CORPORATE GOVERNANCE MECHANISMS AND EARNINGS QUALITY OF LISTED MANUFACTURING COMPANIES IN NIGERIA

 

 CORPORATE GOVERNANCE MECHANISMS AND EARNINGS QUALITY OF LISTED MANUFACTURING COMPANIES IN NIGERIA

ABSTRACT

Corporate governance mechanisms are essential for establishing an attractive investment climate and an efficient capital market, but the accounting ethics of managers tend have tremendous affect on the quality of earnings and thus the investment climate is distorted. These motivated the researcher to investigate the relationship between some sets of corporate governance (CG) mechanisms and earnings quality (EQ) of listed manufacturing companies in Nigeria. Four null hypotheses were formulated in line with the objectives of the study to test the variables. Correlation research design and multiple regression were adopted as research design and technique of data analysis. The results indicate that the corporate governance proxies have a significant impact on earnings quality of Nigerian Manufacturing companies. This establishes the fact that corporate governance plays a significant role in checkmating the unethical behaviours of managers in the Nigerian manufacturing sector and thus improving the earnings quality. The study therefore, recommends that the proportion of independent directors’ on the board should be increased. More institutional shareholders should be allowed to invest, and audit committee members should comprise of persons with high integrity and experience to ensure effective monitoring. Also, the quantum of shares held by managers should be minimized to reduce unethical practice.

 

CHAPTER ONE

INTRODUCTION

1.1     Background to the Study

The financial scandals that sunk the once „high profile‟ companies such as Enron, Worldcom and Xerox in the United States, Parmalat in Italy and many other big companies around the world confirmed that there was an opaqueness in financial reporting that had hitherto not been penetrated. Corporate Governance (CG) was then introduced to facilitate and stimulate the performance of firms by creating and maintaining the incentives to motivate insiders to maximize the firm‟s performance and serve as control mechanism. The CG limits insiders‟ abuse of power over corporate resources and provides the means to monitor behaviour of managers for accountability and giving protection to investors (Ahmed, 2006). However, it becomes glaring that the existing Corporate Governance mechanisms are inefficient as they fail to protect the owners‟ interest. Consequently, the Sarbanese-Oxley Act was introduced in 2002 in the U.S. with a view to improving Corporate Governance practices. Many other countries, both developed and developing, followed suit. The Nigerian Stock Exchange (NSE) was not left out in the struggle for a better CG. However, despite the various measures adopted by Security and Exchange Commission (SEC) to foster efficient Corporate Governance structure and restore investors‟ confidence, there are still cases of manipulation or abusive accounting which is unethical by managers (Shehu, 2012).

 

Accounting information is relevant to the extent that it is capable of influencing a decision maker by helping him to form predictions about the outcomes of past, present, and future events or to confirm or correct prior expectations (Bushman, Cheng, Engel and Smith, 2004). In order for information to be relevant, it must be timely, and it must have predictive value or feedback value or both (Ahmad, 2006). Financial statements should always provide reliable information to assist users in decision making. The statements should disclose relevant, reliable, comparable and understandable information (Kamaruzaman, 2009). Reliability has to do with the quality of information which assures that information is reasonably free from error and bias and faithfully represents what it intend to represent. Financial statement of firms can never be completely free from bias, since economic phenomena presented in annual reports are frequently measured under conditions of uncertainty because many estimates and assumptions are included in the report (Shehu, 2011). Although complete lack of bias cannot be achieved, a certain level of accuracy is necessary for financial report to be decision useful (IASB, 2008). Therefore, it is important to examine the arguments provided for the different estimates and assumptions made in the annual report, if valid arguments are provided for the assumptions and estimates made, they are likely to represent the economic phenomena without bias (Jonas and Blanchet, 2000).

