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CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Financial scandals around the world and the recent collapse of major corporate institutions in the United State of America (USA), South East Asia, Europe, and Africa such as Adelphia, Enron, commercial Banks and recently XL Holidays have shaken investors’ faith in the capital market and the efficacy of existing corporate governance practices in promoting transparency and accountability. This has brought to the fore once again the need for the practice of good corporate governance (Kajola, 2008). Corporate governance is about ensuring that the business is run well and investors receive a fair return. Organisation for Economic Corporation and Development (OECD), (1999) provides a more encompassing definition of corporate governance. It defines corporate governance as the system by which business corporations are directed and controlled. The corporate governance structures specify the distribution of rights and responsibilities among different participants in the corporation such as the board, managers, shareholders and other stake holders, and spells out the rules and procedures for making decisions on corporate affairs. Kang and Kim (2011) note that management could influence reported earnings by making accounting choices or by making operating decisions discretionally. According to Ebraheam, Saleem and Alzonbi (2012), the integrity of financial reporting system was being questioned due to the failure of the board to oversight its implementation. Defond and Francis (2005) claimed that the corporate collapse consequence has renewed the significance of corporate governance minority role. Earnings Management has consistently raised severe concerns about corporate governance practices in a broad-spectrum. Also, it has brought to spotlight issues relating to quality of financial reporting and the weak internal control system among firms (Ebrahim, 2007; Kanchanapoomi, 2005; Bellow, 2011; & Uwuigbe, 2013). The Corporate failures of such large organizations in the past have highlighted the intentional misconduct of managers in a wider-spectrum. In addition, there are apprehensions about the weakness of corporate governance in the past as it was not effective enough to protect investors from expropriation (Uwuigbe, Daramola & Anjolaoluwa, 2014). Earnings management affects firm performance and can even temper with shareholders wealth simply because it involves a deliberate altering of financial information to either misled investors on the underlying economic status of a firm or to gain some contractual benefits that depend largely on accounting numbers, (Watts & Zimmerman, 1986; Healy & Wahlen, 1999). Earnings management as acceptable as it is within the bounds of Generally Accepted Accounting Principle (GAAP) has been a concern to investors, policy makers and researchers across the globe. Gulzer and Wuhan (2011) note that the nature of earnings management provides managers the opportunity to manipulate the financial information of firms in order to get their own benefit. Unlike fraud, earnings management involves the selection of accounting procedures and estimates that confirms to the generally accepted accounting procedures manipulations (Rahman & Ali, 2006). In Nigeria, this was further heightened subsequent to the collapse of several financial and non-financial institutions which includes the bank PHB, Spring bank plc, Oceanic bank plc, Intercontinental bank plc, African petroleum plc, Levers Brothers and Cadbury plc. An investigation into the cause revealed significant, deep-rooted problems in the account preparation and also the intentional misconduct of managers which led to the concurrent sack of eight (8) bank chiefs by the Governor of Central Bank of Nigeria and the call for an investigation of the efficacy of the monitoring and controlling of managerial and financial behaviour of managers (Ndukwe & Onwuchekwa, 2014). A good corporate governance structure helps to ensure that the management properly utilize the enterprises resources in the best interest of absentee owners, and fairly reports the financial condition and operating performance of the enterprise (Lin & Hwang, 2010). It is on this note that the study aims at examining corporate governance and earnings management practices in selected quoted companies in Nigeria.

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