Proceedings of the 6th Economic & Finance Conference, OECD Headquarters, Paris

EFFECT OF AUDIT QUALITY AND CORPORATE GOVERNANCE ON REAL ACTIVITIES MANIPULATION IN NIGERIAN BANKS

MODIBBO ABUBAKAR

Abstract:

Nigerian banking industry has in recent times suffered different degrees of financial malfeasances which rendered many banks distress and bankrupt. This is in spite of the regulatory mechanisms put in place to monitor and control the operations of the banks. Investigations by regulators and researchers to determine the possible causes of the problem are still going on. One of the factors identified is managerial unethical practices which affect the quality of corporate reporting adversely. However, despite an extensive studies on accrual-based earnings management in the banking industry, there has been none or limited research examining whether the audit quality and corporate governance mechanisms constraint real earnings management of banks in Nigeria. This paper examined the effect of audit quality and corporate governance on real earnings management of banks in Nigeria. The paper examined two real earnings management activities; revenue manipulation to alter cash flows from operations and manipulation of discretionary expenses to smooth earnings. Correlation research design was adopted using a cross-section of 15 banks for a period of 10 years (2004-2013). Generalized Least Squares (GLS) technique of analysis was used and the study found an insignificant negative relationship between Big4 auditor and real earnings management (revenue and discretionary expenses manipulation); and positive relationship between joint audit and real earnings management. The results show that governance mechanisms (board independence and board size) have significant positive effect on cash flows manipulation, while audit committee (size, independence and financial knowledge) has a significant negative effect on cash flows manipulations during the period. Overall, the results indicate a significant relationship between aggregate real earnings management and the audit quality measures and governance mechanisms. The study recommends among others that regulators and policy makers in the Nigerian banking industry should consider real and accrual earnings management when making policy to mitigate unethical practices.

Keywords: Earnings Quality; Earnings Management; Corporate Governance; Financial Reporting Quality

DOI: 10.20472/EFC.2016.006.001

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