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Corporate Governance and Financial Reporting
Quality in Nigeria: Evidence from Pre-and
Post- Code 2011
Article · December 2015

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Nuraddeen Usman Miko

Hasnah Kamardin

Federal University of Education, Zaria-Nigeria

Universiti Utara Malaysia

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(2009-2010) and post(2012-2013) periods based on 20 of listed Nigerian consumer goods industry as sample. Thecorporate governance code of FRCN 2013 is introduced to strengthening earnings quality of financial reporting and previous’ CG codes shortcomings. Hasnah Kamardin managers use different earnings management method in order to meet the target to avoid reporting losses annually (Cohen & Zarowin. Intercontinental Bank. Union Bank. for example. Equitorial Trust Bank. Managers use earnings management to increase or decreasethe volume of reported earnings for example. Investments and Securities Act (ISA). Dube. subsequent period will go down which cause negative effect to the owners of businesses. for example. INTRODUCTION Regulating business environment in Nigeria has a long history. The introduction of governance mechanisms (Code. Although SEC Code (2011) and 2003 are for listed firms while Financial Reporting Council of Nigeria Code (FRCN Code. separation of functions of chairperson of the board and chief executive officer. Pension Commission (PENCOM) Code 2008. 2003) in Nigeria is expected to mitigate corporate scandals and other associated problems. Revised Version Manuscript Received on December 19. for example. However. Insurance Act (IA). Furthermore. 2002. This new code is applicable to all firms whether quoted or unquoted. University Utara Malaysia. The study concludes that corporate governance mechanism encouraged earnings management in the pre. . Keywords: Corporate governance. and etc. 2010. Securities and Exchange Commission (SEC) Code 2011 and financial reporting council of Nigerian FRCN Code 2013. 2008). Nigerian Stock Exchange 1960. corporate failures and scandals are increasing. Privatization and Commercialization Act 1980. Zaria-Nigeria. Dechow & Dichev.and PostCode 2011 Nuraddeen Usman Miko. Klein.code 2011. private or public. Another similar codewas launched in 2013 by the Financial Reporting Council of Nigeria (FRCN) which harmonized all corporate governance code in Nigeria. A committee was inaugurated to review the CG code 2003 for further improvement.Board of directors as a mechanism of corporate governance is set to oversee the manager's activities of the firm. 2011). Subsequently. and the others are Central Bank of Nigeria Code 2006. namely BankPHB. SEC corporate governance code was introduced in 2003 and replaced with another in 2011. At the post-independence. Bank and Other Financial Institutions Act (BOFIA) Company and Allied Matters Act 1990 (CAMA 90). and Cadbury Nigerian plc(Ajibolade. evaluations of the board performance by an independent outside consultant. Malaysia 1 Published By: Blue Eyes Intelligence Engineering & Sciences Publication Pvt. 2002). & Mashayanye. there is Companies Act 1968 (Okike. Nigeria has inherited many rules and regulations left behind by the colonial government. & Sweeney. the case of Lever Brothers plc. Oceanic Bank. Corporate governance and earnings managements have been widely discussed in literature(Dechow. Ltd. National Insurance Commission Act of 1977. In 2009. CBN revealed that most of the banks were about to collapse (Afribank. National Insurance Commission (NAICOM) Code 2008. Ge. pre. This study aims at finding out the effect of corporate governance code 2011in the pre.Central Bank of Nigeria (CBN) Act. this kind of earnings management lasts for a short time. Sloan. policies and guidelines have been introduced several times to complement or abolish another in some cases. Hasnah Kamardin. CG code 2011 did not considerunquoted and private firm etc. & Schrand. 2010). Volume-4 Issue-2. training of directors. the following laws were put in place: Indigenization Policy of 1972.and post. Dechow. 1995. 2006). Spring Bank and Wema Bank) because they failed audit test and CBN had veiled them(Njanike. After the review. December 2015 Corporate Governance and Financial Reporting Quality in Nigeria: Evidence from Pre. 2007). 2015. board diversity. Usually. the new amendments fixed in the new code (2011) to improve the quality of reported earnings. Among the negative effects are the bankruptcy. Federal College of Education. Libby. Due to the shortcomings and inconsistencies of the Code 2011. 2009). For example the cases of Wema Bank plc and Spring Bank plc in Nigeria (the case of mismanagement of capital) suffered from the poor corporate governance practice (Demaki. differentiating between independent director and executive director. Similarly. The revised code 2011 shows the regulators’ intention to shape up the role of the audit committee by providing independent audit committee. earnings management. Nuraddeen Usman Miko. The study recommends periodic review of corporate governance code for more efficiency of the code.period while significantly reduced earnings management in the post.period. Board of directors’ control increase transparency and reduce earnings management behavior of managers (Hunton. such as British Company Legislation 1922 and Company Ordinance of 1922. & Mazza. Nigeria I.International Journal of Emerging Science and Engineering (IJESE) ISSN: 2319–6378. some new issues were raised. Business Education Department. The first corporate governance code is the Securities and Exchange Commission (SEC) Code 2003.Corporate failure has been the issue of discussion in the business environment for a long time Corporate laws. 2013) is general for the listed and non-listed firm in Nigeria. several general and specific corporate governance codes were introduced in Nigeria to tackle the problems in business environments such as company bankruptcy which mostly resulted from influencing earnings. capital shortage and fraud of the corporations. Finbank. School of Accountancy. Ownership structure is also believed to increase Abstract. In the case of Nigeria.

