CORPORATE GOVERNANCE MECHANISMS AND EARNINGS QUALITY OF LISTED COMPANIES IN NIGERIA

Abstract

The study on corporate governance and earning management in Nigeria banking industry aimed to examine the relationship between corporate governance and earning in Nigeria banking industry, to examine the extent to which the proportion of independent directors affects earnings management in Nigeria, to investigate on the factors affecting effective implementation of corporate governance and earning management policy in Nigeria banking industry. The study made use of primary data which are gotten from the distribution of the research questionnaires; the sample size for the study is 40. The study made use of the Pearson correlation method for the analysis. The study therefore concluded that there is significant relationship between corporate governance and earning in Nigeria banking industry. The study also made useful recommendation to assist the federal government in decision making.

CHAPTER ONE

INTRODUCTION

1.1 Background of study

The financial scandal that sunk once high profile companies such as Enron, Worldcom and Xerox in the United States, Parmalat in Italy and many other big companies around the world confirmed that there was an opaqueness in financial reporting that had hitherto not been penetrated. It becomes glaring that the existing corporate governance mechanisms is inefficient as it fails to protect the owners’ interest. Consequently, the Sarbanese-Oxley Act was introduced in 2002 in the U.S. with a view to improving corporate governance practices. Many other countries, both developed and developing, followed suit. But despite the various measures adopted by Most indusrance firmsto foster efficient corporate governance structure and restore investors’ confidence, still there are fresh cases of governance malpractice that threaten the survival of some insurance firms.

The need for a good corporate governance structure arose because of the separation of ownership between a firm and its owners, which turns the firm into a nexus of relationship among managers, employees, shareholders, creditors, government and all its stakeholders. The separation of ownership and control by the sophistication of the modern day business redefines the relationship that exists between the owners and the managers to that of an agent and a principal. Being the agent, the manager is expected not pursue goals that are geared towards the achievement of his own interest at the expense of shareholders’ wealth maximization. The existence of  conflict of interest between managers and owners naturally compromises the value of the firm (Ramly and Rashid 2010).

Universally, banking industry is a well regulated industry and the governance structure is given serious attention because of the crucial role that indusrance firms play in the economy. Shehu (2011) observed that “The importance of indusrance firms to national economies is underscored by the fact that banking industry is, almost universally, a regulated industry and that they have access to government safety nets”. The regulation in banking industryis much more strict than any other industry. This is because they come under the constant watchful eyes of the depositors and investors who are interested in the safety of their deposits and the return on their investment respectively. And the role of the government is to ensure the protection of both the depositor and the investor to ensure stability in the financial system, the performance of which reflects the overall performance of the economy.

It has long been recognized that financial statements play an important role in assessing managers performance by the board of directors, outside investors and external regulators. It is therefore, not unlikely that managers will manipulate financial reports in order to produce a good image of themselves and the firms that they manage. Earning management simply refers to the manipulation of earnings by companies using financial statement elements that are largely at the discretion of the managers to achieve divergent personal goals. These elements are peculiar to industries depending on their nature of operation and their external regulatory framework. The study in this regard wishes to examine corporate governance and earnings management in Nigeria banking industry using some selected banking industry in portharcourt as the case study.

1.2 STATEMENT OF PROBLEM

The issue of earnings management and corporate governance mechanisms has received considerable attention in recent years from academics, market participants, and regulators. It continues to receive attention due to recent corporate failures that has bought about doubts in the minds of stakeholders on the credibility and reliability of financial report. Earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the industry or to influence contractual outcomes that depend on reported accounting numbers (Healy & Whalen 1998). There has been a considerable debate in recent times concerning the need for strong corporate governance (Adeyemi & Fagbemi 2010; Adeyemi & Uadiale 2010; Dabor & Adeyemi 2009; McConomy & Bujaki 2000) with countries around the world drawing up guidelines and codes of practice to strengthen governance (Cadbury 1992; Corporate Governance Code of Nigeria 2005). Little wonder therefore that several studies and initiatives have been undertaken by countries and International Institutions on the subject “corporate governance”. As a result of the foregoing, several codes of corporate practices and conduct have been fashioned out and are in use in various jurisdictions including Nigeria. The rationale for this emphasis can be linked to increased concerns over the integrity of securities markets (International Federation of Accountants-IFAC 2003; Millstein 1999).

1.3 AIMS AND OBJECTIVES OF STUDY

The main of the research is to examine corporate governance and earnings management in Nigeria. Other specific objectives of the study include:

1. to examine the relationship between corporate governance and earning in Nigeria banking industry
2. Examine the extent to which the proportion of independent directors affects earnings management in Nigeria
3. to investigate on the factors affecting effective implementation of corporate governance and earning management policy in Nigeria banking industry
4. to determine the effect of corporate governance on the well being of the Nigeria banking industry
5. to proffer solution to the above stated problem

1.4 RESEARCH QUESTION

The study came up research question so as to be able to ascertain the above stated objectives. The research questions for the study are stated below as follows:

1. What is the relationship between corporate governance and earning in Nigeria banking industry?
2. What is the extent to which the proportion of independent directors affects earnings management in Nigeria?
3. What are the factors affecting effective implementation of corporate governance and earning management policy in Nigeria banking industry?
4. What is the effect of corporate governance on the well being of the Nigeria banking industry?

1.5 STATEMENT OF RESEARCH HYPOTHESIS

H0: There is no significant relationship between corporate governance and earning in Nigeria banking industry

H1: There is significant relationship between corporate governance and earning in Nigeria banking industry

1.6 SIGNIFICANCE OF STUDY

The study on corporate governance and earnings management in Nigeria banking industry will be of immense benefit to the entire banking industry in portharcourt and other researcher that wishes to carry out similar research on the above topic as it will educate the entire firms on the importance corporate governance and management of earnings in Nigeria banking industry. The study will also discuss some factors affecting the efficiency of the banking industry

1.7 SCOPE OF STUDY

The study on corporate governance and earnings management in Nigeria banking is only limited to the banking industry in portharcourt; the study will cover the effect of corporate governance and earning management on the banking industry in Nigeria; the study will also cover the factors affecting the efficiency of the banking industry

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.9 DEFINITION OF TERMS

CORPORATE GOVERNANCE: Is the system of rules, practices and processes by which a industry is directed and controlled

EARNINGS: money obtained in return for labour or services.

INSURANCE: Is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss

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