 

The need for a good Corporate Governance structure arose because of the seperation of ownerhip between a firm and its owners, which turns the firm into a nexus of relationship between it and all its stakeholders such as managers, employees, shareholders, creditors, government and all its stakeholders. The seperation of ownership and control by the sophistication of the modern day business redefines the relationship that exists between the owners and the managers to that of an agent and a principal. Being the agent, the manager is expected not to pursue goals that are geared towards the achievement of his own interest at the expense of shareholders‟ wealth maximization. The existence of conflict of interest between managers and owners naturally compromises the value of the firm and only transparency can eliminate the conflict. For a company to be transparent, it should be able to disclose financial information properly, that is, providing a full and frank account of a company’s activities (Thompson and Yeung, 2002). This is due to the fact that corporate transparency is the widespread availability of relevant and reliable information about the periodic performance, financial position, investment opportunities, governance, value and risk of publicly traded firm (Bushman and Smith, 2001).

 

Furthermore, it has long been recognized that financial statements play an important role in assessing managers‟ performance by the board of directors, outside investors and external regulators. It is therefore, not unlikely that managers will manipulate financial reports in order to produce a good image of themselves and the firms that they manage through unethical accounting by managing earnings. Earning management is the manipulation of earnings by firms using financial statement elements that are largely at the discretion of the managers to achieve personal or firms goals. These elements are peculiar to industries depending on their nature of operations and external regulatory framework. Researchers such as Klien (2002) have identified that accruals arising from depreciation are used to manipulate earnings in manufacturing firms. The use of discretion by firm managers to influence reported earnings has long being recognized by accountants and financial economists (Amat, Gothorpe and Perramon 2005, Ahmed 2006). Similarly, torrent of literature exists on the impact of corporate governance on firm performance using one or more of the governance variables of audit committee, board composition, ownership concentration and institutional shareholding (Sanda, Mikailu & Garba 2005: Belkhir 2009). Similarly, several studies conclude that good governance mechanisms can impact on the discretionery behaviour of managers (Warfield, Wild & Wild 1995, Klein 2002, Ahmed 2006 and Shehu, 2011). Specifically, this study concentrates on Corporate Governance mechanisms of board composition, institutional shareholdings, audit committee and managerial ownership in relation to Earnings Quality. The study is motivated by several factors such as the attributes of the manufacturing sector being a sector that occupies a crucial position of every economy yet little or no attention is given by researchers in ensuring its growth. Even though the banking industry is said to acts as an engine of any economy, and it dominates the Nigerian financial sector (Augusto, 2004), the manufacturing industry also plays a very significant role in providing labor to the grassroots. Added to these is that the issues of CG has long been accepted by most countries including Nigeria to be one of the easiest ways of combating financial irregularities, agency problems, and improving an attractive investment climate. However this is not always the case, and this is what the study intends to find.

 

1.2     Statement of the problem

Limited access to managerial information causes the providers of finance such as shareholders and debt holders to heavily rely on the financial statement of firms. As financial reporting provides value-relevant information to the external parties of the organization, the heavy reliance placed on accounting numbers create powerful incentives for managers to manipulate earnings to their own advantage (Rahman & Ali, 2006). Hence, it is important for financial accounts to provide the truthfulness and accuracy of financial information to enable the shareholders to make decisions wisely. The lack of accuracy in the financial results will lead to the shareholders and other users making wrong judgments and decisions.

 

Managers manage earnings to gain investors‟ confidence by encouraging and convincing stakeholders to invest, however, there are inherent activism that are unethical and fraudulent. The central concern of board composition (which is the extent to which outside directors are represented on the board) with earnings quality is that independent outside directors are expected to protect shareholders specific interest when there is no agency problem. However, this depends on who is on the board, and thus the composition of board members may significantly affect the quality of financial information. It is still not very clear whether the independent directors of Nigerian Manufacturing companies protect the interest of shareholders by preventing earnings management and thus earning quality is increased, does the independent directors of listed my companies in Nigeria protect the interest of stake holders by increasing earning quality? While for the institutional Shareholdings it is expected that the more the institutional investors‟ participate the more the minority shareholder‟s interest is protected. The significant increase in the institutional investors‟ shareholdings led to the formation of a large and powerful constituency to play a significant role in corporate governance. The question that still, remains is to what extent does an institutional shareholder checkmate the accounting ethics by managers, thus improving earning quality? The Audit Committee and Earnings Quality problem may be from the fact that the function of the audit committee is to monitor a firm‟s financial performance and financial reporting; the audit committee may have a more direct role in improving earnings quality. The presence of well enlightened audit committee may deter unethical intentions by managers thus; it is expected that the quality of earnings will be improved. However, the question that still remains is, to what extent audit committee play a role in improving Earning Quality.