It is the duty of the board of directors to ensure that audit committee is formulated and discharge its responsibility effectively. Pope and Young (2005) and Marra. Some studies like Monks and Minow (2004)established the relationship between board size and earnings management. The structure and composition of the board of directors should have diversity of directors. Yu (2008) submitted that small size of the board cannot detect earnings management. every public compay is mandated under section 359(3) and (4) of the CAMA’90 to form an audit committee. findings byAbdullah and Nasir (2004). i. 2013). Rahman and Ali (2006) revealed that board size increases earnings management. Carcello and Neal (2000)find a positive relationship between audit committee independence and the quality of financial reports.code 2011. According to the SEC Code (2011). It is hypothesized that: H2: Board independence has a significant negative relationship with discretionary accruals in the pre.Code 2011 transparency and reduce conflict of interest to the minimum level. Based on the agency theory it is hypothesized that: H3: Audit committee independence has a significant negative relationship with discretionary accruals in the pre. (2009)find that independent boards provide effective monitoring of earnings management. Mazzola and Prencipe (2011)find that board independence provides an essential tool to reduce the magnitude of earnings management.e. 2012). In contrary. Audit committee size is the number of directors in the audit committee. The audit committee charcteristics considered by this study are audit committee independence and audit committee size. Saleh and Iskandar (2005) find that board independence has no impact on constraining earnings management. Fodio et al.3.2. 2. whose responsibility is to provide independent oversight of management performance and to hold management accountable to shareholders for their actions (DeFond & Jiambalvo. Jaggi et al. Osma and Noguer (2007) find that audit committees with greater independence are associated with lower earnings management levels. (2013)reveals that audit committee independence has a positive relationship with discretionary accruals. Board functions can be seen as a dynamic process which involves a strategy that leads to policy making and planning. It is hypothesized that: H1: Board size has a significant negative relationship with discretionary accruals in the pre. II. Bryan et al. They disclosed that larger board committed more time and resources to monitor management activities in the corporations. Dichev & Skinner. 1994. 2011). 2. (2013)find that board independence has a negative association with discretionary accruals.3.and post. presentation and discussion of the result. Osma and Noguer (2007) find a positive relationship between board independence and lower earnings management.code 2011. Firms use opportunistic behaviors by involving in manipulation of earnings to meet investors expectations(Rahman & Ali. Some of the board characteristics considered are boards size and boards independence.According to the SEC Code (2011)the main function of the board is to set company’s goals and ensure that set objectives are achieved. 2012). The number of the directors in the board should not be less than five directors and the majority should be non-executive with at least one independent director. This study consider some corporate governance factors that will reduce the opportunistic behaviours. monitoring and supervising executive performance.1 Earnings Management Earnings management is considered as adjustments of financial transactions to suit the interest of mangers and to mislead investors(Healy & Wahlen. Peters and Raghunandan (2003) and Klein (2002) find that audit committee independence has a negative relationship with misstatement and earnings management.and postperiod of the code. Abbott.2 Board Indepedence and Earnings Management Board independence means majority of the board of directors are non-executive. 2. the majority of the members must be non-executive directors (SEC Code. One of the most important factors influencing the integrity of the financial accounting process involves board of directors 2.code 2011.2 Board of Directors Audit committee is a committee with members selected by the shareholders to verify director's reports (Tricker.. 2006) and subsequently have negative effects to the investors capital. Rahman and Ali (2006). However. 2.and post.and Post. 2002).1 Audit Committee Independence and Earnings Management After the events of the financial scandals of giant companies (such as Enron.1Board Size and Earnings Management The relationship between board size and earnings management is guided by the agency theory. For any board to be independent. Peasnell.Corporate Governance and Financial Reporting Quality in Nigeria: Evidence from Pre. majority of the directors must be non-executive or independent directors. and Xerox).2. LITERATURE REVIWEW 2.and post. For the audit committee to be fully independent and effective. Fodio et al. This study tends to measure the effectiveness of corporate governance Code 2011 in relation to minimization of earnings management by comparing the pre. . providing accountability which forms the basis for reviewing strategy (Tricker. WorldCom. 1999).3 Audit Committee 2. to make sure that human and financial resources are properly utilized toward achieving the overall strategic goals of the firm effectively. Parker. The sections of the study include literature review. method of conducting the study. investors require firms to provide truthful and reliable financial information (Fodio et al. Marra and Moon (2010)find that audit committee size influencing 2 Published By: Blue Eyes Intelligence Engineering & Sciences Publication Pvt. SEC Code (2011) states that board must comprise executive and non-executive directors. Ltd. and conclusion and recommendations. (2004)posit that an efficient audit committee enhances the credibility of reported earnings. Ghosh.2 Audit Committee Size and Earnings Management SEC Code (2011) provides no fixed number of the audit committee members and the audit committee size should be based on the company size.

