EARNINGS MANAGEMENT AND CORPORATE GOVERNANCE IN NIGERIA ABSTRACT This study examined earnings management and corporate governance in the banking sector. In light of the empirical review and other discussions, a number of questions arose as to whether there is relationship between earnings management and corporate governance mechanisms. Using the Ordinary Least Square (OLS) regression technique with the aid of computer software, the empirical findings revealed among other things that there is no significant relationship between earnings management and corporate governance mechanisms in the banking sector. Recommendations were however made by the researcher. TABLE OF CONTENTS CHAPTER ONE General Background to the Study Statement of Research Problem Objectives of the Study Research Hypothesis Scope of Study Significance of the Study Limitation of the Study References CHAPTER TWO: LITERATURE REVIEW Introduction Earnings Management Conceptual Framework of Earnings Management Corporate Governance Mechanisms Corporate Governance Measures in Nigeria CEO Duality and Earnings Management Number of Board Meetings and Earnings Management Board Sex Ratio And Earnings Management Audit Committee and Earnings Management Managerial Share Ownership and Earnings Management Concentrated Ownership and Earnings Management Board Composition and Earnings Management Board Size and Earnings Management References CHAPTER THREE: RESEARCH METHODOLOGY Introduction Research Design The Population and Sampling Sources of Data The Research Instrument Operationalization of Variables Model Specification and Analysis Plan CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS 4.1 Introduction 4.2 Presentation of Regression Results Discussion of Findings CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS Introduction Summary of Findings Conclusion Recommendations Bibliography Appendix CHAPTER ONE GENERAL BACKGROUND TO THE STUDY The term "Corporate Governance" has been identified to mean different things to different people. Magdi and Nadereh (2002) stress that corporate governance is about ensuring that the business is run well and investors receive a fair return. OECD (1999) provides a more encompassing definition of corporate governance. It defines corporate governance as the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company’s objectives are set and the means of attaining those objectives and monitoring performance. This definition is in line with the submissions of, Wolfensohn (1999) Uche (2004) and Akinsulire (2006). Financial scandals around the world and the recent collapse of major corporate institutions in the USA, South East Asia, Europe and Nigeria such as Adelphia, Enron, World Com, Commerce Bank and recently XL Holidays have shaken investors’ faith in the capital markets and the efficacy of existing corporate governance practices in promoting transparency and accountability. This has brought to the fore once again the need for the practice of good corporate governance. Effective corporate governance reduces "control rights" shareholders and creditors confer on managers, increasing the probability that managers invest in positive net present value projects (Shleifer and Vishny, 1997). Thus, the relationships of the board and management, according to Al-Faki (2006), should be characterized by transparency to shareholders, and fairness to other stakeholders. This will in effect mitigate the agency cost as predicted by Jensen and Meckling (1976). Corporate performance is an important concept that relates to the way and manner in which financial resources available to an organization are judiciously used to achieve the overall corporate objective of an organization, it keeps the organization in business and creates a greater prospect for future opportunities. This study is a contribution to the ongoing debate on the examination of the relationship that exists between corporate governance and earnings management. Mixed and tenuous findings have been made from previous studies especially those ones that were conducted in the developed nations, particularly USA, UK, Japan, Germany and France. More so, few studies have been conducted so far on the Nigerian business environment; hence the study intends to reduce the knowledge gap. STATEMENT OF RESEARCH PROBLEM By the evolution of today’s modern business many of the corporations have become owned and controlled by families and the major agency problem exists not only between the management and owners in general, but between the management (the controlling family) and minority shareholders as well. Due to the increase in this conflict the issue of trust has taken the key position in today’s financial analysis procedures. Because management is accountable to shareholders and with in the business other stakeholders are also present and each stakeholder has his own interest in the business so, each one who is having any where any authority try to convert the results of that authority into his own favor. Earnings management is one of the examples which accountants 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. It is against this backdrop, the researcher intends to carry out this study to investigate the relationship between earnings management and corporate governance; hence the following research questions are raised. What is the relationship between earnings management and corporate governance? OBJECTIVES OF THE STUDY To ascertain the relationship between earnings management and corporate governance? RESEARCH HYPOTHESIS The hypotheses that would be tested in the course of the work are: H1: There is relationship between earnings management and corporate governance? Ho: There is no relationship between earnings management and corporate governance? SCOPE OF STUDY This research work is an empirical study on earnings management and corporate governance. The population of the study is the entire quoted banks in Nigeria, while the sample is selected banks operating in Nigeria (since a cross sectional study is adopted). The length of period covered by the study was three years (2009 – 2010). Geographically, the study will be conducted in Benin City, Edo State. SIGNIFICANCE OF THE STUDY The banking industry in Nigeria will find the research findings or report useful in decisions making. Investors and other interested parties such as shareholders and business oriented individuals will find the research finding useful for investment decisions. Society: which is made up of individual and organizations will finds 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. Analysts and future researchers such as professional accountants, auditors and academicians will find the research findings useful for analyzing the role of corporate governance on earnings management through financial reporting and the future research by academicians. Data bank future studies: the research findings or literature will serve as a research topic for future studies by academicians and researchers. LIMITATION OF THE STUDY The subject matter of this study is constrained by the available limited time which would not allow for a more comprehensive work. Also this work is constrained by the following factors; limited number of published texts on the subject matter, lack of adequate finance, distance from source of data which makes it impossible to get some relevant data and lukewarm attitude of some officials towards researchers. In the course of data collection more, there may be some personal judgement which may not be absolutely correct. Finally, possible mistakes of the different writers whose work were consulted might be reflected. REFERENCES Akinsulire, O (2006): Financial Management 4th Edition, Lagos, El-Toda Ventures. Al- Faki, M (2006): “Transparency and corporate governance for capital market development in Africa: The Nigerian case study”, Securities Market Journal, 2006 Edition, 9- 28. Magdi, R and R, Nadareh (2002): “Corporate governance: A framework for implementation”, Britain World Group Journal, Vol 20, pp 123- 132. OECD (1999): “Principles of corporate governance”, http://www.encycogov.com/ Uche, C (2004): “Corporate governance in Nigerian financial industry”, Chartered Institute of Bankers of Nigeria Journal, Vol 2, pp11- 23. Wolfensohn, (1999): “Corporate governance is about promoting corporate fairness, transparency and accountability”, Financial Times, 21st June.
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