The Relationship Between Corporate Governance Practices And Earnings Management For Companies Quoted At The Nairobi Securities Exchange
The regulatory response to financial scandals has been to take measures to protect information transparency, mitigate conflicts of interest and ensure the independence of auditors, all in order to protect the investors interests’ and increase the confidence of capital markets (Leuz, Nanda & Wysocki, 2003). Unethical managers may be attracted to misstate financial statements when growth slows to maintain the appearance of consistent growth of the company (Summers and Sweeney, 2007). According to Dechow et al. (1995) earnings management is a strategy used by the management of a company to deliberately manipulate the company’s earnings so that the figures match a pre-determined target. This practice is carried out for the purpose of income smoothing. Empirical studies have also concluded various relationships exist between corporate governance and earnings management. In Kenya, cases where managers and directors have been accused of poor corporate governance resulting to corporate scandals include the collapse of Euro Bank in 2004, the placement of Uchumi Supermarkets under receivership in 2004 due to mismanagement. The objective of the study was to establish the relationship between corporate governance practices and earnings management for companies quoted at the NSE. This study adopted a descriptive research design. The target population consisted of the 49 companies that had been continuously and actively trading at the NSE between January 2010 and December 2012. The study used secondary quantitative data to analyze the relationship between corporate governance and earnings management. This data covered the period 2010 to 2012. The data collected was analyzed using linear regression and correlation analysis to test the relationship between the dependent variable Discretionary Accruals as an earnings management tool and specific corporate governance variables assumed to fit the NSE. The regression results were interpreted based on the Pearson correlation, R-squared, adjusted R-squared, Test of significance using F statistic through the Analysis of Variance (ANOVA), coefficients of the independent variables and their p-values. From the findings, the study found that a unit increase in ownership concentration will cause a decrease in earnings management, further a unit increase in board size will lead to a decrease in earnings management, a unit increase in board independence will lead to a decrease in earnings management, a unit increase in board activity will lead to an increase in earnings management and a unit increase in CEO duality will further lead to an increase in earnings management. The study concluded that earnings management is negatively related to ownership concentration. The study also concluded, that board independence is negatively related to earnings management. In addition the study also concluded that adding outside directors to the board may improve in governance practices and may be helpful to the board in monitoring the firm’s management of earnings which implies that investors will rely on the information revealed in the financial statements when there are more outside directors in the board. The study recommended the need for effective corporate governance practices at senior managerial level of quoted companies in Kenya to contribute to reduced earnings management and hence improve on actual firm liquidity and avert possible collapse of public organizations in Kenya.