipulate business earnings within the GAAP or the IFRS framework, depending on the jurisdiction. This act, simply taking advantage of the loopholes that exist in the reporting framework which is similar to taking advantage of a backdoor scheme. In 2018, The Nigerian Code of Corporate Governance (the "Code") was issued by the Financial Reporting Council of Nigeria. The code set a new standard that is intended to bolster corporate governance, financial reporting integrity and accountability across the country. Currently, Nigeria is witnessing transition, growing transparency and consistency in this area (Peterson, 2020). However, there is need to have a steady rise in corporate governance practices amidst the rising misconduct cases in the stock market. In the fast-changing and competitive Nigerian economy, the manufacturing sector is going to play a rising part (Malek, et al., 2020). Thus, the study seeks to contribute to the existing body of knowledge by examining the effect of corporate governance using audit committee size, audit committee meeting frequency and gender diversity on earnings management of listed companies in Nigeria through concepts, relevant theories and empirical findings reached in the research.
1.2 Rationale for the Study
Over the past two decades, several financial and non-financial companies in Nigeria have collapsed because of bad management, such as Oceanic Bank, Intercontinental Bank, Nitel and Vodafone, amongst others. These company failures in Nigeria have led to a greater interest in study of corporate governance in Nigeria. Many of the corporate governance studies in Nigeria center around how compliance to laws and regulations influence the occurrence of corruption and fraud. However, as earlier mentioned, there is a need to further research and deep dive into corporate governance and how companies and the wider economy can benefit from it. There is a conviction that managers prefer to conform with the CG code of a tougher regulator, while managers are unlikely to comply with the lax regulator's CG code. In Nigeria, more significantly, the CG concerns, such as the plurality of CG codes in the literature are partly linked to regulation multiplicity issues in international corporate governance systems (Harris, et al., 2019).
Comparative literature on corporate governance emphasizes the challenges of compliance in various countries by multinationals with different rules and codes.
In the history of earnings management, Enron is a prime example. The last few decades have seen several failures of companies in Nigeria in terms of good corporate governance (Hamdan, 2020; Ana, 2020; Nik & Hassan, 2014). These corporate failings in Nigeria have spurred increased research into the impact of corporate governance practices in Nigeria. Researchers noted that this particular domain is poorly studied in comparison to the rising cases of misconduct and non- compliance (Dong et al., 2020; Harris et al., 2019; Fan et al., 2019; Tolulope et al., 2018; Arya, Glover, & Sunder, 2003; Guay et al., 1996; Healy & Palepu, 1993).
Prior studies in this area have focused majorly on how corporate governance characteristics impact the occurrence of earnings manipulation within the financial services industry like commercial banks and insurance companies. In these papers, firm ownership, board size and CEO duality are the key variables used as proxies for corporate governance. As a result, this paper seeks to assess how board gender diversity influences the accounting technique under review as this variable is not popularly considered (Harris, et al., 2019). In addition, the board meeting frequency, board size and audit committee meeting frequency will also be evaluated to ascertain their relationship with earnings management both individually and holistically. The environment of this study is the listed Nigerian manufacturing food companies.
1.3 Objective of the Study
The main objective is to examine the effect of corporate governance on earnings management of listed manufacturing firms in Nigeria. The specific objectives are to;
i. examine the effect of board meeting frequency on earnings management of listed food processing companies in Nigeria.
ii. evaluate the effect of board gender diversity on earnings management of listed food processing companies in Nigeria.
iii. identify the effect of board size on earnings management of listed food processing companies in Nigeria
iv. ascertain the effect of audit committee meeting frequency on earnings management of listed food processing companies in Nigeria
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