Development of a Sustainable Corporate Governance and Earnings Management: Framework of Quoted Manufacturing Firms in Nigeria

Abstract

This study examined the development of a sustainable corporate governance and earnings management framework for quoted manufacturing firms in Nigeria. The study investigated the relationships between key corporate governance mechanisms such as Board Composition (BCM), External Audit (EAD), and Audit Committee Independence (ACI) and earnings management indicators including Income Smoothing (ICS), Earnings Restatement (ERI), and Discretionary Accruals (DAC). The study was anchored on Agency Theory, which explains the monitoring role of governance structures in mitigating managerial opportunism and improving financial reporting quality. The study adopted an ex post facto research design based on a quantitative approach using secondary data. Data were obtained from the annual financial reports of fifteen (15) listed consumer goods manufacturing firms quoted on the Nigerian Exchange Group over a ten-year period. The use of panel data enabled the study to capture both cross-sectional and time-series variations in the variables. The analysis employed descriptive statistics to summarize the characteristics of the data, while panel regression techniques, specifically fixed effects and random effects models were estimated using EViews 15 to determine the relationships between the governance variables and earnings management proxies. The choice between the fixed and random effects estimators was guided by the Hausman specification test to ensure robustness and consistency of the estimated parameters. The empirical findings reveal that external audit does not significantly influence income smoothing, discretionary accruals, or earnings restatements. Audit committee independence was found to have a positive and statistically significant effect on income smoothing, while its effects on discretionary accruals and earnings restatements were statistically insignificant. Board composition showed a negative but insignificant relationship with income smoothing but exhibited positive and significant relationships with both discretionary accruals and earnings restatements. These results suggest that corporate governance mechanisms in the Nigerian manufacturing sector appear to function more as reactive governance tools responding to reporting irregularities rather than as preventive monitoring mechanisms.