Research Article

BOARD DIVERSITY AND MANIPULATIVE ACCOUNTING PRACTICE AMONG LISTED CONGLOMERATES IN NIGERIA

Ishaka Mohammed Tukur1*, Ahmad Bello Dogarawa1, Jibril Yero2
1 Department of Accounting, Ahmadu Bello University, Zaria, Nigeria
2 Ahmadu Bello University Zaria and University of Technology and Arts of Byumba
* Corresponding author: ishakamohammedtukur@njar.org.ng
Published: Jun, 2015
Pages: 55-85
Views: 19
Downloads: 19

Abstract

One of the main characteristics of an effective Board of Directors (BOD) is its membership diversity. Well-managed diversity on the BOD is expected to enhance a board’s capacity and effectiveness to monitor the opportunistic behaviour of managers, which more often than not motivates them to among other things engage in manipulative accounting practice. This paper examines the effect of board diversity on manipulative accounting practice among listed conglomerates in Nigeria for the period 2007 – 2014. The paper hypothesises that foreign directors, board gender, non-executive directors and board competence have no significant effect on manipulative accounting practice among the firms. It utilises panel data extracted from the financial statements of the six (6) conglomerates listed on the Nigerian Stock Exchange (NSE) as at December 2014. The result of the robust fixed effects model reveals that foreign directors and non-executive directors have significant negative influence on manipulative accounting of the firms. The analysis further shows that board gender and board competence have no significant effect on manipulative accounting practice among the firms. This implies that an increase in the number of foreign directors and non-executive directors will reduce the opportunistic tendencies of management as their presence plays a crucial role in reducing manipulative accounting activities of the firms. In line with the result, the paper recommends that management of listed conglomerates in Nigeria should increase the number of foreign and non-executive director to average of 44% and 47% respectively. This is because at these respective percentages, foreign and non-executive directors have significant negative effect on manipulative accounting. Also, shareholders of listed conglomerates in Nigeria need not to bother about the number of females and competent directors on their board whenever they are to decide on how to curtail manipulative accounting practice.

Keywords

Board diversity; conglomerates; corporate governance; earnings management; manipulative accounting

