BOARD CHARACTERISTICS AND EARNINGS MANAGEMENT OF LISTED FOODS AND BEVERAGES FIRMS IN NIGERIA

MSC Project Topics in Accounting and Finance

Abstract 
As a response to some financial scandals and corporate failures in Nigeria and around the globe which are linked to earnings management, certain characteristics of Board of Directors that can improve their monitoring function are suggested in the literature as corporate governance mechanisms. Thus, the study concentrated on three board characteristics’ proxies, namely: Board Competency, frequency of Board Meetings and Gender Mix and their relationships with earnings management (because, they have not yet been studied extensively in Nigeria). Therefore, the study investigated the impacts of Board Competency, frequency of Board Meetings and Gender Mix on Earnings Management (in the context of agency relation) of listed foods and beverages firms in Nigeria from 2007 to 2013. The estimation of discretionary accruals (proxy for Earnings Management) is by using modified Jones (1991) model. The sample size of the population is nine (9) firms. Both correlational and ex-post factors research design were used. A multiple regression technique was employed to determine the impact of Board Characteristics on Earnings Management. The result was interpreted using fixed effect- least square dummy variables. The results reveal that Board Competency has no significant impact on Earnings Management. The impact of frequency of Board Meetings and Gender Mix on Earnings Management were however found to be negative and statistically significant. The study concluded that increase in number of board meetings and the proportion of women directors in the board constrain the level of discretionary accruals; while directors’ knowledge of accounting and/or finance (board competency) does not guarantee quality of earnings. Therefore, in line with the findings and conclusions, the study recommends that SEC should encourage adherence to at least the minimum requirement of board meetings (four times in a financial year) by making it mandatory. Government in collaboration with Corporate Affairs Commission should come up with a policy where by companies will be forced to provide seat for women in their boards, give them responsibilities in area of finance and control related matters; as this would enhance firm performance and constrain earnings management, since they normally develop trust leadership.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Earning is one of the most important items in financial statements. This is because, users of financial statements mostly focus on the company’s earnings before looking at other variables. Earnings represent the image of a company on the eyes of many investors and other financial statements‟ users for decision-making purposes. Earnings indicate the extent to which a company has engaged in value added activities. Therefore, increase in earnings represents an increase in company’s value, while decrease in earnings signals a decrease in that value (Lev, 1989). Accounting deals with measurement and communication of economic information that involves the determination of net income (accounting earnings). Accounting’s earnings serve as a major constituent of corporate information required in the capital market for assessing firm performance and for stock valuation (Musa, Ibikunle & Oba, 2013). Therefore, accounting earnings‟ information need to be more reliable. This is because, the integrity of financial reports depends on the reliability of earnings being reported by firms; and the capital market needs precise and unbiased financial reporting to value securities and revive investors‟ confidence (Roodposhti & Chasmi, 2011).

The only source through which information is passed from the principal to the owners is through financial statement. A reliable financial statement is expected to provide vital information to investors to enable them make the right business decisions. A reliable financial statement is assumed to provide information free from errors and bias that would enable users to make accurate judgment regarding the information (Shehu, 2013). Moreover, the responsibility for preparing and publishing external information lies with the firm‟s managers. As such, managers use their knowledge of the firm and the current state of business circumstance to prepare information that gives a true and fair view of the firm‟s financial state and performance. However, due to information asymmetry, managers may use their own discretion in preparing and reporting financial statement to their own advantage (Scott, 2003). This may give rise to agency problem. Agency problem is said to have existed when managers fail to act in the best interest of the owners. The existence of agency problem results from separation between ownership and control; as managers would have more inside information than the financial providers (shareholders). Evidence from literature reveals that managers use their discretion over accounting numbers to achieve private gain; and flexibility of accounting standard usually gives room for them to adjust earnings through managing accruals. Managers have many incentives to manage earnings like compensation, avoid debt covenant violation, meeting and beating benchmark, reducing regulatory or political cost, to meet analysts‟ expectations and to make a firm appears a less risky investment (Kasznik, 1999 and Trueman & Titman, 1988). Bunamin, Abdulra‟uf, Johari and Abdulrahman (2012) have the notion that Earnings Management with the intention to manage users‟ perception in firms are considered unethical even if no accounting standards are violated. Hence, Earnings Management has the propensity to mislead which may be difficult to detect by ordinary people who do not have requisite knowledge on the issue relating to accounting numbers.

Earnings manipulation makes financial reporting to be of less quality and reduces the level of confidence of investors in their decision making process (Shehu & Abubakar, 2012). Nowadays, most users of financial statement do not count accounting earnings as a major yardstick for performance evaluation as well as for decision-making. Evidences from literature and financial scandals around the globe prove that Earnings Management reduces investors‟ confidence. On the other hand, Board of Directors are regarded as an important internal corporate mechanism responsible for mitigating agency conflicts between managers and shareholders by helping in constraining the level of Earnings Management. Therefore, one of the major roles of Board of Directors is to monitor and reduce the incidence of Earnings Management (Hashim, Ariff & Salleh, 2013). They are responsible for monitoring managers on behalf of shareholders and overseeing the financial reporting processes.

