Earnings Management And Corporate Governance In Nigeria Banking Industry

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Earnings Management And Corporate Governance In Nigeria Banking Industry


Abstract


We examine earnings management and corporate governance in the Nigerian banking sector; we also examine the effectiveness of board characteristics when the incentives to avoid losses are strong. We found the proportion independence of directors has a significant impact on earnings management in the Nigerian banking sector. The result shows that there a negative relation between board independent and earnings management. The size of the board of directors has no significant impact on earnings management of banks in Nigeria. The result also shows that there is a positive relationship between earnings management and board size Ownership structure has a significant impact on earnings management. The result shows that there is a negative relationship between ownership structure and earnings management the control variables reveals that there is a positive relationship between loss and earnings management ,audit report quality has a negative relationship with earning management while ROAM has a positive relationship with earnings management in the Nigerian Banking sector


Chapter One


Introduction

1.1 Background to the Study

The recent financial crisis that heat the globe necessitated the move for good corporate governance practices. According to Babalola (2010) the common denominator of these monumental failures was poor corporate governance culture, exemplified in poor corporate management, fraud and insider abuse of power by management and board of directors. The major aftermath of bad corporate governance is earnings smoothing. Poor corporate governance practice invariably leads to poor financial reporting as in cases of Enron, world corn and Tycod. Investors generally believe that management of firms manipulate earning for self gratification rather than for firms growth. Beneish (1997 and 1999) opines that managers use accounting choice to miss inform stakeholders about the financial position of their firms. The perverseness of earnings manipulations using choice accounting is the order of the day in most countries of the world. This practice is more pronounce in emerging economies that have no history of capital punishment for fraudsters.

The relationship between corporate governance and earnings management has become a topic for debate. Companies with sound corporate governance report higher quality earnings and the assertion that positive earnings surprise are higher quality than negative surprises. Investors tend to believe that management manipulate earnings for self gratification rather than for the growth of the firms. There is conflict of interest between the owners and the agent borne from fact that managers could use the latitude provided by accounting standards to manage income opportunistically thereby, creating a distortion in reported earnings. Accrual accounting enables managers to use their discretion in determining the earnings the firm reports in any given period, this goes a long way to create 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 and Sweeney,1996).

Watts and Zimmerman(1986) suggest that misalignment of interest between managers and shareholders has resulted to the development of international corporate governance codes that will help shareholders to checkmate the opportunistic behaviours of managers that have reduced the value placed on financial reporting by end users. Corporate governance attributes are mechanisms used by regulatory bodies resolve the conflict between company owner and the agent erformance of management by aligning the interest of managers with the interest of shareholders and. Corporate governance attributes also add value to corporate by enhancing the reliability of financial information and integrity of the financial reporting process .


1.2 Statement of Research Problem

To detect earnings management, researchers have used accrual models (DeAngelo, 1986; Healy 1985 and the Jones, 1991). However uniqueness of the banks and other financial institutions make these models unsuitable for banks and other financial institutions. To best of our knowledge there is no ingenious study on that use loan loss provision as a proxy for earnings management. Based on aforementioned the following research questions were formulated:

  1. What is the relationship between earnings management and board composition in the Nigerian Banking sector?
  2. What is the relationship between earnings management and ownership structure in the Nigerian banking sector?
  3. What is relationship between earning management and board size in the Nigerian banking sector

1.3 Objectives of the Study

The broad objective of the study is to identify the relevant corporate governance mechanism that could help in classification of earnings management practices in Nigeria.

However the specific objectives are to;

  1. Find out the relationship between earnings management and ownership structure in the Nigerian banking sector ;
  2. Investigate the relationship between earning and board size in the Nigerian banking sector ; and
  3. Ascertain the relationship between earnings management and board composition in the Nigerian banking sector.

1.4 Research Question

The following research questions will be answered by the study

  1. What is the relationship between earnings management and board composition in the Nigerian Banking sector?
  2. What is the relationship between earnings management and ownership structure in the Nigerian banking sector?
  3. What is relationship between earning management and board size in the Nigerian banking sector

1.5 Statement of Research Hypothesis

The following hypotheses formulated :

  1. There is no significant relationship between earnings management and board size in the Nigerian banking sector
  2. There is no significant relationship between earnings management and board composition in the Nigerian banking sector
  3. There is no significant relationship between ownership structure and earning management in the Nigerian banking sector

1.6 Significance of the Study

The findings of this study can have implications for users of financial statements such as shareholders, potential investors, policy makers, the regulatory bodies and also students. The study is expected to practically contribute in strengthening the areas of concern by practitioners such as external auditors and financial consultants in manning the financial records of Nigerian Quoted companies (NLMC) relating to the role of CG practice. Again, the Board of directors and regulatory agencies of NLMC in discharging their duties of policy making and regulating respectively. And also to consider the prominent roles or activities that CG mechanisms play in checkmating and preventing as well as minimizing the possible opportunistic accounting by managers in preparing the financial statement of the firms.