The Corporate Governance Culture in Nigeria failed to be Responsible to the Stakeholders, Accountable to the Shareholders and has no deep-rooted mechanism to maintain a balance among the major players (board of directors, shareholders, and management) in corporate governance which have resulted in poor financial reporting quality (Shehu, 2011). The challenges and failure of corporate governance in Nigeria stems from the culture of corruption and lack of institutional capacity to implement the codes of conduct governing corporate governance. Company executives enjoy an atmosphere of lack of checks and balances in the system to engage in gross misconducts since investors are not included in the governing structure. How strictly the listed manufacturing firms comply with the provisions of corporate governance code? Studies such as (Mark 1996, Bello 2002, Klien 2002, Adams and Mehran 2003, Schipper and Vincent 2003, Park and Shinn 2004, Borgia 2005, Sanda et al 2005, Fodio 2006, Rahman and Ali 2006, Ahmad 2006, Devi and Hashim 2010), concentrated on either the banking sector or some sectors of manufacturing companies. In addition, most of the studies used Ordinary Least Square (OLS) without considering the robustness of the techniques, while this study conducted a robustness test to ensure the validity of the statistical inference derivable from the results. However, this study is said to fill the obvious methodological gap discovered by the previous studies specifically the robustness tool of analysis. The study therefore examines the influence of Corporate Governance mechanisms on the quality of financial reports of quoted manufacturing firms in Nigeria.

 

1.3     Objectives of the study

The main objective of the study is to examine the effect of Corporate Governance on Earnings Quality of listed Manufacturing companies in Nigeria. The specific objectives include:

i.                   To determine the effect of Board Composition on the Earnings Quality of listed manufacturing Companies in Nigeria.

ii.                 To determines the effect of Institutional Ownership on the Earnings Quality of listed manufacturing Companies in Nigeria.

iii.              To determine the effect of Audit Committee on the Earnings Quality of listed manufacturing Companies in Nigeria.

iv.              To determine the effect of Managerial Ownership on the Earnings quality of listed manufacturing Companies in Nigeria.

 

1.4     Hypotheses of the study

In line with the studies objectives, the following hypotheses were formulated in a null form. Ho1: Board Composition has no significant effect on Earnings Quality of listed manufacturing firms in Nigeria. Ho2: Institutional Shareholdings has no significant effect on Earnings Quality of listed manufacturing firms in Nigeria. Ho3: Audit Committee has no significant effect on Earnings Quality of listed manufacturing firms in Nigeria. Ho4: Managerial Ownership has no significant effect on Earnings Quality of listed manufacturing firms in Nigeria.

1.5     Scope of the study

The scope of the study is limited to the listed Manufacturing companies in Nigeria. There are 59 Manufacturing Industries in Nigeria which are divided into four strata, that is, Food and Beverages, Building Materials, Chemicals & Paints and Conglomerates. It covers period of 6 years (2006 – 2011). And the selection of the period is informed by the commencement of compliance investigation by SEC on the code of CG. The study focuses on only four of the CG mechanisms; that is Board Composition (BC), Institutional Ownership (IO), Audit Committee (AC) and Managerial ownership (MO) which stands for the independent variable and the accounting ethics which is measured as Earnings Quality (EQ) as the dependent variable.