References

  1. Abdul Rauf, F. H., Johari, N., H., Sharifar, B. & Abd Rahman, N., R. (2012). The Impact of Company and Board Characteristics on Earning Management among Malaysian Public Listed Companies, Global Review of Accounting and Finance 3(2), 114-127.
  2. Abdulahi, S., N. & Isma'il, K. (2009). Do Women Directors Constraint Accruals Management? Malaysian Evidence. Department of Accounting, Kulliyyah of Economics and Management Science International Islamic University Malaysia.
  3. Agrawal, A. & Chadha, S. (2005)."Corporate Governance and Accounting Scandals", Journal of Law Economics 48(2), 371-406.
  4. Agrawal, A. & Knoeber, C. R. (1996). "Firm Performance and Mechanism to Control Agency Problems between Managers and Shareholders", Journal of Financial and Quantitative Analysis 31(3), 377-397.
  5. Aguir, A., Lakhal, N., Malek, A. (2015). The Effect of Gender Diversity on the Boardroom and in Top Management Position on Earnings management, Journal Applied Business Research 31(3), 1107-1118.
  6. Alves, S. (2014). The Effect of Board Independence on the Earnings Quality: Evidence from Portuguese Listed Companies, Australasian Accounting, Business and Finance Journal 8 (3), 23-44.
  7. Assahsah, A. (2006). Motives for Earnings Management. Being a Published Bachelor Thesis in Accountancy and Control Submitted to the Department of Accounting, University of Amsterdam.
  8. Aygun, Suleiman & Sayim (2014). The Effect of Ownership Structure and Board Size on Earnings management, an International Journal of Business Management 9 (12), 123.
  9. Ayres, F., L. (1994). Perception of Earnings Quality: What Managers Need to Know Management Accounting, 75 (9), 27-29.
  10. Barnea, A., Ronen, S. & Sadan, S. (1976). 'Classificatory smoothing of income with extraordinary items', The Accounting Review, January. 110-122
  11. Bedard, J., Chtourou, S. M. & Courteau, L. (2004). The Effect of Audit Committee Expertise, Independence, and Activity on Aggressive Earnings management. Auditing: Journal of Practice and Theory 23, 13-35.
  12. Belkaoui, J., Ben A. M. (2002). The effects of Mandatory IAS/IFRS Regulation On The Properties of Earnings' Quality in Australia and Europe. European Journal of Business and Management, 6 (3), 2222-2839.
  13. Bello, A. (2010). Corporate Governance and Accounting Ethics in Nigeria. Department of Accounting, Ahmadu Bello University, Zaria, Nigeria.
  14. Bello, A. (2011). "Corporate Governance and Accounting Ethics in Nigeria," Proceedings of International Conference on Management organised by ICM, Malaysia, 1591-1609.
  15. Bello, S. M. (2005). Income smoothing and quality of earnings among Nigerian Banks. Un-Published PhD Thesis submitted to Department Accounting Ahmadu Bello University, Zaria, Nigeria.
  16. Beneish, M. (2001). Earnings management: A Perspective", Managerial Finance. 27, 3-17.
  17. Benjamin, K., G. & Hussaini, B. (2014) Board Characteristics and Earnings management of Listed Food and Beverages Firms in Nigeria. European Journal of Accounting, Auditing and Finance Research 3 (8), 25- 41.
  18. Bermig, A. & Frick, B. (2010). Who is the Better Monitor? The Impact of Female Board of Directors, Board Composition and Board Size and Earnings management. German Economic Association of Business Administration-Geaba.
  19. Bhagat, S. & Boltan, B. (2009, March 18). Sarbanes-Oxley, Governance and Performance. Retrieved June 23, 2015 from SSRN: Http://Ssrn.Com/Abstract=1361815.
  20. Budrina, M. (2014). The Impact of IFRS Adoption on Accrual-Based Earnings Management: Evidence from Russia. University of OULU.
  21. Bugshan, T. (2005). Corporate Governance, Earnings management and the Information Content
  22. Buniamin, S., Johari, N. H. & Abdul Rauf, F., H. (2012). Board Diversity and Discretionary Accruals of the Top 100 Malaysia Corporate Governance (MCG) Index Company: African Journal of Business Management 6 (29), 8496-8503.
