AN ASSESSMENT OF CORPORATE GOVERNANCE AND QUALITY OF FINANCIAL REPORTS (A CASE STUDY OF SOME SELECTED FIRMS ON THE NIGERIA STOCK EXCHANGE)

CHIAPTER ONE

1.1 BACKGROUND OF THE STUDY

 Corporate governance deals with the system or processes of controlling and directing the activities of an organization. It is seen as a means of ensuring that the business organization are controlled and directed to align with the interest of its owners (corporate bodies) it aims at ensuring that corporate managers to whom resources are entrusted by resource owners, manage them properly.  The modern nature at corporations separate resources owners (shareholders) from day to day running of the business activities of such corporations consequently resource owner’s vest control of the corporation to corporate managers while  appointing a board of directors to oversee the activities of the corporate managers. It is  on this premise that oversight function of the manager therefore work towards maximizing the  wealth of the shareholders. However, because of the separation of resources owners from corporation, periodic report are require to update resources owners with how resources have been employed and the wealth generated therefore. This make corporate managers stewards requiring them to given stewardship reports.

          This report is modern days  is made through the presentation of financial reports. However, it must  be sated that  there are other interested parties  (stakeholder) who make use of these reports presented by corporations. This pushes the responsibilities of corporation beyond the focus of shareholder alone to include other interested parties giving rise to the  stakeholder. Theory. The financial reports thus, represent the only means which stakeholder, can evaluate the performance usually on the basis of earnings, in an  “impressive light. As a result of t heir day to day involvement in the control of corporations. Corporate managers have access to information which stakeholders (except  inside directions) do not have. This fact is much more of concern because investors as a component of stakeholders, attach importance on the reported earnings of corporation. To them a corporation with less earning is seen as poor performing corporation and vis-versa. This scenario creates the incentives for corporate managers to manage reported earnings.

          The management of earning connotes manipulation of income (profit) to create an impressive perception on stakeholders, corporate managers indulge in several act of managing earning. This impairs the  quality of financial reporting, betrays the trust of stakeholders and negates the concept of social responsibilities of corporations.  Showing and Britain (2000:6) buttress this  by that in perspective where firms  - exist go generate are disseminate wealth on a society. Cheating with account is cheat the society in general. Aadedupe (2005;26) also opine that the  essence  corporate governance is to ensure that corporation respect the rule of law, play by rule guiding business and hold ethics and professionalism in the highest esteem.

1.2 STATEMENT OF RESEARCH PROBLEMS

The transparency and quality of financial reports by corporate entities has become a cause of concern for regulations investors’ analysis and other stakeholders, the Nigeria stock market annual Journal (2004:200) point that corporate managers indulge in several despicable acts such as understanding losses, covering bad debt, overstating profit and other wrongful acts. This has become of regular feature in the Nigeria Corporate market and has trained the corporate image of the Nation week corporate governance and other reasons have been identified as cause of the demise (Chenetal: 2007:6). This has lead to the following research questions;

1. Are corporations with separate offices for their chief executive officer and chairman of board engaged in earnings management?
2. Do corporations have more non – executive director? External directors on their board compared to executive directors/internal directors involved in earning management
3. Do corporations with audit committee membership as stipulated by the companies and allied matter act,  1990 (as amended to date) engage in earning management?
4. Are corporations have institutional shareholders association with earning management?

1.3 SCOPE OF THE STUDY

          This study shall be restricted to public limited companies listed on the Nigeria stock Exchange (NES) as at January 2007. These companies shall be of a manufacturing concern. Thus, excluding services corporations (financial constitution and other service providing company). This exclusion is an a  result of the modified Jones model which shall be  used in expounding the discretionary accrual behavior of corporate manager.

          Data  relating to  20 quoted companies purposely selected and  covering the industrial material food beverage and tobacco, breweries, agriculture /agro allied health care, chemical and paint automobile and tyre etc.

          The choice of limiting the study to 20 quoted  companies and the above sub-sector is to permit  manageable size of the study rather than focusing on a  wide scope which ma prove to be a great task considering the time and resources necessary to carryout this study  effectively with a  large sample size.