1.6     Significance of the study

The findings of this study can have implications for users of financial statements such as shareholders, potential investors, policy makers, the regulatory bodies and also students. The study is expected to practically contribute in strengthening the areas of concern by practitioners such as external auditors and financial consultants in manning the financial records of Nigerian Listed Manufacturing Companies (NLMC) relating to the role of CG practice. Again, the Board of directors and regulatory agencies of NLMC in discharging their duties of policy making and regulating respectively. And also to consider the prominent roles or activities that CG mechanisms play in checkmating and preventing as well as minimizing the possible opportunistic accounting by managers in preparing the financial statement of the firms. Theoretically, the findings of this study is expected to provide additional literature in the areas of CG and quality of accounting numbers. This will go a long way in validating theories, such as agency that anchored CG mechanism and EQ in NLMC. In particular, financial statement users should be aware of income the users should be aware of income smoothing and the factors affecting such behavior when they rely on financial statements to help them make decisions. Specifically, users are expected to know the influence of the independent or non-executive directors, institutional shareholdings and the audit committee on such behavior. Further, since extensive accounting ethics may lead to inadequate or misleading income disclosure, thus regulators should concentrate their efforts where such practices are likely and most extensively to happen.

 

 

THE EFFECTS OF CORPORATE GOVERNANCE ON FINANCIAL PERFORMANCE OF SELECTED NIGERIA COMPANIES

THE EFFECTS OF CORPORATE GOVERNANCE ON FINANCIAL PERFORMANCE OF SELECTED NIGERIA COMPANIES

ABSTRACT

This study examines the effects of corporate governance on financial performance of selected Nigeria companies. Specifically seek to determine the effect of Board Composition on the financial performance, examine the relationship between board size and the financial performance and ascertain the impact of independence of directors on the financial performance selected Nigerian companies. The adopted descriptive research design to evaluate the effect of corporate governance on financial performance of selected Nigeria companies. The study used regression analysis which is carried out with the use of Statistical Package for Social Science (SPSS) for data analysis. The finding of the study revealed that board composition has no effect on financial performance of selected Nigeria companies and that there is no significant relationship between board size and financial performance of selected Nigeria companies. Finally, the study recommends that much focus should be placed on management efficiency at improving liquidity for the firm and emphasizing on expanding the scope of the business operation by involving in exports of the firms products.

CHAPTER ONE

INTRODUCTION

1.1     Background to the Study

Corporate governance is a system or an arrangement that comprises of a wide range of practices (accounting standards, rules concerning financial disclosure, executive compensation, size and composition of corporate boards) and institutions (legal, economic and social) that protect the interest of corporation’s owners. Laporta et al (2000) opined that corporate governance is to a certain extent a set of mechanism through which outside investors protect themselves against expropriation by the insiders.

Good corporate governance is widely believed to be an important factor in improving value of a firm in every economy of the world, though the relationship between some corporate governance mechanism and firm financial performance differs in emerging economies like Nigeria and other developed economies of the world (Urhoghide and Omolaye, 2017).

Corporate governance is of significance to the growth, expansion and stability of the economy. It enhances investors’ confidence as well as provides platform for ensuring that duty of loyalty by managers to shareholders exist and that managers will efficiently and effectively strive to maximize the firm’s wealth (Kihumba, 2018). According to the McKinsey and Company Investor Opinion Survey (2000), more than 80% of investors are willing to pay for the shares of well-governed firms than poorly governed firms of comparable financial performance.

