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EARNINGS MANAGEMENT AND CORPORATE GOVERNANCE IN NIGERIA BANKING INDUSTRY

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EARNINGS MANAGEMENT AND CORPORATE GOVERNANCE IN NIGERIA BANKING INDUSTRY

BY

OGBEBOR RITA

SSC0508358

DEPARTMENT OF ACCOUNTING

FACULTY OF MANAGEMENT SCIENCES

UNIVERSITY OF BENIN

BENIN CITY.

NOVEMBER, 2011.

TITLE PAGEEARNINGS MANAGEMENT AND CORPORATE GOVERNANCE IN NIGERIA BANKING INDUSTRY

BY

OGBEBOR RITA

SSC0508358

BEING A RESEARCH PROJECT SUBMITTED TO THE DEPARTMENT OF ACCOUNTNG, UNIVERSITY OF BENIN, IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF BACHELOR OF SCIENCE (B.Sc) DEGREE IN ACCOUNTING.

NOVEMBER, 2011.

DECLARATIONThis project is based on a study undertaken by me in the Department of Accounting, University of Benin under the supervision of Mr. F.K Emeni

All ideas and views are product of my personal research and where the view of others has been expressed, they have been duly acknowledged.

_______________________

OGBEBOR RITA

CERTIFICATIONWe certify that this project work was completed by OGBEBOR RITA in partial fulfillment of the requirement for the award of Bachelor of Science (B.Sc) degree in Accounting.

___________________________________________

MR. F.K EMENIMR. JAMES ILABOYA

Project SupervisorProject Coordinator

DATE:____________________DATE:_________________

____________________________________

PROF. PRINCE FAMOUS IZEDONMI

Head of Department

DATE:______________________

DEDICATIONI dedicate this project work to my heavenly father, the chariot of Israel, the Bishop of my soul. I call Him the “All Mighty”.

ACKNOWLEDGMENT

My foremost gratitude goes to God Almighty for bestowing upon me grace, mercy and favor. And also to my project supervisor, Mr. F.K Emeni

I am delighted deep down to express my gratitude to my parents Mr. & Mrs. Oigianbeogbebor and my brother Itua Gabriel destiny and my lovely hub Clearment Elwelifho. For their love shown me through this years.

My profound gratitude goes to my foster parent Mr. and Mrs. Oigiangbe Ogbebor (to you sir, I’m forever grateful). They have always been a strong pillar to me in all areas of life. To my well wishers and friends Jude chichi Ever Twie (my dearest), my sweet baby Omoye Tayo Kevie Blessing Joy Rita and the rest of others. God bless you all Amen!.



ABSTRACTWell stability analysis is becoming a necessary tool to improve operational economy and to avoid well born problem. By the evolution of today’s modern business, many of the corporation have become owned and controlled by families and the major agency problem exist not only between management and minority shareholders. A case study was carried out wish is this study also attempt to assess that whether corporate governance creates any impact on earning management of not.