  23. Bushman, R., Chen, Q., Engel, E. & Smith, A. (2004). 'Financial Accounting Information, Organizational Complexity and Corporate Governance System', Journal of Accounting and Economics 37, 17-201.
  24. Cadbury, (1992). Report of the Committee on the Financial Aspects of Corporate Governance London: Gee and Co. Companies and Allied Matters Act (1990) (as amended), Laws of the Federation of Nigeria. (LFN).
  25. Cahan, S. F. (1992). The effect of antitrust investigations on discretionary accruals: A refined test of the political cost hypothesis. The Accounting Review.67, 79-95
  26. Carter, D. A., Simkins, B. J. and Simpson, W. G. (2003). Corporate governance, board diversity and firm value. Financial Review, 38(1), 33-53.
  27. Chen, J., T. & Ya Y. H. (2002). The Relationship between Corporate Restricting, Corporate Governance and Earning Management. The International Journal of Accounting Studies 34, 1-29.
  28. Chen, K.C.W., Yuan, H. (2004). Earnings management and Capital Resources Allocation Evidence from China's Accounting-Based Regulation of Rights Issues. The Accounting Review 79(3), 645-665.
  29. Cheng, J., J. & Zhang, H. (2003) The Impact of the Corporate Governance Code on Earnings management Evidence from Chinese Listed Companies.
  30. Chtourou, S. M., Bedard J. & Couurteau L. (2001). Corporate Governance and Discretionary Accruals. (On line). Http:// ssrn. com/ Abstract=275053(5 January 2003).
  31. Competency and Ownership on Discretionary Accruals in Malaysia. International Journal of Economics and Management, 2 (2), 281-306.
  32. Cornett, M. M., Marcus, A. J. & Tehranian, H. (2008). "Corporate Governance and Pay for Performance," The Impact of Earnings management,' Journal of Financial Economics', 87, 357-373.
  33. Danaldson, L. & Davis, J. H. (1991). 'Stewardship Theory or Agency Theory: CEO Governance and Shareholder Returns. Australian Journal of Management, 19 (1), 49-64.
  34. Dang, R., Nguyen, D. K. & Vo, L. C. (2012). Women on corporate boards and firm performance: A Comparative study. A Working Paper.
  35. David, A. C., Frank, D., Betty J. S. & Simpson, W. G. (2010). The gender and ethnic diversity of us boards and board committees and firm financial performance. Corporate Governance: An International Review, 18(5), 396-414.
  36. Davidson, W. & Dadalt, P. j. (2003). Discretionary Accruals and Corporate Governance: the Roles of the Board and the Audit Committee. J. Corporate Finance, 9, 295-316.
  37. Deakin, S. & Konzelmann, S. J. (2004). Learning from Enron. Corporate Governance, 12 (2):134-142.
  38. DeAngelo, H., DeAngelo, L. & Skinner, D. (1994). Accounting choice in trouble Companies. Journal of Accounting and Economics, 17, 113–143.
  39. Dechow, P. M. & Sloan R. G. (1991). Executive Incentives and the Horizon Problem: An Empirical Investigation, Journal of Accounting and Economics, 14, 51-89.
  40. Dechow, P. M., Sloan, R. G., Sweeney, A. P. (1996). Causes and Consequences of Earnings Manipulation. An Analysis of Firms Subject to Enforcement Actions by the Sec, Contemporary Accounting Research, 13 (1), 1–36.
  41. Dechow, P., Sloan, R. G. & Sweeny, A. P. (1995). "Detecting Earnings Management," The Accounting Review 70 (2), 193-225.
  42. Defond and Park (1997) Defond, M. L., and Park, C. W. (1997). Smoothing the Income in Anticipation of Future Earnings. Journal of Accounting and Economics 23(2), 115-139
  43. Defond, M. L., Jiambalvo, J. (1994). Debt Covenant Violation and Manipulation of Accruals, Journal of Accounting and Economics 17, 145-176.
  44. Demaki, G. O. (2011). Proliferation of Codes of Corporate Governance in Nigeria and Economic Development. Business and Management Review. 1 (16), 17- 45
  45. Doyle, J. Ge W, & Mc Vay, S. (2007). Determinants of Weaknesses in Internal Control over Financial Reporting, Journal of Accounting Economics 44, 193-209.
  46. Fama, E. & Jensen, M. (1983). Agency Problems and Residual Claims. Journal of Law and Economics 26, 327-350.