istitutional owners. 2. 2. Ltd. Vafeas (2005) reports that audit committee performance are determined by committee size. Koh (2003) find that the relationship between instructional ownership and aggressive earnings management was positive at lower level of institutional ownership and negative at higher level of institutional ownership. Oloruntoba and Oba (2014) find that audit committee size has no significant impact on the quality of financial reporting.code 2011.Bolton (2014) finds that firms with the highest levels of directors in audit committee stocks’ ownership have higher operating performance than firms with smaller level of ownership. It is hy pothesized that: H6: Institutional investors havea significant negative relationship with discretionary accruals in the pre. 2.. 2002). Hunton and Rose (2012) find that board increases transparency that can reduce directors’ incentives to act in their own self-interests. December 2015 discretionary accruals at the pre.1 Directors Ownership and Earnings Management Agency theory highlights that executive directors’ stock ownership might reduce the level of conflict of the goals between the management and the shareholders (Jensen & Meckling. A sample of 20 firms with available datawithin the two periods. 1976). Fodio et al. The finding of the study suggests that the directors’ alliance with management will decrease due to the directors’ interest to protect their investments.4 Ownership Structure Ownership structure is expected to have vital relatioship with earnings management in corporations. Xie et al. RESEARCH METHODS The study uses 27 consumer goods listed firms in Nigerian Stock Exchange as the population of the study.and post.Bushee (2001)reported that institutional non-block-holders are more interested in short-run earnings. Percy.∆RECit)/ TAit-1 + α3 (PPTit-1)]. family owners and managerial owners) (Siregar & Utama.4. 2008).2 Institutional Ownership and Earnings Management Institutional investors always try to protect their investment by not allowing managers to report unrealistic earnings.[α1 (1/TAit-1 + α2 (∆REVit . was used for the study. It is hypothesized that: H5: Directors’ shareholdings have a significant III. 2003.. Mitra & Rodrigue.1 Earnings Management Measurement This study used modified Jones Model 1995 to measure earnings management as it is the most powerful model to detect earnings management (Dechow et al.period. (2003) reveal an insignificant relationship between audit committee size and discretionary accruals.period (2012-2013).Siregar and Utama (2008)found that institutional ownership does not significantly encourage managers to improve earnings. negative relationship with discretionary accruals in the preand post.1995). It is hypothesized that: H4: Audit committee size has a significant negative relationship with discretionary accruals in the pre. Where: Total accruals (TA) is measured by net income before extraordinary items minus cash flows from operation.code 2011.4. Volume-4 Issue-2.and post. Ownership of a groups are expected to limit earnings management for example. Hsu and Koh (2005) suggested that the transient and long-term institutional investors co-exist and have differential effects on earnings management. 3.Preperiod (2009-2010) and Post. for instance. . (2013)find that directors who own stock were less likely to agree with management’s aggressive reporting.code 2011. Charitou. Rose et al. Musa. Most of the companies in developing and developed countries are owned by the a group of ownership (e. & Erkurtoglu. owners of the firm should make sure managers undertake risk-bearing strategies that will enhance stock value of the firm (Hutchinson. 2008). The model is as follows: DAit= TAit-1 . Figure1. Lambertides and Trigeorgis (2007) indicated that the management of distressed firms with lower (higher) institutional ownership have greater (lesser) tendency to manage earnings downwards. (2013) report that audit committee size is significant and negatively associated with discretionary accruals. institutional owners find to constrain earnings management (Koh. For aligning the interest.g. Research Framework 3 Published By: Blue Eyes Intelligence Engineering & Sciences Publication Pvt.International Journal of Emerging Science and Engineering (IJESE) ISSN: 2319–6378.

