Does the Effectiveness of Risk Management Committee Mitigate Earnings Management Practices?
DOI:
https://doi.org/10.24191//jibe.v9i1.905Keywords:
Risk management committee, earnings management, corporate governance, NigeriaAbstract
Recently, there has been a lot of debate on the issues of earnings management practices. Most of these arguments have been confirmed by past studies in developed economies, where their regulations and institutional settings of corporate governance varied from those of emerging markets. Accordingly, corporate governance best practice has been considered an effective monitoring mechanism for strengthening the credibility and reliability of financial reporting. This study examines the effectiveness of risk management committee (RMC) attributes in mitigating earnings management (EM) practices in Nigeria. The study used a sample of 365 firm-year observations of listed non-financial companies from 2018 to 2022. Driscoll and Kraay’s fixed effect standard error regression model was used to test the hypotheses. The study finds that RMC size and expertise have a negative effect on both AEM and REM. However, RMC independence is found to negative effect on REM only. Moreover, additional test validates that RMC scores (effectiveness) are significantly associated with lower EM practices. Our results are robust under alternative regression and measurements for endogeneity. The findings provide enormous insight to regulators, policymakers, and investors on the ongoing debate surrounding the effectiveness of the RMC attributes in mitigating EM practices, and the effectiveness of the revised NCCG 2018. Besides, the findings will provide important intuition to shareholders, financial analysts, and academia about the effective role of stand-alone RMC
References
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Abdullah, A., & Ismail, K. N. I. K. (2016). The effectiveness of risk management committee and hedge accounting practices in Malaysia. Information (Japan), 19(7B), 2971–2976.
Abdulmalik, S., Che, A., Usman, A., & Aliyu, B. (2015). Financial Reporting Quality: the Role of Independent and Grey Directors, Board Continuous Training and Internal Audit Function. Ipbj, 7(2), 40.
Abubakar, A. H., Ado, A. B., Mohamed, M. I., & Mustapha, U. A. (2018). The Effect of Risk Management Committee Attributes and Board Financial Knowledge on the Financial Performance of Listed Banks in Nigeria. 1(5), 7–13.
Agustia, D., Harymawan, I., Nasih, M., & Nowland, J. (2022). Joint board management meetings and earnings management. Asian Review of Accounting, 30(4), 540–558. https://doi.org/10.1108/ARA-09-2021-0165
Ahmad, R. A. R., Abdullah, N., Jamel, N. E. S. M., & Omar, N. (2015). Board Characteristics and Risk Management and Internal Control Disclosure Level: Evidence from Malaysia. Procedia Economics and Finance, 31(2011), 601–610. https://doi.org/10.1016/s2212-5671(15)01147-8
Al-Haddad, L., & Whittington, M. (2019). The impact of corporate governance mechanisms on real and accrual earnings management practices: evidence from Jordan. Corporate Governance (Bingley), 19(6), 1167–1186. https://doi.org/10.1108/CG-05-2018-0183
Al-Hadi, A., Hasan, M. M., & Habib, A. (2016). Risk Committee, Firm Life Cycle, and Market Risk Disclosures. Corporate Governance: An International Review, 24(2), 145–170. https://doi.org/10.1111/corg.12115
Aldhamari, R., Mohamad Nor, M. N., Boudiab, M., & Mas’ud, A. (2020). The impact of political connection and risk committee on corporate financial performance: evidence from financial firms in Malaysia. Corporate Governance (Bingley), 20(7), 1281–1305. https://doi.org/10.1108/CG-04-2020-0122
Alexander, D. (2010). Corporate governance and earnings management: going beyond agency theory and secondary data. International Journal of Corporate Governance, 2(1), 31. https://doi.org/10.1504/ijcg.2010.035233
Alhadab, M. (2018). Abnormal audit fees and accrual and real earnings management: evidence from UK. Journal of Financial Reporting and Accounting, 16(3), 395–416. https://doi.org/10.1108/JFRA-07-2017-0050
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Annuar, H. A., & Abdul Rashid, H. M. (2015). An investigation of the control role and effectiveness of independent non-executive directors in malaysian public listed companies. Managerial Auditing Journal, 30(6–7), 582–609. https://doi.org/10.1108/MAJ-09-2013-0936
Ayuningtyas, Eka Sari, & Harymawan, Iman. (2022). Risk Management Committee and Textual Risk Disclosure. Risks, 10(2).
