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.