Composing Board of Directors with diverse knowledge, skills, gender, and function is an important determinant of effective board for carrying out its monitoring function. Board composition includes the determination of the proportion of independent and executive directors, mix of qualification and expertise, designating audit, proportion of female directors on the board and number of Board Meetings (Man, 2012; Bertrand & Mullainathan, 2001). Several studies suggest that both the informativeness of reported earnings and firm‟s performance are affected by Board of Directors‟ attributes such as the board size, board independence, frequency of Board Meetings, Board of Directors‟ competencies and managerial ownership (Vafeas 1999; Klein 2012; Hermalin & Wesberch 2012). Therefore, they are expected to monitor and control the behaviours of managers to ensure they act based on the shareholders‟ interest. Although, a lot of literature suggest that effective board helps reduce Earnings Management, but issues related to corporate governance and Earnings Management are inconclusive. This is because many corporates failure witnessed around the globe occurred in the developed countries, where they have more sophisticated, and sound corporate governance system. And the Board of Directors were mostly held responsible for failure to control the activities of managers. Accounting scandals and large businesses failure such as Pamalat (2003) in Italy, Enron (2000), Xerox (2001), Worldcom (2000), Satya Computer service in India among others indicate Board of Directors as internal corporate governance mechanism, might not be able to withhold managers from Earnings Management behaviours. And many people considered Board of Directors as passive entities controlled by management. This accounting scandals and businesses failure around the globe have shaken the integrity of accounting information and resulted in a drop of investors‟ confidence in capital market. Enron‟s case made the United States congress to respond by passing Sarbanes Oxley Act of 2002 to remedy perceived deficiencies in financial reporting. The role of Board of Directors was strengthened; and certain characteristics are suggested within the corporate governance (Saleh, Iskandar & Rahmat, 2005).

In view of the centrality of Board of Directors in the entrenchment of good corporate governance practice, many corporate governance codes were introduced in Nigeria (such as the Code of Best Practices on Corporate Governance in Nigeria- 2003 SEC Code; Code of Corporate Governance in Nigeria- 2011 SEC Code; Code of Corporate Governance for Banks in Nigeria Post-Consolidation- 2006 CBN Code among others) to tackle the issue of poor representation by the management that resulted in failure and bankruptcy of some companies such as Cadbury Nigeria, African Petroleum (AP), Savannah bank, and the financial scandal of the five banks‟ managers, all in Nigeria. Therefore, to improve the monitoring functions of board of directors, most of the commendable features of the 2011 SEC code are boards‟ related. As such, several characteristics of board of directors are suggested by the code; furthermore, there are also some attributes of Board of Directors that were not mention by the code, but suggested in the literature to improve the monitoring functions of corporate boards. Several studies suggest that there are some Board of Directors‟ attributes that have significant impact on Earnings Management. Considering the fact that most of the businesses failure and financial scandals around the globe happened in the developed countries where they have more sophisticated corporate governance system; and the list of recent cases of creative accounting practices seems to be growing as many corporate bodies in Nigeria are being investigated (Akenbor & Ibanichuku, 2012). Furthermore, foods and beverages sector of the economy has also witnessed the problem of earnings manipulation. For example, Cadbury Nigeria Plc. manipulated its financial statement to boost its image as well as push its stock price. As a result, the company inflated its turnover, profit and other performance indices. The company had been doing so since 2002 but was later discovered in 2006 (Onyenweau, 2009). Therefore, the motive behind this study is the implicit assertion made by Klein (2006) that poor corporate governance and Earnings Management are positively related; and that most corporate governance codes introduced in Nigeria are designed to strengthen boards‟ monitoring functions; yet there are still cases of corporate governance malfunctions. Several bodies of literature have identified various board attributes that can improve their monitoring functions. However, up to date there is no consensus as to what combination of board of directors‟ characteristics constitutes effective board in monitoring managerial incentive to manage earnings.

The study is aim at determine the impacts of board characteristics on earnings management. Three Board of Directors‟ characteristics of listed foods and beverages firms in Nigeria will be considered as the independent variables, namely: Board Competency, frequency of Board Meetings and Gender Mix. While the dependent variable will be Earnings Management, proxy by the discretionary accruals of listed foods and beverages firms in Nigeria.

MSC Project Topics in Accounting and Finance

BOARD CHARACTERISTICS AND EARNINGS MANAGEMENT OF LISTED FOODS AND BEVERAGES FIRMS IN NIGERIA

Department: Accounting and Finance (M.Sc)

Format: MS Word

Chapters: 1 - 5, Preliminary Pages, Abstract, References, Questionnaire.
Delivery: Email

No. of Pages: 121

NB: The Complete Thesis is well written and ready to use. 

Price: 10,000 NGN

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