Bajra, U., & Čadež, S. (2018). Audit committees and financial reporting quality: The 8th EU Company Law Directive perspective. Economic Systems, 42(1), 151–163. https://doi.org/10.1016/j.ecosys.2017.03.002
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Bédard, J., Chtourou, S. M., & Courteau, L. (2004). The effect of audit committee expertise, independence, and activity on aggressive earnings management. Auditing, 23(2), 13–35. https://doi.org/10.2308/aud.2004.23.2.13
Bhuiyan, M. B. U., Salma, U., Roudaki, J., & Tavite, S. (2020). Financial reporting quality, audit fees and risk committees. Asian Review of Accounting, 28(3), 423–444. https://doi.org/10.1108/ARA-01-2019-0017
Bin-Ghanem, H., & Ariff, A. M. (2016). The effect of board of directors and audit committee effectiveness on internet financial reporting Evidence from gulf co-operation council countries. Journal of Accounting in Emerging Economies, 6(4), 429–448. https://doi.org/10.1108/JAEE-07-2014-0037
Boachie, C., & Mensah, E. (2022). The effect of earnings management on firm performance: The moderating role of corporate governance quality. International Review of Financial Analysis, 83(January), 102270. https://doi.org/10.1016/j.irfa.2022.102270
Boudiab, M., Mehiaddine, S., & Abderrahmane, Y. (2021). The Impact of Risk Management Committee Characteristics on Corporate Voluntary Disclosure in Malaysia. International Journal of Intellectual Human Resource Management (IJIHRM), 02(02), 53–59. https://doi.org/10.46988/ijihrm.02.02.2021.007
Boyd, B. (1990). Corporate Linkages and Organizational Environment : A Test of the Resource Dependence Model. Strategic Management Journal, 11(6), 419–430.
Braam, G., Nandy, M., Weitzel, U., & Lodh, S. (2015a). Accrual-based and real earnings management and political connections. International Journal of Accounting, 50(2), 111–141. https://doi.org/10.1016/j.intacc.2013.10.009
Braam, G., Nandy, M., Weitzel, U., & Lodh, S. (2015b). Accrual-based and real earnings management and political connections. International Journal of Accounting, 50(2), 111–141. https://doi.org/10.1016/j.intacc.2013.10.009
Bzeouich, B., Lakhal, F., & Dammak, N. (2019). Earnings management and corporate investment efficiency: does the board of directors matter? Journal of Financial Reporting and Accounting, 17(4), 650–670. https://doi.org/10.1108/JFRA-06-2018-0044
Chi, W., Lisic, L. L., & Pevzner, M. (2011). Is enhanced audit quality associated with greater real earnings management? Accounting Horizons, 25(2), 315–335. https://doi.org/10.2308/acch-10025
Cohen, D. A., Dey, A., & Lys, T. Z. (2008). Real and accrual-based earnings management in the pre- and post-sarbanes-oxley periods. Accounting Review, 83(3), 757–787. https://doi.org/10.2308/accr.2008.83.3.757
Cohen, D. A., & Zarowin, P. (2010). Accrual-based and real earnings management activities around seasoned equity offerings. Journal of Accounting and Economics, 50(1), 2–19. https://doi.org/10.1016/j.jacceco.2010.01.002
Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2–3), 344–401. https://doi.org/10.1016/j.jacceco.2010.09.001
Driscoll, J., & Kraay, A. C. (1998). Consistent covariance matrix estimation with spatially dependent data. Review of Economics and Statistics, 80, 549-560.
Efenyumi, P. E., & Okoye, E. I. (2022). Risk Management Committee Characteristics ’ Effects on Listed Companies ’ Earnings Quality. 12(3), 81–93.
Elamer, A. A., & Benyazid, I. (2018a). The impact of risk committee on financial performance of UK financial institutions. International Journal of Accounting and Finance, 8(2), 161. https://doi.org/10.1504/ijaf.2018.10014470
Elamer, A. A., & Benyazid, I. (2018b). The Impact of Risk Committee on Financial Performance of UK Financial The Impact of Risk Committee on Financial Performance of UK Financial Institutions. March. https://doi.org/10.1504/IJAF.2018.10014470
Elamer, A., & Benyazid, I. (2018). The impact of risk committee on financial performance of UK financial institutions. International Journal of Accounting and Finance, 8.
