Corporate Governance And Financial Reporting In Nigerian Banking Industry
The aim of this study is to ascertain the effect of corporate governance and financial reporting in Nigeria banking industry. A population of 200 staff of banks in Lagos metropolis was selected as the population of the study. The analysis carried out and the findings deduced in addition to the review of relevant literature and open ended responses of respondents, the following recommendations are deemed necessary to ensure high ethical banking governance and operations which would invariably lead to a sound and ethical system of reporting. Risk management should be transparent and ethical in order to promote the image of the banking sector. Efforts to improve corporate governance should focus on the value of the stock ownership of board members, since it is positively related to both future operating performance and to the probability of disciplinary management turnover in poorly performing banks.
1.1 Background of the Study
The The concept of corporate governance has attracted a good deal of public interest in recent years, because of its apparent importance on the economic health of corporations and society in general. Basically, corporate governance in the banking sector requires judicious and prudent management of resources and the preservation of resources (assets) of the corporate firm; ensuring ethical and professional standards and the pursuit of corporate objectives, it seeks to ensure customer satisfaction, high employee morale and the maintenance of market discipline, which strengthens and stabilizes the bank Recently, the banking industry in Nigeria has been undergoing serious reforms over the past couple of years arising from the central bank of Nigeria’s requirement for banks to increase their capital base (share) to a minimum level of twenty five billion naira (N25B), (Ogbeche, 2006:1). This triggered off several mergers and acquisitions that have reduced the number of players from eighty nine (89) to twenty five (25) banks as at the beginning of 2006 (Kama, 2006; 66). It is imperative to note that at the end of the consolidation exercise, the total capitalization (the value of all equities of the banks came to N775.0 billion compared to the figure of N327 billion before the commencement of this program in July 2004. (Adedipe, 2004: 52).The issue of corporate governance has recently been given a great deal of attention in various national and International forays. This is in recognition of the critical role of corporate governance in the success or failure of companies. Corporate governance refers to the processes and structures by which the business and affairs of an institution are directed and managed. In order to improve long-term shareholder value by enhancing corporate performance and accountability, while taking into account the interest of other stakeholders. Corporate governance is therefore about building credibility, ensuring transparency and accountability as well as maintaining an effective channel of information disclosure that would Foster good corporate performance.
The strategy for addressing the challenges of corporate governance has taken various forms at both the national and International levels and have culminated in initiatives such as: the OECD Code; the Cadbury Report; the Basel Committee Guidelines on Corporate Governance; the King‟s Report of South Africa etc. It is therefore necessary to point out that the concept of corporate governance of banks and very large firms have been a priority on the policy agenda in developed market economies for over a decade. Further to that, the concept is gradually warming itself as a priority in the African continent. Indeed, it is believed that the Asian crisis and the relative poor performance of the corporate sector in Africa have made the issue of corporate governance a catchphrase in the development debate (Berglof and Von -Thadden, 1999).
Performance may be defined as the reflection of the way in which the resources of a company (bank) are used in the form which enables it to achieve its objectives. According to Heremans, (2007), financial performance is the employment of financial indicators to measure the extent of objective achievement, contribution to making available financial resources and support of the bank with investment opportunities.
These are factors which play a role in shaping the financial status of a company. Most studies divide the determinants of commercial banks’ financial performance into two categories, namely internal and external factors. Internal determinants of profitability, which are within the control of bank management, can be broadly classified into two categories, i.e. financial statement variables and nonfinancial statement variables, (Linyiru, 2006). While financial statement variables relate to the decisions which directly involve items in the balance sheet and income statement; non-financial statement variables involve factors that have no direct relation to the financial statements. The examples of non-financial variables within the this category are number of branches, status of the branch (e.g. limited or full-service branch, unit branch or multiple branches), location and size of the bank, Sudin (2004).
Several events are therefore responsible for the heightened interest in corporate governance especially in both developed and developing countries. The subject of corporate governance leapt to global business limelight from relative obscurity after a string of collapses of high profile companies. Enron, the Houston, Texas based energy giant and WorldCom the telecom behemoth, shocked the business world with both the scale and age of their unethical and illegal operations.In developing economies, the banking sector among other sectors has also witnessed several cases of collapses, some of which include the Alpha Merchant Bank Ltd, Savannah Bank Plc, SocieteGenerale Bank Ltd (all in Nigeria), The Continental Bank of Kenya Ltd, Capital Finance Ltd, Consolidated Bank of Kenya Ltd and Trust Bank of Kenya among others (Akpan, 2007). In Nigeria, the issue of corporate governance has been given the front burner status by all sectors of the economy. For instance, the Securities and Exchange Commission (SEC) set up the Peterside Committee on corporate governance in public companies. The Bankers‟ Committee also set up a sub-committee on corporate governance for banks and other financial institutions in Nigeria. This is in recognition of the critical role of corporate governance in the success or failure of companies (Ogbechie, 2006:6). Corporate governance therefore refers to the processes and structures by which the business and affairs of institutions are directed and managed, in order to improve long term share holders‟ value by enhancing corporate performance and accountability, while taking into account the interest of other stakeholders (Jenkinson and Mayer, 1992).
