EARNINGS MANAGEMENT AND FINANCIAL PERFORMANCE OF LISTED NON-FINANCIAL FIRMS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Earnings management is the deliberate neutering of monetary data to either mislead investors on the underlying economic standing of a firm or to realize some written agreement advantages that rely mostly on accounting numbers (Watts and Zimmerman, 2013: Healy and Wahlen, 2012). Accruals are the most important earnings management instruments that are used by managers to either increases or decrease reported income. This is because they are “components of earnings that are not reflected in current cash flows and a great deal of managerial discretion go into their construction” (Bergstresser and Phillippon 2013).

Financial report is shown by an information management to assess the quality of a firm's performance and demonstrate its responsibility to potential investors, employees, customers, society and government. Financial report serves to present information to help investors, creditors, and other potential users in a similar decision rationally. The statements are very important because of the demonstration of quality of management performance in a period of time. One importance of financial statements is its use to measure management performance. Therefore, management will try to make a financial report in such a way that the performance of the company looks good in the financial statements. Due to the important role of financial statements in demonstrating the performance of a company, the management will try to mislead investors or the owner of the company to avoid the confidentiality of the actual condition of the financial statement. One way that is often applied to mislead the owner of the company or investors is conducting earnings management, because the manipulation of earnings management is the safest and legal, and does not violate generally accepted accounting principles (Haryudanto & Yuyetta, 2012).

Following these scenarios, earnings management also called creative accounting, aggressive accounting, according to Ignacio (2015) is the manipulation of financial numbers, usually within the letter of the rules of law and standard accounting practices, but deviating from the spirit of those rules and certainly not providing the true and fair view that accounts are supposed to. This (earnings management) is becoming an area of interest to many researchers, after the case of Enron, WorldCom, and other similar accounting scandals in Nigeria particularly in deposit money banks. In 2013, the House of Representatives Committee on Finance accused commercial banks in the country of sundry sharp practices, including tax evasion, non-remittance of government revenue and outright falsification of their accounts. In a report released on the 25th of August 2013, the committee said it had uncovered a lot of discrepancies in the data submitted to it by the banks including the outright refusal to present documentary evidence of revenue remittances, blank violations of existing laws, self-exemption from existing rules, false declaration and manipulation of financial information ( Ijeoma, 2014).

1.2 STATEMENT OF THE GENERAL PROBLEM

Earnings management practices may be occurred in either ways: through increasing the current profits in the interest of prior or future periods; or decreasing current profits in the interest of previous or future periods. This is done in the eyes of auditors and other controlling parties since such practices are adopted because of the flexibility existence of international financial reporting standards (IFRS). However, the problem of earnings management is ended with this but many accountants, management, analysts, internal auditors and others are concerned with the unknown practices of earnings management that led to negative effects on both parties inside and outside the company. Actually, earnings management reflected many practices by management to change net profits in a way to achieve management's interest, more than a reflection of a real indicator of the economic performance. As a result, many stakeholders, and investors in particular, have been deceived by untrue and unreliable financial statements and reports, as a result of earnings management practices, and this was resulted in unsound investment and economic decisions. Accordingly, the whole economy will be negatively affected by such decisions leading to un-stability in economic activities at micro and macro levels.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine earnings management and financial performance of listed non financial firms in Nigeria. Other general objectives of the study are:

1. To examine the factors affecting earnings management and financial performance of listed non financial firms in Nigeria.
2. To examine the determinants of Earnings Management.
3. To examine the impact of earnings management and financial performance on listed non-financial firms in Nigeria.
4. To examine the impact of form’s growth opportunity and performance on earnings management in non listed firms in Nigeria.
5. To examine the relationship between financial performance and earnings management.
6. To examine ways of how to earnings management (FP) and firm performance can help in influencing shareholders wealth.

1.3. RESEARCH QUESTIONS

1. What are the factors affecting earnings management and financial performance of listed non financial firms in Nigeria?
2. What are the determinants of Earnings Management?
3. What are the impacts of earnings management and financial performance on listed non-financial firms in Nigeria?
4. What are the impact of form’s growth opportunity and performance on earnings management in non listed firms in Nigeria?
5. What is the relationship between financial performance and earnings management?
6. What are the ways in which earnings management (FP) and firm performance can help in influencing shareholders wealth?

1.5 RESEARCH HYPOTHESES

H01: There is no significant impact of earnings management and financial performance on listed non-financial firms in Nigeria.

H01: There is no significant relationship between financial performance and earnings management.

1.6 SIGNIFICANCE OF THE STUDY

First by analyzing the magnitude of earnings management for Nigerian firms using discretionary accruals, the study will be able to shed light on how such activities can be curtailed. The study will apparently be conducting one of the first in-depth comparative analyses of earnings management in Nigerian context. The findings can add to the efforts to better understand the effectiveness of the ownership structure of the Nigerian corporate entities. This study will help stakeholders and investors in analyzing the financial performance of a firm holistically both financial, non-financial performance and the cash position. It will also help the Government and other regulatory agencies in regulating the industry and developing new regulations as the economy grows and as investors’ needs increase. This will build investor confidence which is the key for growth and development of any economy globally. Further, it will help firms in upholding good corporate governance while exercising transparency, accountability and responsibility in their financial reporting.

1.7    SCOPE OF THE STUDY 

The study is based on earnings management and financial performance of listed non-financial firms in Nigeria.

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Earnings Management: Is the use of accounting techniques to produce financial reports that present an overly positive view of a company's business activities and financial position. Many accounting rules and principles require company management to make judgments.

Financial Performance: Is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues.

Firms: A commercial organization that operates on a for-profit basis and participates in selling goods or services to consumers. The management of a business firm will typically develop a set of organizational objectives and a strategy for meeting those goals to help employees understand where the company is headed and how it intends to get there.