In the achievement of the business objectives, corporate governance is a major factor and it is concerned with the relationships that exist among firms’ management, board of directors, shareholders and other stakeholders. Osundina, Olayinka and Chukwuma (2016) emphasized that corporate governance is a non-financial factor that affects the performance of companies and increases accessibility of external finance that brings sustainable economic growth. Weak corporate governance may manifest in form of non-accountability and transparency to stakeholders, bribery scandals, violation of the rights of the minority shareholders, official recklessness among the managers and directors, weak internal control system, insider abuses and fraudulent practices (Olumuyiwa & Babalola, 2012). Also, non – distinction between ownership and control of organization has been identified to be a major reason for weak corporate governance. The corporate governance structures specifies the distributions of rights and  responsibilities among different stakeholders in a corporation, like the board, managers, shareholders and others, and spell out the rules and procedures for making decisions on corporate affairs. This is in conformity with the view of Uche (2004) and Akinsulwe (2006).

The priority of any organization is to effectively, efficiently and ethically manage the company for profitable long term growth and perpetual existence; the policies and practices of management must also align with the interest of shareholders and other stakeholders. Thus, the development of good corporate governance is essential in order to protect corporate stakeholders and maintain factors for control and prevention of collapse and long lasting economic depression (Osundina, Olayinka and Chukwuma, 2016). It is against this background that this study seeks to examine the effect of corporate governance on financial performance of selected Nigeria companies.

1.2     Statement of the Problem

Investors are faced with the challenges or problems of making decision in terms of determining when to invest, whether to invest or not. Investors are not interested in the beautification of the firm or its products rather they are very much interested in the financial performance of the firm, because no investor would invest in a non-going concern firm, and the financial performance can be ascertain through the financial information provided by the firm. Corporate governance have enable the separation of owners from management due to the fact that the ownership of most larger companies is widely spread, while the day to day control of the business rest in the hand of a few managers who usually own a relatively small proportion of the total share issued. Many notable scholarly articles written on the topic of coporate governance and have established the relationship between corporate governance and financial porperformance (Abor, 2007). Corporate governance and disclosure practice (Aboagye-Otchere, Bedi and Ossei Kawkye, 2012). Also Kyereboah-Kyeeboah-Coleman and Biekpe, (2006) studied corporate governance and financial performance of an organization. Myers, (1974) argues that there is a significant interaction between corporate financing and investment decisions while the study Abor, (2007) addresses corporate governance and financial performance. from the studies above, few studies exists the effect of corporate governance on financial performance of Nigeria quoted firms. The literary gap, therefore necessitate the need to examine the effect of corporate governance on financial performance of selected Nigeria companies.

1.3     Objective of the Study

The main objective of this research work is to examine the effect of corporate governance on financial performance of selected Nigerian companies. To achieve this; the following specific objectives will be pursued:

1. To determine the effect of Board Composition on the financial performance selected Nigerian companies.
2. Examine the relationship between board size and the financial performance selected Nigerian companies.
3. Ascertain the impact of independence of directors on the financial performance selected Nigerian companies.

1.4     Research Questions

In the attempt to evaluate the impact of corporate governance on financial performance of  selected Nigeria companies, the following research questions were raised.

1. What is the effect of Board Composition on the financial performance of selected Nigerian companies?
2. What is the relationship between board size and financial performance of selected Nigerian companies?
3. What are the impacts of independence of directors on the financial performance of selected Nigerian companies?

1.5     Research Hypotheses

H₀₁: Board Composition has no effect on financial performance of selected Nigerian companies.

H₀₂: There is no significant relationship between board size and financial performance of selected Nigerian companies.

H₀₃: Board independence has no significant effect on the financial performance of selected Nigerian companies.

1.6     Significance of the Study

The finding of this research work will be useful to policy makers such as Nigerian Stock Exchange to encourage compliance to the existing guidelines by establishing if there is a relationship between corporate governance and stock market performance. Given the need to Fast Track governance reforms the significance cannot be over emphasized.

Managers, shareholders and investors can use this research work to construct corporate governance index and use same to forecast stock market liquidity of companies listed in NSE. The study will enable the investors know which stocks are likely to be perform better thus able to help to determine which stocks to acquire and which to dispose. The research work will enable academics and scholars to bridge the gap on the relationship between of corporate governance practices and stock market performance in Nigeria. It will also be useful to future researchers as it will form part of the empirical literature on corporate governance practices.