1.2 Statement of the Problem
With the increasing dynamism and complexity of modern business operations, coupled with the ever-present accounting scandals of high profits companies such as Cadbury plc and Enronlinc have questioned the effectiveness of corporate governance mechanism and the quality of financial reports and the credibility of audit functions.
Since ownership is separated from in their own interest, rather than the interest of shareholders whom they represent. They could manipulate financial statements, giving investors misleading impression about the financial position of the corporation. As a result, financial reports in most cases, do not reflect the true and fair position of the corporation.
Therefore. The need for accurate, reliable, timely and accessible financial reports is imperative in order to maintain corporate accountability so as to achieve organizational goals and quick decision making.
1.3 Objective of the Study
The followings are the purpose of the study:
- To establish the relationship that exist between corporate governance and financial reporting
- To establish the relationship between management and shareholders’ interests.
- To ensure that the financial reports in most cases reflect the true and fair position of the corporate.
- To enhance the need for accurate, reliable, timely and accessible financial reports necessary for corporate accountability so as to achieve organizational goals and quick decision making.
1.4 Research Hypotheses
For the successful completion of the study, the following research hypotheses were formulated:
- H0: Corporate governance has no effect on the financial reporting of the banks
H1: Corporate governance haseffect on the financial reporting of the banks
- H0: Corporate governance does not enhance management and shareholders relationship through transparency and accountability.
H2: Corporate governance does enhance management and shareholders relationship through transparency and accountability
1.5 Significance of the Study
It is believed that at the completion of the study, the findings will be of great importance to the central bank of Nigeria who are charged with the responsibility of regulating the activities of the commercial banks to ensure strict compliance with the corporate governance guideline. The study will also be of great importance to the managers of commercial banks as the findings will remind them of the tremendous benefit of corporate governance practice.
The study will also be of great benefit to researchers who wishes to embark on a study in similar topic as the study will serve as a guide to them. Finally the research will be of great importance to student, teachers, lecturers, academia’s and the general public.
1.6 Scope and Limitation of the Study
The scope of the study covers the effect of corporate governance on the performance of commercial banks in terms of profitability. In the course of the study, the researcher encounters some constrain which limited the scope of the study. Some of these constrain are stated below:
(a) Availability of Research Material:
The research material available to the researcher is insufficient, thereby limiting the study.
The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
The finance available for the research work does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover.
1.7 Definition of Terms
Management (or managing) is the administration of an organization, whether it is a business, a not-for-profit organization, or government body.
A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets.
The methods by which suppliers of finance control managers in order to ensure that their capital cannot be expropriated and that they earn a return on their investment.
Bank that dealing with businesses: a bank whose primary business is providing financial services to companies
1.8 Organization of the Study
This research work is organized in five chapters for easy understanding as follows
- Chapter one is concern with the introduction which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study.
- Chapter two highlights the theoretical framework on which the study it’s based thus the review of related literature.
- Chapter three deals on the research design and methodology adopted in the study.
- Chapter four concentrate on the data collection and analysis and presentation of finding.
- Chapter five gives summary, conclusion and recommendations made of the study.
Summary Conclusion and Recommendation
It is important to ascertain that the objective of this study was to ascertain the effect of corporate governance and financial reporting in Nigeria banking industry.
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the effect of corporate governance and financial reporting in banks.
For so many years banks in Nigeria operated ignoring the basic duties of banking which are high degree of professionalism, transparency, and accountability. These duties or roles of the banking sector are very essential for building strong public confidence in the banking industry. It has been shown that behaving ethically is in the best interest of businesses as well as in the interest of other stakeholders in the system. To behave unethically has dire consequences for all stakeholders and for the system. Given the above it thus becomes necessary to establish frameworks with which such behaviours are measured and guided. Regulators, both professional such as the CIBN and institutional such as the CBN and NDIC, should therefore take the subject of ethics in banks governance beyond the development of codes and submission of reports. The question should not therefore be whether regulatory codes exist, as there are already too many in circulation, but that they should be enforced to a point where it would yield a remarkable change in the system, saving it of possible future downturn similar to what it was in the past
The four pillars of corporate governance which are accountability, independence, fairness and transparency cannot be deleted from financial reports of business organizations. The financial reports when they contain reliable facts and faithfulness in contents, it proves that the business organization is presenting a sustainable performance that will attract investors and relevant stakeholders. Trust and confidence have been identified over time as the key blocks for laying the foundation of survival and profitability in the banking industry.
Based on the analysis carried out and the findings deduced in addition to the review of relevant literature and open ended responses of respondents, the following recommendations are deemed necessary to ensure high ethical banking governance and operations which would invariably lead to a sound and ethical system of reporting. Risk management should be transparent and ethical in order to promote the image of the banking sector. Non-compliance with the standard of reporting and disclosure requirement should be sanctioned. Executive compensation should be regularly reviewed to discourage misappropriation of firms’ resources. The level of the remuneration should be sufficient and reasonable to motivate employees for higher performance.
Efforts to improve corporate governance should focus on the value of the stock ownership of board members, since it is positively related to both future operating performance and to the probability of disciplinary management turnover in poorly performing banks.
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