RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND EARNINGS MANAGEMENT

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

The evolution of today’s modern business, many of the corporations have became owned and controlled by families and the major agency problem exist not only between management and owners in general but shareholders as well. Due to the increase in this conflict the issue of trust has taken the key position in today’s financial analysis procedure.

Earnings management is one of the examples which accountant by the will of authorities smoothen their earnings. Here a need has been assessed in the result of which concept of appropriate corporate governance emerged. In the confirmation of which Securities and Exchange Commission of Pakistan gave a code of Corporate Government in March 2002. Better governance is supposed to lead to better corporate performance by preventing the expropriation of controlling shareholders and ensuring better decision making. This expropriation may be due to the result of smoothening of earnings intention which known as earnings management. This study attempts to assess that whether corporate governance creates any impact on earnings management or not. Good governance means little expropriation of corporate resources by managers or controlling shareholders which contribute to better allocate resources or better performance.

As investors and lenders will be willing to put their money in firms with good governance. They will face with lower costs of capital, another source of better firm performance. Other stakeholders, including, employees and supplies will also want to associated with such firm as the relationship are likely to be more prosperous, fairer, longer lasting than those with firms with less effective governance. Over the past two decades a number of prominent participant in debates surrounding professional accounting and auditing standard have increased the attention given to the role of corporate procedure in financial reporting practices.

Corporate governance is not just about the process by which elicited representatives as directors make decisions. It is also about the way organizations are held accountable. The obvious way is via financial reporting. A lot of financial reporting issues have remain under discussion in the financial literature earnings management is one of them. Impact of corporate governance on earnings management is the core theme of this paper. Implicit in all of their recommendations is the assertion that the creditability of financial statement information is related to specific institutional features of corporate governance. The purpose of this paper will be to identify the empirical evidence that such a relation exist. The purpose is also to find out between different measures of earnings management and the composition of firms boards of directors particularly the subset of directors serving in the audit committee.

In developing countries like Pakistan, more attention needs to be paid to the corporations owned and controlled by families and with family members holding key managerial position however the major agency problem exist not between the management and owners in general but between the management (the controlling family) and minority shareholders.

The existence of large shareholders may by itself not be a matter of concern or may even be a blessing but the beneficial effect of large shareholders should be expected only when management is separated from ownership or when proper corporate governance mechanisms are in place so that outsiders shareholders can effectively check misbehavior by controlling owners. These conditions are generally not met in most companies in Pakistan.

1.2     STATEMENT OF RESEARCH PROBLEM

Lax corporate governance ad poor risk management have been regarded to the major causes of the earning management in Nigeria bank industry.

1.3     OBJECTIVES OF THE STUDY

1. To identify the empirical evidence that a relationship exist between corporate governance and earnings management.
2. To find out correlation between measures of earnings management and the composition firms boards of directors, particularly the subset of directors serving on the audit committee.
3. To determine the relationship between different corporate governance mechanisms and earning management.

1.4     SCOPE OF THE STUDY

1. Sample size: Selected fifteen commercial banks in Nigeria.
2. Geographical coverage: The research was carried out interstates of Nigeria.
3. Time horizon: The length of period covered by the study was three years.
4. The sites: The project study was carried out in Benin City in Edo state.

1.5     RELEVANCE OF THE STUDY

1. The banking industry in Nigeria will find the research findings or report useful in decisions making.
2. Investors and other interested parties such as shareholders and business oriented individual will find the research finding useful for investment decisions.
3. Society which is made up of individual and organizations will find the research findings useful for investment decisions.

Government authorities and agencies will find the research findings useful in the areas of making tax policy and investment decisions into corporate organizations.

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