TABLE OF CONTENTS TOC \o "1-3" \h \z \u TITLE PAGE PAGEREF _Toc309926936 \h iDECLARATION PAGEREF _Toc309926937 \h iiCERTIFICATION PAGEREF _Toc309926938 \h iiiDEDICATION PAGEREF _Toc309926939 \h ivACKNOWLEDGMENT PAGEREF _Toc309926940 \h vABSTRACT PAGEREF _Toc309926941 \h viTABLE OF CONTENTS PAGEREF _Toc309926942 \h viiCHAPTER ONE PAGEREF _Toc309926943 \h 11.1INTRODUCTION TO THE STUDY PAGEREF _Toc309926944 \h 11.2STATEMENT OF THE RESEARCH PROBLEM . PAGEREF _Toc309926945 \h 41.3OBJECTIVE OF THE STUDY PAGEREF _Toc309926946 \h 51.4RESEARCH HYPOTHESIS’ PAGEREF _Toc309926947 \h 61.5.SCOPE OF THE STUDY PAGEREF _Toc309926948 \h 61.6.SIGNIFICANCE OF THE STUDY PAGEREF _Toc309926949 \h 71.7LIMITATION OF THE STUDY PAGEREF _Toc309926950 \h 91.8OPERATIONAL DEFINITION OF TERMS. PAGEREF _Toc309926951 \h 9CHAPTER TWO PAGEREF _Toc309926952 \h 15LITERATURE OF REVIEW PAGEREF _Toc309926953 \h 152.1INTRODUCTION PAGEREF _Toc309926954 \h 152.1.1WHY EXTERNAL DEVICES HAVE DIFFERENT EFFECTS ON EARNINGS MANAGEMENT THAN INTERNAL DEVICES. PAGEREF _Toc309926955 \h 182.2EARNINGS MANAGEMENT PAGEREF _Toc309926956 \h 202.2.1EARNING MANAGEMENT & FINANCIAL STATEMENT PAGEREF _Toc309926957 \h 212.2.2 NAMES OF EARNINGS MANAGEMENT PAGEREF _Toc309926958 \h 232.2.3 ACHIEVING EARNINGS MANAGEMENT PAGEREF _Toc309926959 \h 252.2.4EARNINGS MANAGEMENT AND RESOURCE ALLOCATION IN THE BANKING INDUSTRY PAGEREF _Toc309926960 \h 262.2.5EARNING MANAGEMENT AND INVESTMENT BANKING. PAGEREF _Toc309926961 \h 272.2.6EARNING MANAGEMENT AND INVESTMENT DECISION PAGEREF _Toc309926962 \h 292.3EARNING MANAGEMENT QUALITY PAGEREF _Toc309926963 \h 302.3.1EARNING MANAGEMENT AND INTERNAL CONTROL SYSTEM IN THE BANKING SECTOR IN NIGERIA. PAGEREF _Toc309926964 \h 302.3.2EARNING MANAGEMENT AND INVESTOR PROTECTION PAGEREF _Toc309926965 \h 322.3.3EARNINGS MANAGEMENT, PRIVATE CONTROL BENEFITS AND INVESTOR PROTECTION. PAGEREF _Toc309926966 \h 332.3.4PRIVATE CONTROL BENEFITS AND HIDING INCENTIVES PAGEREF _Toc309926967 \h 342.3.5THE ROLE OF INVESTOR PROTECTION IN THE BANKING INDUSTRY IN NIGERIA. PAGEREF _Toc309926968 \h 342.4CORPORATE GOVERNANCE PAGEREF _Toc309926969 \h 352.4.1THE IMPORTANCE OF EFFECTIVE CORPORATE GOVERNANCE PAGEREF _Toc309926970 \h 462.5COMPARISON BETWEEN EARNINGS MANAGEMENT CORPORATE GOVERNANCE AND THE FINANCIAL STATEMENT. PAGEREF _Toc309926971 \h 512.6BOARD INDEPENDENCE PAGEREF _Toc309926972 \h 522.7INTERNAL GOVERNANCE PAGEREF _Toc309926973 \h 53REFERENCES PAGEREF _Toc309926974 \h 54CHAPTER THREE PAGEREF _Toc309926975 \h 60RESEARCH METHODOLOGY PAGEREF _Toc309926976 \h 603.1INTRODUCTION PAGEREF _Toc309926977 \h 603.2RESEARCH DESIGN PAGEREF _Toc309926978 \h 613.3DETERMINATION OF POPULATION PAGEREF _Toc309926979 \h 623.4SAMPLE SIZE PAGEREF _Toc309926980 \h 623.5SOURCES OF DATA PAGEREF _Toc309926981 \h 623.6DATA COLLECTION METHOD PAGEREF _Toc309926982 \h 633.7DATA ANALYSIS METHOD PAGEREF _Toc309926983 \h 63REFERENCES PAGEREF _Toc309926984 \h 65CHAPTER FOUR PAGEREF _Toc309926985 \h 664.1DATA PRESENTATION AND ANALYSIS PAGEREF _Toc309926986 \h 664.2DATA PRESENTATION PAGEREF _Toc309926987 \h 664.3HYPOTHESIS PAGEREF _Toc309926988 \h 87CHAPTER FIVE PAGEREF _Toc309926989 \h 95SUMMARY, CONCLUSION AND RECOMMENDATION PAGEREF _Toc309926990 \h 955.1INTRODUCTION PAGEREF _Toc309926991 \h 955.2SUMMARY OF FINDINGS PAGEREF _Toc309926992 \h 955.3CONCLUSION PAGEREF _Toc309926993 \h 965.4RECOMMENDATIONS PAGEREF _Toc309926994 \h 97BIBLIOGRAPHY PAGEREF _Toc309926995 \h 99APPENDIX PAGEREF _Toc309926996 \h 101