Theoretically, the findings of this study is expected to provide additional literature in the areas of CG and quality of accounting numbers. This will go a long way in validating theories, such as agency that anchored CG mechanism and EQ in NLMC.

In particular, financial statement users should be aware of income the users should be aware of income smoothing and the factors affecting such behavior when they rely on financial statements to help them make decisions. Specifically, users are expected to know the influence of the independent or non-executive directors, institutional shareholdings and the audit committee on such behavior.

Further, since extensive accounting ethics may lead to inadequate or misleading income disclosure, thus regulators should concentrate their efforts where such practices are likely and most extensively to happen.


1.7 Scope of the Study

In this study welooked at earnings management and coporate governance .We took a sample of fifteen banks that are quoted on the floor of the Nigerian stock exchange .The study covers aperiod of five years( 2015-2020).The researcher chose this period because it is the post merger and acquisition era in the Nigerian banking industry


1.8 Limitation of the Study

This project work is limited to only the banking industries in Nigeria due to population size, logistics and financial constraint. The project work should have incorporated all the banking companies in Nigeria, but they are too confidential and this has made the researcher to limit his scope to examine only 10 manufacturing industries in Nigeria.


1.9 Definition of Key Terms.

Current Assets Ratio

The current ratio is mainly used to give an idea of a company’s ability to pay back its liabilities (debt and accounts payable) with its assets (cash, marketable securities, inventory, accounts receivable). As such, current ratio can be used to make a rough estimate of a company’s financial health.

Acid Test Ratio

In finance, the acid-test or quick ratio or liquidity ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values.

Cash and Cash Equivalent Ratio

The cash ratio is the ratio of a company’s total cash and cash equivalents to its current liabilities. A cash equivalent is a highly liquid investment having a maturity of three months or less. It should be at minimal risk of a change in value. Examples of cash equivalents are: Certificates of deposit. Commercial paper.

Exchange Rate

In finance, an exchange rate is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in relation to another currency.


1.10 Organizations of the Study

The chapter one consist of the introductory part of the study which includes the study background, the statement of the research problem, the study objective and scope of the study.

The second chapter is a critical review of other literatures relevant to the study and its objectives including the theoretical framework for the study. While the third chapter is methods of data collection, sampling and data analysis used in conducting the study. The fourth chapter centres around the research findings including an analysis of how it relates to previous findings. The fifth chapter consists of the summary of findings, conclusion and recommendations base on the study objectives.


Chapter Five


Conclusions and Recommendations

5.1 Conclusions

Based on the findings of the research, the study concludes as follows:

Firstly, the study has provided both empirical as well as statistical evidence on the utility of four independent variables that constitute corporate governance board composition, institutional shareholding, managerial shareholding and audit committee in explaining and predicting earnings management of the sample firms.

Secondly, independent directors play a prominent role of monitoring management to reduce their opportunistic behavior in managing earnings. Therefore, the presence of higher proportion of independent members on corporate board is likely to enhance the earnings management reported by the firms. Thus, efficient monitoring from non-executive directors that are free from managerial influence is capable to improve the quality of financial information conveyed to the user of financial statement. As is the case with the upper limit of the size of the board of directors, there is also a maximum level of independence of the board, from which the virtues of independence no longer apply.

Thirdly, institutional investors as one of the factors that constrain managers‟ ability and influence their choice to manage earnings, their substantial institutional presence reduces the level of earnings management by inhibiting managers to use questionable accounting techniques to manage accruals. In this sense, institutional investors improve the quality of corporate governance and that of financial reporting.

Finally, the quantum of shares held by managers should be reduced in order to minimize unethical accounting and improve the quality of earnings. The presence of an elaborate audit committee will improve the overall quality of earnings as they play a vital role of internal control mechanism


5.2 Recommendation

Based on our findings following recommendations were made;

  1. The apex bank should ensure that the number of independent directors in the board should be more than the executive directors to enhance checks and balances
  2. The apex bank should ensure that large board in the sector be reduced to enhance effective monitoring and communication
  3. Banks should be encouraged to increase shareholding of outsiders.

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