1.7     Scope of the Study

The scope of the study is limited to 5 listed Manufacturing companies on Nigeria Stock Exchange between 2015 to 2019. These companies include Nestle Nigeria plc, Dangote flour mills Nigeria plc, flour mills of Nigeria plc, Guinness Nigeria plc and Cadbury Nigeria plc.

1.8     Limitation of the Study

Time is the major constraint in this research work. This is due to the fact that this research is carried along with normal academic programme, making it difficult to devote time to it. Additional information need for this study is not within the reach of the researcher, especial annual reports of companies listed on the Nigeria stock exchange.

THE EFFECT OF CORPORATE GOVERNANCE ON EARNINGS MANAGEMENT ON NIGERIA HEALTHCARE COMPANIES

THE EFFECT OF CORPORATE GOVERNANCE ON EARNINGS MANAGEMENT ON NIGERIA HEALTHCARE COMPANIES

Abstract

The aim of this research was to determine the effect of corporate governance on earnings management of healthcare companies in Nigeria. The companies listed on the Nigeria Security Exchange (NGSE) platform were used for the research. The corporate governance variables measured in the study were board size, board independence and audit committee independence. Discretionary accrual was used as the proxy for earnings management. Sample sizes of ten (10) companies were selected. Data for calculating discretionary accruals and corporate governance elements were collected from the annual reports of the firms within the period 2015 to 2018. Regression Analysis was used in the analysis of data and results were interpreted based on the R-squared, adjusted R-squared, coefficients of the independent variables and their p-values. The study found that a unit increase in board size will cause a statistically significant increase in earnings management, also a unit increase in board independence will lead to a statistically significant decrease in earnings management. While a unit increase in audit committee independence yield a statistically insignificant decrease in earnings management. The study concluded that earnings management is negatively related to board independence and audit committee independence while having a positive relationship with board size. It was also found out that the corporate governance element that have the largest impact on earnings management is board independence. The study recommends the need for effective corporate governance practice at board selection level of healthcare companies.

CHAPTER ONE

INTRODUCTION

1.1    Background of the Study

The separation of ownership from management raises the issue of monitoring managerial activities to ensure investor confidence. Following a spate of well-publish corporate scandals that took its toll with the collapse of once the prestigious companies such as Enron and WorldCom reiterated the need for an investigation into the quality of financial reports and increased the clamoring for a better governance mechanism worldwide. It has been observed by accountants and financial economist that central to these corporate failures is that “there are systematic deficiencies in accounting standards and governance system that generate financial information” (Bowen, Rajgopal and venkatachalam, 2003). 

In a bid to prevent such future failure of companies, most nations across the global introduced new code of best governance practices to align managers interest with the wealth maximization objective of the shareholders and ensure that corporate reports communicate economic measurements of and information about the resources and performance of the reporting entity useful to those having reasonable rights to such information. (Bhuiyan, 2009) states that users of accounting information, such as investors, government agencies, auditors and financial analysts, have focused on monitoring corporate governance systems. This lead to increased disclosures about corporate governance, demands for the regulation of systems of corporate governance, and consequentially, enhanced internal controls system. Regulators, academics and practitioners around the world now evaluate corporate governance compliance from inception to the implementation of suitable and sustainable system that takes account of the socio-economic environment relevant to any particular company.

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 and 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, 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 company’s 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 and 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.

1.2    Statement of the Problem

The separation of ownership and control in publicly held corporations encourages conflicts of interest between managers and shareholders. Thus a good corporate governance structure helps ensure that the management properly utilizes the enterprise’s resources in the best interest of absentee owners, and fairly reports the financial conditions and operating performance of the enterprise (Lin and Hwang, 2010). Therefore, corporate governance manages the utilization of shareholder’s resource best way possible, hence increasing the shareholder’s wealth.