CHAPTER ONE1.1INTRODUCTION TO THE STUDY

By the evolution of today’s modern business, many of the corporation have become owed and controlled by families and the major agency problem exist not only between the management and minority shareholders as well. Due to the increase in this conflict, the issue of trust has taken the key position in today’s financial analysis procedure. Because management is accountable to shareholders within the business. Other stakeholders are also present and each stakeholder has his own interest in the business so each one has authority and also tries to command the result of that authority to his own favour. Earning sometimes called the “bottom line” or “not income” are the single most important item in financial statement. They indicate the extent to which a company has engaged in value – added activities they are a signal that helps direct resource allocation in capital markets. Given the importance of earnings, it is no surprise that company management has a vital interest in how they are reported. That is why every executive needs to understand the effect of their accounting choices so they can make the best possible decision for the company. They must in other words learn to manage earnings.

This study also attempt to assess that whether corporate governance creates any impact on earnings management of not good governance means that little expropriation of corporate resources by management or contouring shareholders which contribute to better allocate resources for better performance as investors and lenders will be willing to put their money in firms with good governance. Other stakeholders, including employees and suppliers will also want to be more prosperous, fairer, longer lasting than those winless effective governance.

Over the past two decades a number of prominent participants in the debates were surrounding professional accounting and auditing standard increase the attention given to the role of corporate procedure in financial reporting practices.

Corporate governance is not just about the process by which elicited representatives as directors make decisions it is also about the way organizations are held accountable. The obvious way is via financial reporting.

A lot of financial reporting issues have remained under discussion in the financial literature, earnings management is one of them.

Impact of corporate governance on earnings management is the core theme of this paper. Implicit in all of their recommendation is the ascertion that the creditability of financial statement information is related to specific institutional features of corporate governance. The purpose of this will be to identify the empirical evidence that such a relation exist. The purpose is also to find out between different measures of earning management and the composition of firms board of directors particularly the subset of directors serving in the edit committee.

In developing countries like Nigeria, more attention needs to be paid to the corporations owned controlled by families and with the family members holding the managerial position. However, the major agency problem exist not between the management and owners in general but between the managerial and minority shareholders.

The existence of large shareholders may be itself not be a matter of concern or may even be a blessing but the beneficial effect of large shareholders should be expected only when management is separated from ownership or when proper corporate governance mechanism are in place so that outsides shareholders can effectively check misbehavior by controlling owner’s

1.2STATEMENT OF THE RESEARCH PROBLEM.

The research as easier noted noted is “Earning management and corporate governance in Nigeria banking industry”.

The research problem is a study attempts to assess whether corporate governance creates any impart on earning management thus the research tends to provide answers to the following questions.

1.To what extent has earning management and corporate governance improve management decision making in the banking industry

2.Has corporate governance creates any impart on earning management.

1.3OBJECTIVE OF THE STUDY

Any study without a clearly defined objective is baseless and worthless. At one end of the continuum is the issue of “earnings management” and at the other end is the resultant use of corporate governance in the banking industry. Hence the objectives of study would be emphasize as follow:

1.To investigate hoe earnings management and corporate governance improves management decision making in the banking industry

2.To determine the relative impart of corporate govanance on earnings management.

1.4RESEARCH HYPOTHESIS’In undertaking this study the following alternatives hypothesis were formulated.

There is a positive relationship between earnings management, corporative governance and decision makings.

Corporate governance impart positively on earnings management.

1.5.SCOPE OF THE STUDY

The scope of the study will provide boundary for research of the study in terms of the following

SAMPLE SIZE: selected ten commercial banks in Nigeria.

GEOGRAPHICAL COVERAGE: The research will be carried out within the southern part of Nigeria.

