Author:Tolulope, Ikumapayi


The importance of corporate governance in the administration of companies cannot be over-emphasized especially as it relates to earnings management. Earnings to stakeholders of any organization serve as the faith of the firm upon which the stakeholders depend on to make returns on investment. Thus, making it one of the most significant accounting items on the financial statements. According to Abata & Migiro (2016), Mohammady (2010), earnings are described as a fundamental component in the decisive process of dividend policy. It serves as a guide for making investment decisions, poses a significant tool for measuring firm's performance. More so, it can serve as a competent yardstick for stock pricing and also a mechanism employed to derive predictions. Cheng & Warfield (2005) have described earning management from two dimensions. First, as a manager, it is seen as an opportunity to efficiently handle debt contracts, political cost and effectively manage resources in dealing with compensation contracts (opportunistic earnings management). Secondly, it is described as a tool used by managers to protect themselves and the organization in anticipation of unexpected events that could negatively affect the gains in the contract especially in the aspect of efficient contracting. To further buttress the subject matter, Healy & Wahlen (1999) averred that earnings management arises when agents of organisations use their subjective opinion in financial reporting and shaping transactions to adjust financial reports to either misinform or hoodwink some stakeholders about the original pecuniary performance of the organisation or to sway predetermined outcomes that depend on reported accounting figures. The reality of managing earnings is that it is likely to induce companies performance to be unreal thereby defeating the purpose of relevance and reliability of the financial statements. It is therefore important for scholars in the accounting profession to continually observe earnings management as it helps to maintain the relevance of financial statements to users especially in the area of decision-making. However, better governance is likely to bring about exceptional performance in organizations (Uwuigbe et al., 2017). Hence, corporate governance has a high level of impact on firms' performance and the practice of earnings management. This interrelationship, however, has become a contemporary issue among various scholars especially accounting and financial management scholars.

Over the years, financial reporting quality has become topmost importance to the regulatory agencies and the academic world not only in Nigeria but also globally (Abata & Migiro, 2016; Olubukola et al., 2016). In 2003, the Corporate Governance Code in Nigerian was issued with the notion that it would be adhered to by Nigerian companies so as to increase the economy's level of confidence (Adegbite, 2012a:2012b); this would, in turn, boost the level of confidence attached to financial reports of organizations and also translate to an increase in the investment rate in the economy. Gabrielsen et al. (2002) described corporate governance as all-inclusive which implies that it's concerned with the means and technique that organizations are being regulated and controlled. It entitles popular stewardship, trust, accountability and honesty and it also encapsulates managerial features such as monitoring, supervision and inspection of the quality of financial statement reported. Earnings management practice entitles revamping the figures of earnings to be reported as a result of judgmental discretion usage the Generally Accepted Accounting Principles (GAAP) allowed. That is taking advantage of the loopholes in the system. However, on October 2014, the CBN revised "the code" of corporate governance to include crucial parameters that confirms the size of the board, formation of the board of directors, chairman and Chief Executive Officer (CEO) eligibility, board composition, structure of ownership, the reporting disclosure mandatory requirements and external auditors' compliance report. This law was targeted at promoting accountability and transparency amid managers and investors functions. Currently, Nigeria as a developing country has recently revised its code Oct 2014 in anticipation to improve the quality of report issued to the public and increasing the level of confidence and reliability placed by the stakeholders.

In recent times, quite a number of the studies conducted in Nigeria have explored the practices of corporate governance on earning management (Uwuigbe et al., 2014; Hassan & Ahmed, 2012). More so, due to the revised code conduct, more studies have been accomplished on the individual variables of corporate governance (audit committee, board size, board characterizes ownership structure) and how it affects earnings management (Abata & Migiro, 2016; Uwuigbe et al., 2016). However, these studies were conducted using the accruals approach as a basis for the evaluation of earnings management regardless of other proxies available to measure earnings management. Thus, after a critical examination of the other proxies, this study seeks to evaluate the significance of corporate governance attributes on earnings management using earnings persistence as earnings management proxy. This is based on the fact that persistence uses current earnings to determine future earnings which invariably help to validate earnings usefulness in the prediction of expected cash flows and helps promote better planning. In addition, this study ascertained the existence of an individual relationship between corporate governance attributes (organizational ownership structure, board size and audit committee independence) and earning management.

To achieve this objective, organizations annual reports and financial statements for the financial period 2012-2016 were analysed. Also, premised on the size and accessibility of the annual report, a total of 44 listed companies were selected for this study using the judgmental sampling technique from a population of 176 listed companies on Nigerian Stock Exchange Market. The other outstanding sections of this paper have been structured to include reviews related literature and development of hypotheses. While section three presents the methodology employed in the study, section four and five provides insight on the findings and conclusions drawn from the study.


The argument in respect to the effect of corporate governance attributes on earnings management ought to be reviewed from the aspect of the agency problem which is as a result of control separation and ownership, generating interest irregularity between shareholders and managers (Jensen and Meckling, 1979). Where ownership stakes are not owned by managers of an organization, their attitude is influenced by self-interest goals which are not in accordance with the goal of maximizing shareholders and stakeholder's wealth and increasing the organization value (Chen & Liu, 2010; Fama, 1980; Fama & Jensen, 1983; Uwuigbe et al., 2017). To this end, the agency theory states that there should be a distinct separation between control and ownership (Jensen & Meckling, 1976). Based on this goal conflict of goal congruence the agency problem has become more obvious as managers would act in their own interest rather than the interest of shareholders.

Concept of Earnings Management

Earnings management is a classical issue that has been extensively evaluated and reviewed from various perspectives and dimensions in the accounting literature. Healy & Wahlen (1999) opined that the management of earnings occurs whenever managers make use of their intuition when financial statement are being prepared by formulating financial transactions that would modify the financial statement which may delude financial users regarding the economic performance of the entity. Leuz et al. (2003) described earnings management as the modification in entities reported underlying economic performance by management for the purpose of obtaining undue advantage for a contractual event. According to Roodposhti & Chashmi (2011) management of earnings takes place in three ways namely:

  1. By restructuring numerous transactions (expenses or revenue).

  2. By taking advantage of modification in accounting procedures.

  3. Lastly through management accruals' approach.

From the itemized dimensions, the first two can be measured if the researcher has access to information from within the organization which is also referred to as insider information. However, the third approach (management accruals method) can be externally evaluated through the financial statements of the selected entities and this study would be making use of this approach. Iturriaga & Hoffmann (2005) opined that earnings management may emerge as an aftermath of agency problem. Managers could engage in creative accounting while preparing the financial report with the aspiration of elaborating their position, without considering the facts that stakeholders rely on the information provided in the financial reports. This has however received great attention both internationally and...

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