Elghuweel, M. I., Ntim, C. G., Opong, K. K., & Avison, L. (2017). Corporate governance, Islamic governance and earnings management in Oman A new empirical insights from a behavioural theoretical framework. Journal of Accounting in Emerging Economies, 7(2), 190–224. https://doi.org/10.1108/JAEE-09-2015-0064
Eng, L. L., Fang, H., Tian, X., Yu, T. R., & Zhang, H. (2019). Financial crisis and real earnings management in family firms: A comparison between China and the United States. Journal of International Financial Markets, Institutions and Money, 59, 184–201. https://doi.org/10.1016/j.intfin.2018.12.008
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Geraldes Alves, S. M. (2011). The effect of the board structure on earnings management: evidence from Portugal. Journal of Financial Reporting and Accounting, 9(2), 141–160. https://doi.org/10.1108/19852511111173103
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Harymawan, I., Prabhawa, A. A., Nasih, M., & Putra, F. K. G. (2021). Risk management committee, auditor choice and audit fees. Risks, 9(9). https://doi.org/10.3390/risks9090156
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Hines, C. S., Masli, A., Mauldin, E. G., & Peters, G. F. (2015). Board risk committees and audit pricing. Auditing, 34(4), 59–84. https://doi.org/10.2308/ajpt-51035
Hoechle, D. (2007). Robust standard errors for panel regressions with cross-sectional dependence. Stata Journal, 7(3), 281–312. doi: 10.1177/1536867x0700700301.
Imen, F., & Anis, J. (2021). The moderating role of audit quality on the relationship between auditor reporting and earnings management: empirical evidence from Tunisia. EuroMed Journal of Business, 16(4), 416–430. https://doi.org/10.1108/EMJB-03-2020-0024
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Jia, J., Li, Z., & Munro, L. (2019). Risk management committee and risk management disclosure: evidence from Australia. Pacific Accounting Review, 31(3), 438–461. https://doi.org/10.1108/PAR-11-2018-0097
Joshi, J. M., Dalei, N. N., & Mehta, P. (2021). Estimation of gross refining margin of Indian petroleum refineries using Driscoll-Kraay standard error estimator. Energy Policy, 150, 112148.
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Malahim, S. S. (2023). The relationship between the risk disclosure and risk management committee on banks value : empirical evidence from Jordan. International Journal of Prossional Business Review, 8(3), 1–29.
Abdou, H. A., Ellelly, N. N., Elamer, A. A., Hussainey, K., & Yazdifar, H. (2021). Corporate governance and earnings management nexus: Evidence from the UK and Egypt using neural networks. International Journal of Finance and Economics, 26(4), 6281–6311. https://doi.org/10.1002/ijfe.2120
Abdullah, A., & Ismail, K. N. I. K. (2016). The effectiveness of risk management committee and hedge accounting practices in Malaysia. Information (Japan), 19(7B), 2971–2976.
Abdulmalik, S., Che, A., Usman, A., & Aliyu, B. (2015). Financial Reporting Quality: the Role of Independent and Grey Directors, Board Continuous Training and Internal Audit Function. Ipbj, 7(2), 40.
Abubakar, A. H., Ado, A. B., Mohamed, M. I., & Mustapha, U. A. (2018). The Effect of Risk Management Committee Attributes and Board Financial Knowledge on the Financial Performance of Listed Banks in Nigeria. 1(5), 7–13.
Agustia, D., Harymawan, I., Nasih, M., & Nowland, J. (2022). Joint board management meetings and earnings management. Asian Review of Accounting, 30(4), 540–558. https://doi.org/10.1108/ARA-09-2021-0165
Ahmad, R. A. R., Abdullah, N., Jamel, N. E. S. M., & Omar, N. (2015). Board Characteristics and Risk Management and Internal Control Disclosure Level: Evidence from Malaysia. Procedia Economics and Finance, 31(2011), 601–610. https://doi.org/10.1016/s2212-5671(15)01147-8
Al-Haddad, L., & Whittington, M. (2019). The impact of corporate governance mechanisms on real and accrual earnings management practices: evidence from Jordan. Corporate Governance (Bingley), 19(6), 1167–1186. https://doi.org/10.1108/CG-05-2018-0183
Al-Hadi, A., Hasan, M. M., & Habib, A. (2016). Risk Committee, Firm Life Cycle, and Market Risk Disclosures. Corporate Governance: An International Review, 24(2), 145–170. https://doi.org/10.1111/corg.12115
Aldhamari, R., Mohamad Nor, M. N., Boudiab, M., & Mas’ud, A. (2020). The impact of political connection and risk committee on corporate financial performance: evidence from financial firms in Malaysia. Corporate Governance (Bingley), 20(7), 1281–1305. https://doi.org/10.1108/CG-04-2020-0122
Alexander, D. (2010). Corporate governance and earnings management: going beyond agency theory and secondary data. International Journal of Corporate Governance, 2(1), 31. https://doi.org/10.1504/ijcg.2010.035233
Alhadab, M. (2018). Abnormal audit fees and accrual and real earnings management: evidence from UK. Journal of Financial Reporting and Accounting, 16(3), 395–416. https://doi.org/10.1108/JFRA-07-2017-0050
Alhadab, M., Clacher, I., & Keasey, K. (2015). Real and accrual earnings management and IPO failure risk. Accounting and Business Research, 45(1), 55–92. https://doi.org/10.1080/00014788.2014.969187
Annuar, H. A., & Abdul Rashid, H. M. (2015). An investigation of the control role and effectiveness of independent non-executive directors in malaysian public listed companies. Managerial Auditing Journal, 30(6–7), 582–609. https://doi.org/10.1108/MAJ-09-2013-0936
Ayuningtyas, Eka Sari, & Harymawan, Iman. (2022). Risk Management Committee and Textual Risk Disclosure. Risks, 10(2).