Healthcare has experienced a number of corporate failures in the recent past due to weak corporate governance structures within the organizations. Wairimu (2010) in her article about the corporate governance irregularities in Healthcare’s financial markets, states that despite the good laws that exist in theory, there is still a window for senior managers to misappropriate shareholder’s wealth. The study further adds that recent irregularities in Healthcare involved Nyagah stockbrokers, the stockbrokerage firm put on statutory management in 2008 after failing to meet its financial obligations. Healthcare corporate needs to put in place good corporate governance mechanisms in place that will reduce these irregularities. According to Waweru and Riro (2013), Healthcare has also not been spared from the failures in corporate governance experienced in other countries, with recent examples such as in 2006, Uchumi Supermarket was placed under receivership with millions of shareholders” funds, and the collapse of three stock brokerage firms in 2008.

There are considerable number of studies on corporate governance locally, though most focused on the performance of the firm, no much study about the effect corporate governance has on earnings managements, except (Muchoki, 2013) his study about the relationship between the corporate governance and earnings managements on the companies quoted at NSE, where he tested some corporate governance mechanism relationship with earnings managements and Waweru and Riro, (2013) about corporate governance and firm specific characteristics on earnings management by Healthcare listed companies. 

Since the studies on these areas in Healthcare have been scanty with mixed conclusions. This study will increase the existing knowledge by using a different corporate governance mechanism and different data. Therefore, this research seeks to answer the question: which corporate governance mechanisms (Board size, Board independence, Audit committee independence and CEO shares) affect earnings management of the healthcare Companies?

1.3    Research Objectives

The objective of this study is to investigate the effect of corporate governance on earnings management of healthcare companies. Seek to achieve the following objectives;

1. To determine the joint effect of board size, board independence and audit committee independence on earning management of Healthcare committee.
2. To examine the effect of board size on the earnings management of listed companies.
3. To examine the effect of board independence on the earnings management of listed companies.
4. To examine the effect of audit committee independence on the earnings management of listed companies.

1.4    Research Questions

In view of the research objective, the research questions for this study are as follow;

1. How have board size, board independence, and audit committee independence jointly influence the earning management of Nigeria Healthcare companies?
2. To what extent has the board size influence the earning management of Nigeria Healthcare companies?
3. To what extent does board independence influence the earning management of Nigeria Healthcare companies?
4. How have Audit Committee independence affect earning management of Nigeria Healthcare companies?

1.5    Statement of Hypothesis

The formulation of hypothesis is therefore an inevitable task in quest of searching for an acceptable fact. In this research work, the notable hypotheses to be tested for are;

Ho:    There is no relationship between board size and earning management of Nigeria Healthcare companies.

Ho:   Thereis no relationship between board independence and earning management of Nigeria Healthcare companies

1.6    Scope of the Study

This research attempts to study the earning management and corporate governance for selected company within the period of 2015-2017.  Four (4) companies were randomly selected for this study using the judgmental sampling technique from the listed companies on Nigerian Stock Exchange Market.

1.7    Significance of the Study

This study therefore will be useful to different groups like; investors, shareholders, policy maker/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 practice and the negative impact of creative accounting on a financial statement. The study will especially enlighten organisations management (especially Healthcare organisations) on which element of corporate governance to channel policy efforts to.

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

1.8    Definition of Terms

• Corporate Governance: This is the set of processes, customs, policies law and institution affecting the way a company is directed, administered and control.
• Earning Management: This are companies who deliberately use accounting techniques to make it financial reports better.
• Board of Director: This is a body of elected or appointed members who jointly oversees the activities of the company or organization.
• Board Size: Is the amount of executive and non-executive directors on firm structure.
• Board Independent: This is the non-executive directors on the firms.
• Audit Committee: This is the body formed by the company’s board of director to oversee audit operation and circumstances.
• Shareholders:An individual or group who holds one or more shares in an organization and in whose name the share certificate is issued.
• Stakeholders: Person with interest in an organization such as its owners, employees and creditors.