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Effect Of Corporate Governance On Earnings Management Practices Of Nigeria Quoted Companies (2010-2015)


The study examines the effect of Corporate Governance on Earnings Management practices in Nigeria listed firms.  Specifically the study examined the joint effect of board size, board independent and audit committee independent, Board size, Board Independence and Audit committee independence on earnings management.  This is premised on the increasing failure of firms in Nigeria and which translate into the inability of organizations to meet the expectations of their various stakeholders and to adhere to a mandatory compliance to corporate governance codes.  The modified Jones model was adopted for non discretional accrual while simple and multiple regression was explored to investigate the corporate governance element on earnings management practices in Nigeria quoted companies. Four research hypotheses were formulated for the study.  Data for this study were sourced from the financial statement of twelve firms from the period of 2010-2015. These data were analyzed with the aid of Statistical Package for Social Sciences (SPSS) version -23. The study revealed that Corporate Governance Practices have significant influences on earnings management practice among Nigerian quoted firms.  Based on our findings, it was recommended that there should be constant review and improvement in the Nigeria corporate governance codes governing companies and other listed firms.  Secondly, the use of modified Jones models (earnings management models) in detecting certain types of accrual accounting should be encouraged, because they are substantially more powerful at detecting subtle and bad debt manipulations.


Title Page                                                                                                                                i

Declaration                                                                                                                              ii

Certification                                                                                                                            iii

Dedication                                                                                                                              iv

Acknowledgements                                                                                                                v

Table of Contents                                                                                                                   vi

Abstract                                                                                                                                  ix


  • Background of the Study             1
  • Statement of the problem                                                                                              3
  • Research Objectives                                                                                                       5
  • Research Questions                                                                                                        6
  • Hypotheses                                                                                                                     6
  • Significance of the Study                                                                                               7
  • Scope and Limitation of the Study                                                                                8
  • Operational Definition of Terms 8


  • Conceptual Review                                                                                                          10

2.1.1 Earnings management                                                                                                    10

2.1.2 Corporate Governance elements                                                                                   11

  • Corporate governance                                     11
  • Board size: 14

2.1.5 Audit committee:                                                                                                           15

2.1.6 Board independence                                                                                                      15

2.1.7 Techniques of Earnings Management                                                                            17

2.1.8 Major Scandals of the twenty-first century                                                                   19

2.2   Theoretical Framework                                                                                                   20

2.2.1 Stakeholder theory                                                                                                         20

  • Stewardship theory 22
  • Review of empirical work 22


3.1       Research Design                                                                                                         31

3.2       POPULATION OF THE STUDY                                                                                              31

3.3       Sample size Determination                                                                                         31

3.4       Sources of Data                                                                                                          32

3.5       Model specification                                                                                                    33

3.5.1    Model for firms earnings management represented by NDA                                     33

3.5.2    Model one                                                                                                                   34

3.5.3    Model two                                                                                                                  34

3.5.4    Model three                                                                                                                 35

3.5.5    Model four                                                                                                                  35

3.6       Method of data Analysis                                                                                            36

3.7       Description of Variables                                                                                             37


4.1 Data Presentation                                                                                                              38

4.2 Data analysis                                                                                                                     38

4.2.1 Answer to Research Questions                                                                                      39

4.3 Test of Hypotheses                                                                                                           41

4.4 Discussion of findings                                                                                                      44


5.1 Summary of findings                                                                                                        47

5.2 Conclusion                                                                                                                        47

5.3 Recommendations                                                                                                            48

5.4 Contribution to Knowledge                                                                                              49

References                                                                                                                        50

Appendices                                                                                                                 57




Financial scandals around the world and the recent collapse of major corporate institutions in the United State of America (USA), South East Asia, Europe, and Africa such as Adelphia, Enron, commercial Banks and recently XL Holidays have shaken investors’ faith in the capital market 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 (Kajola, 2008).