Bajra, U., & Čadež, S. (2018). Audit committees and financial reporting quality: The 8th EU Company Law Directive perspective. Economic Systems, 42(1), 151–163. https://doi.org/10.1016/j.ecosys.2017.03.002
Bansal, M. (2021). Board independence and earnings management: influence of family business generation. Journal of Asia Business Studies, 15(5), 748–768. https://doi.org/10.1108/JABS-07-2020-0280
Bédard, J., Chtourou, S. M., & Courteau, L. (2004). The effect of audit committee expertise, independence, and activity on aggressive earnings management. Auditing, 23(2), 13–35. https://doi.org/10.2308/aud.2004.23.2.13
Journal of International Business, Economics and Entrepreneurship
e-ISSN :2550-1429 Volume 9, (1) June 2024
Bhuiyan, M. B. U., Salma, U., Roudaki, J., & Tavite, S. (2020). Financial reporting quality, audit fees and risk committees. Asian Review of Accounting, 28(3), 423–444. https://doi.org/10.1108/ARA-01-2019-0017
Bin-Ghanem, H., & Ariff, A. M. (2016). The effect of board of directors and audit committee effectiveness on internet financial reporting Evidence from gulf co-operation council countries. Journal of Accounting in Emerging Economies, 6(4), 429–448. https://doi.org/10.1108/JAEE-07-2014-0037
Boachie, C., & Mensah, E. (2022). The effect of earnings management on firm performance: The moderating role of corporate governance quality. International Review of Financial Analysis, 83(January), 102270. https://doi.org/10.1016/j.irfa.2022.102270
Boudiab, M., Mehiaddine, S., & Abderrahmane, Y. (2021). The Impact of Risk Management Committee Characteristics on Corporate Voluntary Disclosure in Malaysia. International Journal of Intellectual Human Resource Management (IJIHRM), 02(02), 53–59. https://doi.org/10.46988/ijihrm.02.02.2021.007
Boyd, B. (1990). Corporate Linkages and Organizational Environment : A Test of the Resource Dependence Model. Strategic Management Journal, 11(6), 419–430.
Braam, G., Nandy, M., Weitzel, U., & Lodh, S. (2015a). Accrual-based and real earnings management and political connections. International Journal of Accounting, 50(2), 111–141. https://doi.org/10.1016/j.intacc.2013.10.009
Braam, G., Nandy, M., Weitzel, U., & Lodh, S. (2015b). Accrual-based and real earnings management and political connections. International Journal of Accounting, 50(2), 111–141. https://doi.org/10.1016/j.intacc.2013.10.009
Bzeouich, B., Lakhal, F., & Dammak, N. (2019). Earnings management and corporate investment efficiency: does the board of directors matter? Journal of Financial Reporting and Accounting, 17(4), 650–670. https://doi.org/10.1108/JFRA-06-2018-0044
Chi, W., Lisic, L. L., & Pevzner, M. (2011). Is enhanced audit quality associated with greater real earnings management? Accounting Horizons, 25(2), 315–335. https://doi.org/10.2308/acch-10025
Cohen, D. A., Dey, A., & Lys, T. Z. (2008). Real and accrual-based earnings management in the pre- and post-sarbanes-oxley periods. Accounting Review, 83(3), 757–787. https://doi.org/10.2308/accr.2008.83.3.757
Cohen, D. A., & Zarowin, P. (2010). Accrual-based and real earnings management activities around seasoned equity offerings. Journal of Accounting and Economics, 50(1), 2–19. https://doi.org/10.1016/j.jacceco.2010.01.002
Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2–3), 344–401. https://doi.org/10.1016/j.jacceco.2010.09.001
Driscoll, J., & Kraay, A. C. (1998). Consistent covariance matrix estimation with spatially dependent data. Review of Economics and Statistics, 80, 549-560.