  47. Farouk, M., A. (2014) Possession Formation and Earning Management of Chemical and Paints Firms in Nigeria. A published Thesis Submitted to Department of Accounting Ahmadu Bello University, Zaria.
  48. Firm Value' Financial Review, 38 (1), 33-35.
  49. Friedlan, J. M. (1994). Accounting choices of issues of initial public offering, Contemporary Accounting Research, 11 (1), 1-31.
  50. Fundenberg, D. & Tirole, J. (1995). A theory of income and dividend smoothing based on incumbency rents. The Journal of Political Economy, 75-93.
  51. Garba, T. & Abubakar, B. (2014). Corporate Board Diversity and Financial Performance of Insurance Companies in Nigeria, An Asian Economic Review 4 (2), 257-277.
  52. Granovetter, Mark. (1973). The Strength of Weak Ties. American Journal of Sociology, 78 (6), 1360-1380.
  53. Gray, R. P. & Clarke F. L. (2004): "A methodology for calculating the Allowance for Loan Losses in Commercial Banks" ABACUS, 40 (92).
  54. Gulzar, M. A. & Wang, Z. (2011). Corporate Governance Characteristic And Earnings management: Empirical Evidence from Chinese Listed Firms,' International Journal of Accounting and Financial Reporting, 1 (1), 2162-3082.
  55. Gulzar, M. A. & Wang, Z. (2011).Corporate Governance Characteristic and Earnings management: Empirical Evidence from Chinese Listed Firms,' International Journal of Accounting and Financial Reporting, 1 (1), 133- 151.
  56. Gumanti, Tatang Ary. (2000) Earning Management, Suatu Telaah Pustaka, Journal Akuntansi
  57. Healy, P. M. & Wahlen J. M. (1999) A Review of the Earnings management Literature and its Implications for Standard Setting, Accounting Horizons (4), 365-383.
  58. Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implication for standard settings. Accounting Horizons, 13, 365-383
  59. Hui, L. T. & Fatt, Q. K. (2007). Strategic organisational conditions for risk reduction and earnings management: A combined strategy and auditing paradigm. Accounting Forum, 31 (2), 179-201.
  60. Impact on Financial Reporting with Selected Companies. International Journal of Business and Social Sciences, 2 (21), 205-213, Special Issue, November.
  61. Initial Public Offerings and Seasoned Equity Issues. European Financial Management, 6 (2), 173.
  62. Jensen, M. C. & Meckling, W. H. (1976). The Theory of the Firm Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3, 305-360.
  63. Jensen, M. C. (1993). The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems. Journal of Finance, 48 (3), 831-880.
  64. Jiang W., Lee, P., & Anandarajan, A. (2008). The association between corporate governance and earnings quality: Further evidence using the GOV-Score. Advances in Accounting, 24 (2), 191-201
  65. Johari, N., Mohd Saleh N., Jaffar R., Hassan, M. (2008). The Influence, of Board Independence
  66. Jones, J. (1991). Earnings management during import relief investigations. Journal of Accounting Research 29, 193-228
  67. Journal of Accounting and Economics 16, 273-315.
  68. Kao, J. L., Wu & Yang, Z. (2009). Regulations, Earnings management, And Post IPO Performance, The Chinese Evidence. Journal of Banking & Finance, 33, 63-76.
  69. Kirshenheiter, M. & Melumad, N. D. (2002). Can Big Bath and earnings smoothing Co exist as equilibrium financial reporting strategies? Journal of Accounting Research
  70. Klein, A. (2002). Audit Committee, Board of Directors Characteristic and Earnings management, Journal of Accounting Economics 33,375-400.
  71. Kouki, M., Elkhaldi, A., Atri, H. & Souid, S. (2011). 'Does Corporate Governance Constrain Earnings management? Evidence from U.S Firms', European Journal of Accounting Finance and Administrative Sciences 35, 58-71.
  72. Levitt, A. (1998). The numbers game, unpublished remarks. Available at http://www.sec.gov/news/speeches/spch220.txt
  73. Masulis, R.W., Wang C. (2007). Are Foreign Directors Valuable Advisors or Ineffective Monitors? Evidence from Vanderbilt & Chinese University Hong Kong.