Corporate governance is about ensuring that the business is run well and investors receive a fair return. Organisation for Economic Corporation and Development (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 structures specify the distribution of rights and responsibilities among different participants in the corporation such as the board, managers, shareholders and other stake holders, and spells out the rules and procedures for making decisions on corporate affairs. Kang and Kim (2011) note that management could influence reported earnings by making accounting choices or by making operating decisions discretionally.

According to Ebraheam, Saleem and Alzonbi (2012), the integrity of financial reporting system was being questioned due to the failure of the board to oversight its implementation. Defond and Francis (2005) claimed that the corporate collapse consequence has renewed the significance of corporate governance minority role.

Earnings Management has consistently raised severe concerns about corporate governance practices in a broad-spectrum. Also, it has brought to spotlight issues relating to quality of financial reporting and the weak internal control system among firms (Ebrahim, 2007; Kanchanapoomi, 2005; Bellow, 2011; & Uwuigbe, 2013). The Corporate failures of such large organizations in the past have highlighted the intentional misconduct of managers in a wider-spectrum. In addition, there are apprehensions about the weakness of corporate governance in the past as it was not effective enough to protect investors from expropriation (Uwuigbe, Daramola & Anjolaoluwa, 2014).

Earnings management affects firm performance and can even temper with shareholders wealth simply because it involves a deliberate altering of financial information to either misled investors on the underlying economic status of a firm or to gain some contractual benefits that depend largely on accounting numbers, (Watts & Zimmerman, 1986; Healy & Wahlen, 1999). Earnings management as acceptable as it is within the bounds of Generally Accepted Accounting Principle (GAAP) has been a concern to investors, policy makers and researchers across the globe. Gulzer and Wuhan (2011) note that the nature of earnings management provides managers the opportunity to manipulate the financial information of firms in order to get their own benefit. Unlike fraud, earnings management involves the selection of accounting procedures and estimates that confirms to the generally accepted accounting procedures manipulations (Rahman & Ali, 2006).


In Nigeria, this was further heightened subsequent to the collapse of several financial and non-financial institutions which includes the bank PHB, Spring bank plc, Oceanic bank plc, Intercontinental bank plc, African petroleum plc, Levers Brothers and Cadbury plc. An investigation into the cause revealed significant, deep-rooted problems in the account preparation and also the intentional misconduct of managers which led to the concurrent sack of eight (8) bank chiefs by the Governor of Central Bank of Nigeria and the call for an investigation of the efficacy of the monitoring and controlling of managerial and financial behaviour of managers (Ndukwe & Onwuchekwa, 2014). A good corporate governance structure helps to ensure that the management properly utilize the enterprises resources in the best interest of absentee owners, and fairly reports the financial condition and operating performance of the enterprise (Lin & Hwang, 2010). It is on this note that the study aims at examining corporate governance and earnings management practices in selected quoted companies in Nigeria.



The recent business failures demonstrate what happens when corporate governance fails. These failures also raise some fundamental questions such as; the dependability of financial information, audit independence, the role of regulators, company management, the role  of the board of directors, conflict of interest and of course, the question of ethics and professionalism.


The manipulations of financial statements and subsequent corporate collapses are currently recurring phenomena globally. Various countries have tried to address this situation in order to guarantee the credibility of the financial statements through ensuring strong corporate mechanisms and strict compliance with accounting standards. Since the 1990s, the Nigerian corporate world has been beset bank distresses, corporate frauds and collapses in various dimensions. According to Ani (2014), the reported cases of fraudulent financial reporting by Cadbury Nigeria Plc and Lever Brothers Nigeria Plc led to the drafting of the Code of Corporate Governance of Public companies in Nigeria known as the 2003 Code of Corporate Governance of public companies in Nigeria (security and exchange code, Sec 2003) and later the corporate governance code of Nigeria, 2005 and currently amended in 2011. But, despite the introduction of the codes of best governance practices in Nigeria in 2011 and its continuous modifications, the result that it has achieved can be said to be minimal as there are fresh cases of governance malpractices that threaten the survival of quite a number of firms in different sectors of the economy (Hassan & Ahmed, 2012). Regulators of accounting profession in Nigeria seem to be silent on the issue of earnings management accounting yet it is widely practice among many companies in the country. Users of accounting information seem not to have perceived this practice of earnings management which has led to collapse of many major companies globally such as Enron and WorldCom (Ayala & Giancarlo 2006) and locally such as African Petroleum Plc, Leventis, Cadbury plc, Exide battery etc.