Efenyumi, P. E., & Okoye, E. I. (2022). Risk Management Committee Characteristics ’ Effects on Listed Companies ’ Earnings Quality. 12(3), 81–93.
Elamer, A. A., & Benyazid, I. (2018a). The impact of risk committee on financial performance of UK financial institutions. International Journal of Accounting and Finance, 8(2), 161. https://doi.org/10.1504/ijaf.2018.10014470
Elamer, A. A., & Benyazid, I. (2018b). The Impact of Risk Committee on Financial Performance of UK Financial The Impact of Risk Committee on Financial Performance of UK Financial Institutions. March. https://doi.org/10.1504/IJAF.2018.10014470
Elamer, A., & Benyazid, I. (2018). The impact of risk committee on financial performance of UK financial institutions. International Journal of Accounting and Finance, 8.
Elghuweel, M. I., Ntim, C. G., Opong, K. K., & Avison, L. (2017). Corporate governance, Islamic governance and earnings management in Oman A new empirical insights from a behavioural theoretical framework. Journal of Accounting in Emerging Economies, 7(2), 190–224. https://doi.org/10.1108/JAEE-09-2015-0064
Eng, L. L., Fang, H., Tian, X., Yu, T. R., & Zhang, H. (2019). Financial crisis and real earnings management in family firms: A comparison between China and the United States. Journal of International Financial Markets, Institutions and Money, 59, 184–201. https://doi.org/10.1016/j.intfin.2018.12.008
Financial Reporting Council of Nigeria 2018 (FRCN 2018). Nigerian Code of Corporate Governance. https://www.financialreportingcouncil.gov.ng/the-nigerian-code-of-corporate governance-2018-nccg-2018-unveiled/
Gao, S., Meng, Q., Chan, K. C., & Wu, W. (2017). Earnings management before IPOs: Are institutional investors misled? Journal of Empirical Finance, 42(January), 90–108. https://doi.org/10.1016/j.jempfin.2017.02.003
Journal of International Business, Economics and Entrepreneurship
e-ISSN :2550-1429 Volume 9, (1) June 2024
Geraldes Alves, S. M. (2011). The effect of the board structure on earnings management: evidence from Portugal. Journal of Financial Reporting and Accounting, 9(2), 141–160. https://doi.org/10.1108/19852511111173103
Githaiga, P. N., Muturi Kabete, P., & Caroline Bonareri, T. (2022). Board characteristics and earnings management. Does firm size matter? Cogent Business and Management, 9(1). https://doi.org/10.1080/23311975.2022.2088573
Habib, A., Ranasinghe, D., Wu, J. Y., Biswas, P. K., & Ahmad, F. (2022). Real earnings management: A review of the international literature. Accounting and Finance, 1–66. https://doi.org/10.1111/acfi.12968
Han, W., Yuan, F., Wang, C., Luan, D., Wang, H., Han, W., Ã, F. Y., Wang, H., Wang, C., & Luan, D. (2023). The impact of carbon risk on real earnings management. Economic Research-Ekonomska Istraživanja, 36(3). https://doi.org/10.1080/1331677X.2023.2218461
Harymawan, I., Prabhawa, A. A., Nasih, M., & Putra, F. K. G. (2021). Risk management committee, auditor choice and audit fees. Risks, 9(9). https://doi.org/10.3390/risks9090156
Hillman, A. J., & Dalziel, T. (2003). Boards of directors and firm performance: Integrating agency and resource dependence perspectives. Academy of Management Review, 28(3), 383–396. https://doi.org/10.5465/AMR.2003.10196729
Hines, C. S., Masli, A., Mauldin, E. G., & Peters, G. F. (2015). Board risk committees and audit pricing. Auditing, 34(4), 59–84. https://doi.org/10.2308/ajpt-51035
Hoechle, D. (2007). Robust standard errors for panel regressions with cross-sectional dependence. Stata Journal, 7(3), 281–312. doi: 10.1177/1536867x0700700301.
Imen, F., & Anis, J. (2021). The moderating role of audit quality on the relationship between auditor reporting and earnings management: empirical evidence from Tunisia. EuroMed Journal of Business, 16(4), 416–430. https://doi.org/10.1108/EMJB-03-2020-0024
Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305 (1976). Economic Analysis of the Law, H. MECKLING Copyright © 2003 by Blackwell Publishing Ltd, 162–176.
Jia, J., Li, Z., & Munro, L. (2019). Risk management committee and risk management disclosure: evidence from Australia. Pacific Accounting Review, 31(3), 438–461. https://doi.org/10.1108/PAR-11-2018-0097
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