  74. Matsumoto, D. A. (2002). "Management's Incentives to Avoid Negative Earnings Surprise" the Accounting Review, 77 (3), 483-514.
  75. Merchant, K. & Rockness, J. (1994). The Ethics of Managing Earnings: An Empirical Investigation: Journal of Accounting and Public Policy, 13, 79-94
  76. Muhammad, J. & Saheed, A. (2014). Corporate Governance and Earnings management. An Empirical Analysis of Firms in Petroleum Distributors in Nigeria: A Research Journal of Accounting 2 (2), 367-508.
  77. Murphy, K. J. & Zimmerman, J. L. (1993). Financial performance surrounding CEO turnover.
  78. Musfiquir, R., Mohammed, M. & Jamil, S. (2012). Techniques, Motives and Controls of Earnings Management. International Journal of Information Technology and Business Management 11 (1).
  79. Nafi'u, B. M. & Farouk, M. A. (2015) Influence of Board Characteristics / Heterogeneity on the Performance of Listed Deposit Money Banks in Nigeria, Abuja Journal of Business and Management, 1 (3), 90-100.
  80. Naseer, K. (1993). Creative Financial Accounting: Its nature and use, Hemel Hempstead. Prentice Hall.
  81. Norwani, N. M. (2011). Corporate Governance Failure and Its Consequences on Earnings Theoretical Model and Empirical Tests' PhD Thesis, Bond University Queensland 4229, Australia.
  82. Olayinka M. U. (2012). Earnings management and corporate governance in Nigeria Research Journal of Finance and Accounting, 3(3) 20-33
  83. Omoye, A. S. & Eriki, P. O. (0214). Corporate Governance Determinant of Earnings management, Evidence from Nigeria Quoted Companies, Mediterranean Journal of Social Sciences 5 (23), 553
  84. Omoye, A. S. & Eriki, P. O. (2014). Corporate governance determinants of earnings management: Evidence from Nigerian quoted companies. Mediterranean Journal of Social Sciences. 5 (23) 553 – 564.
  85. Osazevbaru, H. O. (2012). Creative accounting and firm's market value in Nigeria. Kuwait chapter of Arabian Journal of Business and Management Review, 2(3), 38 – 50.
  86. Park Y.W. & Shin, H. H. (2004). "Board Composition and Earning Management in Canada", Journal of Corporate Finance 10 (3), 431-457.
  87. Peni, E. & Vahamma, S. (2010). Examines the Association between Earnings management and
  88. Peni, E. Vahamma, S. (2010). Female Executive and Earnings management. Management Finance, 36(7), 629-645.
  89. Performance, Journal of Financial Economics. 94 (2), 291-309.
  90. Pfeffer, Jeffrey & Gerald R. Salancik. (1978). The External Control of Organizations, A Resources Dependence Perspective. New York. Harper & Row.
  91. Pincus, M. & Rajogopal, S. (2002). The Interaction of Accruals Management and Heading: Evidence from Oil and Gas Firm, the Accounting Review, 71, 127-160.
  92. Rafik, Z. A. (2002). "Determinants of Earnings management Ethics among Accountants". Journal of Business Ethics 40, 33-45.
  93. Rahman, M., Mohammad, M. & Jamil, S. (2013). Techniques, Motives and controls of Earnings Management. International Journal of Information Technology and Business Management, 11 (1).
  94. Renee, S., Adam, R. B. & Ferreira, D. (2009). Women in the Bedroom and their Impact on Governance and Earnings Management. Accounting Review 78 (3), 641-678.
  95. Reggy, H., Hermes, N., Lars, O. & Randoy, T. (2015) Impact of Board Internationalization of Earnings management. Sweden,C University of Agder, Norway.
  96. Salah, A. (2010). "Earnings Management in the Years Following the Integrated Corporate Income Tax within Dutch Housing Associations," Unpublished Master' Thesis, Erasmus University Rotterdam. 365-383.57.73.
  97. Sanda, A. U., Mikailu, A. S. & Garba, T. (2005). Corporate governance mechanisms and firm's financial performance in Nigeria. The African Economic Research Consortium. Kenya.
  98. Schipper, K. (1989). Commentary on Earnings management, Accounting Horizons 3, 91-102.
  99. Schipper, K., Vincent, L. (2003). Earnings quality. Accounting Horizon 17, 235-250.
