The effect of corporate governance on earnings management of companies listed at the Nairobi securities exchange

Abstract

Following the spate of well-publish corporate scandals that took its toll with the collapse of once the prestigious companies such as Enron and Worldcom reiterated the need for an investigation into the quality of financial reports and increased the clamoring for a better governance mechanism worldwide. The aim of this research was to determine the effect of corporate governance on earnings management of companies listed at NSE in Kenya. The corporate governance variables used in the study are board size, board independence, audit committee independence and CEO shares while discretionary accrual was used to proxy for earnings management. Sample sizes of thirty (30) companies were selected from listed companies at NSE for the period 2009 to 2013. This gives us a total of 150 company years/data observations. Regression Analysis was used in the analysis of data and result interpreted based on the R-squared R-squared, adjusted R-squared, coefficients of the independent variables and their p-values. From the findings, the study found that a unit increase in board size will cause an increase in earnings management and statistically significant , further a unit increase in board independence will lead to a decrease in earnings management and statistically significant, a unit increase in audit committee independence will lead to a decrease in earnings management and statistically not significant, a unit increase in CEO shares will lead to an increase in earnings management but statistically not significant and a unit increase in Firm Size will further lead to a decrease in earnings management and statistically significant. The study concluded that earnings management is negatively related to board independence. The study also concluded, that board independence is negatively related to earnings management. The study recommends the need for effective corporate governance practice at board selection level of the companies quoted at NSE. Re-examining the criteria used in selection of directors in the companies and ensure that corporate boards are more independent. This will reduce the earnings management and will ensure that the directors are accountable to the shareholders with a ripple effect of improving investor confidence.