RESULTS AND DISCUSSIONS This study centered on the impact of some corporate governance mechanisms on earnings management in the pre.057. board indpendence (BOID). directors shareholding (DH) and institutional ownership (IO) serve as independent variables. Audit committee size ranges from 4 to 6 directors for both periods with averages of 5. audit Table.period ranges from 0.311 with the average of 0. The ratio of audit committee independence have ranges from 0. Financial leverage ranges from 0.850 and 5.and post.500 with the the average 0.period and -0.001 to 0.936 to 1.520 and 0. 4 Published By: Blue Eyes Intelligence Engineering & Sciences Publication Pvt.period has the average of 10 directors with the mininum of 5 and maximum of 13 directors while in the post. Institutional ownership ranges from 0.2 Model specification Model specification of the study is shown below: DAit = α + β1BOit + β2BOIDit + β3ACINit + β4ACSit + β5DHit + β6IOit + β7FLit + β8CFOit + Ɛit Descritionary accruals (DA) is the dependent variable.period it ranges from 0. The definations and measuments of the variables of the model are outline in table 1 as follows: 3.period and ranges from -0.period.417 to 0. Levene’s test shows that the variance is homoscedasticity.595 to 1.period while in the post.426 of non-executive directors in the pre.060 in the pre. The skewness of the study variables data ranges between -0.100 for the pre.788 in the postperiod which show that the data is normally distributed.period it ranges from 0. Board independence have the ratio ranges between 0. Correlation is significant at the 0.period board size has the average of 10 directors with minimum of 5 and the maximum of 14 directors.000 and 0.Code 2011 committee indpendence (ACIN). The result shows that there is no high correlation between the variables.period while in the post.and post.333 to 0. Descriptive statistics as presented in Table 5 reveals that the average earnings management (EM) is 0. Financial leverage (FL) and cash flow from operation serve as control variables. Correlation is significant at the 0.period the ratio ranges between 0. **.464 with the average of 0.248 with the average of 0. .code 2011 period.01 level (1-tailed).979 with the average of 0.986. audit committee size (ACS).992 to 0.000 to 1. The pearson correlation matrix for panel A and panel B are presented in Tables 3 and 4.985 in the pre. Subsequently.000 to 0.period the ratio of nonexecutive directors ranges from 0.periods respectively. period while in the post.and post.750 for the pre.05 level (1-tailed).485 to 0.66 and 1.200 for pre.418 to 0.923 with the average of 0. Ltd.558 for pre.271 with the average of 0.954 with the average 0.Corporate Governance and Financial Reporting Quality in Nigeria: Evidence from Pre.500 to 0.333 to 0.periods respectively. Directors’ ownnership ranges from 0.and Post. The EM ranges from -1.941 to 1.32 forpanels A and B respectively comfirming the absence of multicollinearity.803 to 1.714. Cash flow ratio ranges from 0.code 2011 period respectively.812 to 1.815.338 in the pre.000 for both periods with the average of 0. VariablesMeasurements IV. test of multicollinearity is carried out which indicated that the mean of VIF is 1.period while in post.period while in the post. Board size in the pre.438.750 with the average of 0. while board size (BO).code 2011 data *.929 with the avearage of 0.855 for the post.and post.730 of non-executive directors in the pre- Table 3 Panel A: Pearson correlation matrix for pre.839 in the pre.

significant at the pre.201 and 4.05 level (1-tailed). Regression is significant at the 0.05 percent levels respectively (1-tailed).01.070 which is significant at 5 percent in the pre. Volume-4 Issue-2.period. The variables BO.period.The relationship between corporate governance and earnings management as presented in Table 6 shows that the model fitness (R2) is 44 Table 6 Multiple Regression Result **.098.period. Ltd. 0. ACIN.309 8. but IO has negative shareholdings (DH) which is signifiantly reducing earnings relationship with earnings management but not management at 1 percent level. While the model fitness (R2) is 56 percent and the F-statistics is 4.132 respectively. For the post. .period except for directors 0.International Journal of Emerging Science and Engineering (IJESE) ISSN: 2319–6378.704. The study used residuals of the modified Jones model for detecting earnings management.01 level (1-tailed). 0.code 2011 data *. FL and CFO will The data in Table 6 also indicates that all the variales are not increase earnings management with 0.950 which is significant at 1 percent in the post. The allvariables including control variables (BO. Correlation is significant at the 0. ACS. variables including control variables (BO. ACIN. FL and CFO) are sigficant at 5 percent level except for ACS. FL and CFO) show positive coefficient indicating that variables BOIN and ACS. 0. and control variables which significancantly related. almost have positive and significance level at 1 percent. BOIN. ACIN. Table 5 Descriptive Statistics percent (44%) and the F-statistics is 3. any increase in unit of BO. DH. BOIN. Correlation is significant at the 0. IO.011. DH 5 Published By: Blue Eyes Intelligence Engineering & Sciences Publication Pvt. **. December 2015 Table 4 Panel B: Pearson correlation matrix for post. *.

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