With increasing harsh economic times, companies may be propelled to practice earnings management for diverse reasons. Carrying out research on corporate governance and earnings management in Nigeria quoted companies will help the players in accounting profession to empirically understand the propelling mechanisms behind the practice of earnings management in Nigeria. Predicated on this, the study is set out to examine the influence of corporate governance on earnings management practices among Nigeria listed companies.



Generally, this study seeks to explore the influence of corporate governance on earnings management practices in Nigeria listed firms. However, it is set to achieve the following specific objectives:

  1. To determine the joint effect of board size, board independence and audit committee independence on earnings management practices of Nigeria quoted companies.
  2. To determine the influence of board size on earnings management practices of Nigeria quoted companies.
  3. To examine the influence of board independence on earnings management practices of Nigeria quoted companies
  4. To evaluate the extent to which audit committee independence affect earnings management practices of Nigeria quoted companies.



Predicted on the above objectives, the following research questions were raised:

  1. How have board size, board Independence and Audit Committee Independence jointly influenced the earnings management practices of Nigeria quoted companies?
  2. To what extent has the board size influenced earnings management practices of Nigeria quoted companies?
  • To what extent does Board Independence influence earnings management of Nigeria quoted companies?
  1. How Audit Committee Independence does affect earnings management practices of Nigeria quoted companies?



To proffer useful answers to the research questions and realize the study objectives, the following null hypotheses were tested at 5% level of significance:

  1. The joint effect of board size, board independence and audit committee independence on earnings management practices of Nigeria quoted companies is not significant.
  2. The influence of board size on earnings management practices of Nigeria quoted companies is not significant.
  • Influence of board independence on earnings management of Nigeria quoted companies is not significant.
  1. Audit committee Independence does not have significant effect on earnings management practices of Nigeria quoted companies.



The study therefore will be useful to different groups like: Investors, Shareholders, Policy makers/Regulatory bodies, and Academics.

Findings of this study will help investors in investment decisions making while serving as a catalyst to policy makers in policy formulation, implementation and monitoring in order to improve the level of corporate governance in Nigeria. This will enlighten the shareholders on the essence of good corporate governance practices and the negative impact of creative accounting on a financial statement.

It will equally help the policy makers take charge of regulating the market. All market systems are regulated to ensure stability in the economy. Regulatory bodies are responsible for developing standards of practices guiding the activities of most corporations. This study will therefore be of immense contribution to them by providing a guide to the use of tools that could become standards corporate practice.

This study is meant to add to the existing literature on the topic of corporate governance and earnings management. Moreover the empirical nature of this study is meant to enlighten researchers on areas for further research studies that would help explain the relationship between corporate governance and earnings management.


This study seeks to examine the connection between corporate governance and earnings management. It is worthy of note that the literature on earnings management encompasses a wide range of creative accounting techniques used by managers in order to achieve organizational goals. The researcher therefore utilised data extracted from a total of 12 quoted companies in Nigerian stock exchange for a period of 2010-2015. Annual reports for 6 years from 2010 to 2015 of selected firms were available. The basis for selecting this period is predicated on the recent implementation of corporate governance code of operations (2011) for quoted companies in Nigeria Stock Exchange.


The sample size was limited to companies in the consumer goods sector, industrial and health care sector. This is because some of the companies quoted on the Nigeria stock exchange where not consistence in presentation of their annual report.



AUDIT COMMITTEE:    The Audit committee refers to the governance body that is charged with oversight of the organization’s audit and control functions

BOARD SIZE: This is defined as the number of directors both executive and non-executive directors on the board of a company

CORPORATE GOVERNANCEThe 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. It is also a system by which business corporations are directed and controlled.

EARNINGS MANAGEMENT: This is an activity where managers use their discretion to mislead stakeholders about the economic performance of the company or to influence contractual outcomes.


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