Earnings Management and Corporate Governance in Nigeria

Abstract

Earnings management has received considerable attention in recent times. This is due to its linkage with the reliability of published accounting reports. Indication from the academic literature has shown that the practice of earnings management is quite extensive among publicly traded firms. In response to the demand for greater proportion of independent directors on corporate boards and the need for financial sophistication of audit committee members, this study examines the role of the board of directors and audit committee in preventing earnings management in Nigeria. Using a questionnaire survey, the study finds that board dominated by outside directors brings a greater breadth of experience to the firm and are in a better position to monitor and control managers, thereby reducing earnings management. It was also observed that audit committee whose members possess certain level of financial competencies would reduce the likelihood of earnings management. The study recommends that board composition should include greater proportion of independent outside directors with corporate experience. Audit committee members should be encouraged to possess a certain level of financial competencies in order to decrease the likelihood of earnings management.

Keyword: Earnings management, audit committee, board composition, corporate governance, Nigeria