  100. Schwiser, P., Soana, M., Cucenelli, D. (2012). Examined the Relation between Board Diversity
  101. Scott, W. R. (2003). Financial accounting theory. Toronto: Prentice Hall, ISBN 0-13-065577-5
  102. Shehu, U., H. & Buba, M. M. (2011). Board Characteristics and Loan Portfolio in Nigerian Deposit Money Banks. Nigerian Journal of Accounting Research, 7 (1), 109-123.
  103. Shehu, U., H. & Farouk, M. A. (2014) Board of Directors Characteristics and Performance of Listed Deposit Money Banks in Nigeria. Journal of Financial Business Management, 2(1), 89-105.
  104. Shen, Ch. & Chih, L. H. (2007). 'Earning Management and Corporate Governance in Asia's Emerging Markets' Corporate Governance: An International Review, 15 (5), 999-1021.
  105. Si Liu. (2011). Board Governance and Earnings management: Chinese Listed Companies; Masters Theses of Philosophy in Environmental and Developmental Economics Degree.
  106. Stehle, R., Ehrhardt, O. & Przyborowsky, R. (2000). Long-Run Stock Performance of German
  107. Sunder, S. (1997). Theory of Accounting and Control, Ohio: South- Western College Pub.
  108. Syakhroza, Ahmad, (2004). Model Komisaris Untuk Efektifitas Gcg. Di Indonesia, Usahawan
  109. The Gender of Firm's Executives, tthe Journal of Accounting Research 1 (4), 657-980.
  110. Uadiale, O., M., Earnings management and Corporate Governance in Nigeria: Research Journal
  111. Uwuigbe, U., Peter, D., S. & Oyeniyi, A. (2014). The Effect of Corporate Governance Mechanisms on Earnings management of Listed Firms in Nigeria: Accounting and Managerial Information System 13 (1), 159-174.
  112. Vafeas, N. (1999). Board Meeting Frequency and Firm Performance. Journal of Financial Economics, 53 (1), 33-509.
  113. Watson, Warren E., Kamalesh, Kumar & Larry, K. Michelson. (1993). Cultural Diversity's Impact on Interaction Process and Performance; Comparing Homogeneous and Diverse Task Groups. Academy of Management Journal 3 (3), 590-602.
  114. Watts, R. & Zimmerman, J. (1978). 'Toward A Positive Theory of the Determination of Accounting Standards', the Accounting Review, 53,112-134.
  115. Watts, R.. L. &Zimmerman, J. L. (1986). 'Positive Accounting Theory, Englewood Cliffs, N.j.
  116. Weisbach, M. (1988). "Outside directors and CEO Turnover" Journal of Financial Economics 20, 431-460.
  117. Wiersema, Margaret, F. & Karen, Bantel. (1992). Top Management Demography and Corporate Strategic, Academy of Management Journal 35 (1), 91-121.
  118. Wu, Yili. (2000). "Honesty, I Shrunk the Board," University of Chicago Working Paper. Xie B,
  119. Xie, B., Davidson, W. N 111 and DaDalt, P. J. (2003). Earnings Management and Corporate Governance: the Role of Board and Audit Committee. Journal of Corporate Finance, 9 (3), 259-316.
  120. Yadav, B. (2013). Creative Accounting: A Literature Review. The SIJ Transactions on Industrial, Financial & Business Management (IFBM), 1 (5): 181-193.
  121. Yang, W., Chun, L. & Ramadili, M. (2009). The Effect of Board Structure and Institutional Ownership Structure on Earnings management ,International Journal of Economics and Management 3 (2), 332-353.
  122. Yermack, D. (1996). Higher Market Valuation of Companies with A Small Board of Directors, Journal of Financial Economics 40 (2), 185-211.
  123. Zhang, Y., Uchida, K. (2011). Corporate Governance, Investor Protection, and Earnings management New International Evidence. Keuangan, 2 (2), 104-115.
How to Cite

Tukur, I. M., Dogarawa, A. B., & Yero, J. (2015). BOARD DIVERSITY AND MANIPULATIVE ACCOUNTING PRACTICE AMONG LISTED CONGLOMERATES IN NIGERIA. Nigerian Journal of Accounting Research, 11(1), 55-85.

I. M. Tukur, A. B. Dogarawa, and J. Yero, "BOARD DIVERSITY AND MANIPULATIVE ACCOUNTING PRACTICE AMONG LISTED CONGLOMERATES IN NIGERIA," Nigerian Journal of Accounting Research, vol. 11, no. 1, pp. 55-85, June 2015.

Share this article:
Facebook X / Twitter LinkedIn
Download PDF Back to Articles