TIME HORIZON: The length of period covered by the study will be four (4) years 2007 – 2010

1.6.SIGNIFICANCE OF THE STUDY

A good earnings management and corporate governance is the pivot of a successful administrative management in the banking industry. The importance of the study is as follows.

1.The banking industry in Nigeria will find the research finding or report useful in decision making.

2.Investors and other interested parties such as shareholder and business oriented individuals will find the research finding useful for investment decision.

3.Society which is made up of individual and organization will find the research findings useful for investment deisms

4.Government: Authorities and agencies will find the research finding useful in the areas of making tax policy and investment decisions into corporate organizations.

5.Analysis and future researchers such as professional accountants, auditors and academicians will find the research findings useful for analyzing the role of corporate governance on earnings management through financial reporting and the future research by academicians.

6.Date Bank Future Studies: The research findings or literature will serve as research topic for future studies by academicians and researchers.

1.7LIMITATION OF THE STUDY

1.The study is limited by respondents to the questionnaire design who might not like to disclose certain requisite information concerning the organization to an outsider

2.The accuracy and reliability of the research findings are limited by the extent of the reliability of the information gathered through personal interview. And it may also be limited by financial constraint.

1.8OPERATIONAL DEFINITION OF TERMS.

There are several terms to be defined in the chapter but majority will be talked about in chapter two (literature review) such terms are earnings, earnings management, corporate governance, investment, management, control, data, bank etc should be looked into.

1.EARNINGS: according to investor’s word, earnings can be defined as revenues minus cost of sales, operating expenses and taxes over a given period of time. Earnings are the important determinant of a stock price.

2.EARNINGS MANAGEMENT: Earnings management may be define as a reasonable and legal management decision making and reporting intended to achieve stable and predictable financial result it can also be defined as manipulation of company’s financial earning either directly of through indirect accounting methods.

3.CORPORATE GOVERNANCE: Corporate governance is a term that refers broadly to the processes or laws by which business are operated and controlled. The term can be refers to internal factors defined by the officers stockholders or constitutions of corporation as well as external forces such as consumers groups event and government regulations.

4.INVESTMENT: It is the purchases of financial product or other item of value with an expectation of favourable future returns.

5.MANAGEMENT: Management can be define as collective body of those who manage or direct any enterprise or interest i.e. the board of managers. Management team works to gather to choose a solution that will benefit the company the following are what management do.

-make decision

- set company vision

- create corporate culture

- Enforce policy and procedure.

6.CONTROL: It involves a comparison of actual result or performance with budgeted so that deviation from plan can identified as corrected actions taken.

7.DATA: It represent facts at any kind it is the raw material from which information is produced.

8.BANK: this can be seen as an organization, usually a corporate, chartered by a stake or federal government which does most of all the following such as receive demand deposits and time deposit honors instruments drawn in them and pay interest on them; discount notes, makes loans and invest insecurities, collects clocks, draft and notes, certifies depositors, checks and issues draft and cashiers checks.



REFERENCES

Marrakchi, Chtairah, Sonola, Jean and Courtean (2001) Corporate Governance and Earnings Management.

Lawrence Brown and Marcus Caylor (2005): The Importance of Corporate Governance and Earnings Managements.

Cadbury Committee (1992): Report of the Committee on the Financial Aspect of Corporate Governance.

Tech, S.H, L. Welch and T.J. Wong (1998): Earnings Management and the Underperformance of Initial Public Offerings Journal of Finance 53 (December): 1935-1974.

Wright D.W. (1996): Evidence on the Relation Between Corporate Governance Characteristics and the Quality of Financial Reporting. Working Paper, University of Michigan.

Tse Committee on Corporate Governance in Canada (1994) Where were the Director.

Ler, B. On the Usefulness of Earnings and Earnings Research: Lesson and Directors from two decades of Empirical Research? Journal of Accounting Research 27 Supplement (1989): 153-2001.

Ziv, A Discussion of Earnings Management and the Revelation Principle? Review of Accounting Studies 3 (19788) 15-40.

CBN (2006). Code of Corporate Governance for Banks Nigeria Post Consolidation.

Cowry Asset Management (2009): Nigeria Banking Report





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