1.4 OBJECTIVE OF THE STUDY

          This study seeks to examine the relationship between the code of corporate governance test practices introduce by the securities and exchange commission (SEC) and the corporate Affairs commission (CAC) in 2003 and earning management behavour of corporate managers. It seeks to establish the effect of the corporate governance mechanism in constraining managerial discretionary accrual behavior and for understanding  of the  response at corporation in implementing the code, the objectives at this study include.

1. To determine no other corporations with roles for board chairman and chief earning management
2. To determine whether corporations with or higher proportion of non executive directors, relative to executive directors,  are indulging in earning management.
3. To establish whether corporations with audit committees membership as stipulated by the companies want (CAMA; 1990s 359 (4). Are associated with earnings management.
4. To ascertain whether corporations with instructional shareholder are associated with earning management.

The concerned companies. These data shall be extracted using a data collection schedule which would be designed for this purpose. The literary achieve section of the Nigeria stock exchange (NSE) Benin a source of data collection.

1.5 SIGNIFICANCE OF THE SUTDY

The need for equality of financial report in an economy cannot be over – emphasized. Its relevance lies in the efficient and effective allocation of economic resources. For a developing country like  Nigeria which requires the inflow of foreign direct investment (FDs) into her financial system, a transparent and reliable financial reporting system is a pre-requisite for attracting foreign investors. Also in line with a vision of making Nigeria the financial hub of the West African region  a credible financial reporting system which would be based on trust must be put in place to enable this dream to be actualized.

          This study will help in 

1. Maintaining good corporate value and safe  business environment which allow for health competition amongst corporations.
2. Enable the regulatory authorities direct their effort properly in curbing the discretionary behaviouir of corporate managers.
3. Boosting the confidence of the  investing public as a consequence  of credible financial reports made by the concerned corporation.
4. Preventing the demise or collapse of corporation in the future.
5. Reducing the additional cost incurred by investors content of financial reports.
6. Creating a  healthy business environment for corporation where the play according to the regulatory guidelines

1.6  LIMITATION OF THE STUDY

          It is obvious that there  is no research study without a limitation. So this study is not an expectation. However, a conscious effect would be made to minimize error that could inherited in this study. Especially errors in measurement of variables. Thus the limitations of this study include;

1. The smallness of the sample size i.e 20 companies as against  127 companies in the population of interest.
2. The assumption of a normally distributed population with equal variances. This is a pre-requisite for the I inferential statistics.
3. The qualitative nature of some variable in the model such as auditors reports thus causing the use of   dummy variable such O and I
4. The precision of the measurement scale used, i.e ratio scaling in the generation of data can be guarantee.
5. Non disclose of full corporate governance practices by some corporations in their annual reports, the status of its directors (i.e either executive or non – executive. 

1.7 STATEMENT OF HYPOTHESIS

The following four hypothesis will be tested to enable users achieve the objective of this work.

HYPOTHESIS I

Ho Corporations whose board chairman’s roles are separated from chief executive officer’s does not publish credible financial report

Hi: Corporation whose board chairman’s roles are  separated from chief executive officers  publics credible financial report

HYPOTHESIS 2

Ho: Corporation with the promotion of non – executive Directors greater than executive directors does not publish credible financial report.

Hi: Corporations having their proportion of non executive directors great or than executive directors publish credible financial report.

1.8 DEFINITION OF TERMS

          Accrual Basis: is a basis used in accounting where revenue and expenses are recognized in the accounting period to which they relate and in which they are earned and incurred and not as money is received or paid.

Corporate Governance; The term refers  to all  influences affecting the institutional processes of  an organization including the appointment of directors and corporate managers, operational activities of corporate articles and memorandum of association legal  ethical  and professional demand on corporation, responsiveness to  rights and  wishes of stakeholders and social responsibilities  of transparency and truthfulness.

Corporate managers:   are the changed with the responsibilities of performing managerial function such as planning, controlling directing and coordinating. They are usually officials at the top cadies of an organization.

Cash Basis: This is the basis used in accounting where only the revenue actually received and expense paid during an accounting period are recognized in the period.

Earning management:  is  defined for the purpose of this study as the acts of management to artificially  manipulate earning in order to  achieve preconceived self interest.

Stakeholders: This refers to these group individual who can significantly   affect or be affected by a company’s activities.

Institutional investors; investor such as banks insurance companies, pension or retirement fund, as well as shareholders with a minimum of  5% shareholding  including individual and government.