CORPORATE GOVERNANCE AND ACCOUNTING CONSERVATISM OF LISTED CONSUMER GOODS COMPANIES IN NIGERIA

ABSTRACT

The study investigated the impact of corporate governance and accounting conservatism of listed consumer goods companies in Nigeria. The survey research was used in this study to sample the opinion of respondents. This method involved random selection of respondents who were administered with questionnaires. Relevant conceptual, theoretical and empirical literature was reviewed. The target population of the study comprised selected employees from three consumer firms in Nigeria.A total of three hundred (300) respondents constitute the sample size for this study. The descriptive and analytical approach was adopted using Chi-square to test and analyze the hypotheses earlier stated. Findings revealed that there is a significant impact of board size on accounting conservatism of listed consumer goods companies in Nigeria. Findings of the study also reveals that there is a significant impact of board independence on accounting conservatism of listed consumer goods companies in Nigeria. Findings of the study also reveals that there is a significant impact of audit committee effectiveness on accounting conservatism of listed manufacturing firms in Nigeria. Finally, findings of the study further reveals that There is a significant impact of ownership structure on accounting conservatism of listed consumer goods companies in Nigeria. It was therefore concluded that corporate governance significantly impacted on accounting conservatism of listed consumer goods companies in Nigeria. It was recommended that Companies should avoid small board sizes and target maintaining the optimal number of members on their boards consistent with governance codes of practice. Evidence from this study shows that large board size has a significant positive trade-off on accounting quality and conservatism.

Keywords: Corporate Governance, Accounting Conservatism, Consumer Goods Companies

CHAPTER ONE

INTRODUCTION

1. Background of the Study

The division of ownership and control in joint-stock corporations necessitates the use of strong corporate governance procedures. In order to run the business and make strategic and operational decisions that serve the interests of the company and its shareholders, managers are hired by the company's owners, the shareholders (Liu, Valenti, & Chen, 2016).Conflicts of interest frequently arise from the connection between agents and owners since they are two distinct entities. Although the managers work to protect the interests of all stakeholders and maximise returns to shareholders, they frequently prioritise their own interests over the financial interests of their principals (Haji, 2014; Smith, 2003). Corporate managers might conceal and profit from price-sensitive information by employing insider knowledge(Appuhami& Bhuyan, 2015; Liu, Valenti, & Chen, 2016).

          Although principal-agent issues in corporations have existed since the industrial revolution, the collapse of the former energy giant Enron, Inc. brought this challenge's subtle nature to the attention of business and political leaders worldwide.A great deal of employment were lost and shareholder value was squandered by Enron's bankruptcy (Liu, Miletkov, Wei, & Yang, 2015). After Enron, there were several high-profile financial scandals and company failures that garnered headlines, including Waste Management, Parmalat, Lehman Brothers, and Global Crossing(Burnsed, 2009CITE). Scholars have proposed that inadequate corporate governance frameworks are the underlying cause of the financial scandals and dysfunctional business behaviour (Conyon& He, 2016; Ueng, 2016). In addition, ineptitude, a bad corporate culture, and leadership philosophies that prioritise immediate gain above long-term goals, reckless risk-taking, and managers' self-interest all contribute to the issue (Zona, 2016). Poor corporate governance systems and the board of directors' lax and inefficient implementation of corporate governance norms have been linked to corporate governance issues by O'Connor and Byrne (2015) and Rashid (2015).

          In the wake of Enron, Inc.'s demise, the U.S. government passed the Sarbanes-Oxley (SOX) Act of 2002 to make sure firm directors are more responsible to shareholders, follow corporate governance guidelines, and are transparent(Malthotra, Poteau, & Fritz, 2013).

          Although the ideas of good governance and governance are not new—they have been there since the dawn of human civilization—development literature has only lately begun to employ them. (Klein, 2018). Additionally, he clarified that governance refers to the decision-making process and the manner in which choices are carried out or not. Corporate governance, international governance, financial governance, national governance, local governance, and so on are some of the constructs in which governance may be employed.Since decision-making and the means by which choices are carried out are often referred to as governance, the current study is aligned with corporate governance. Olayinka and Chukwuma (2012) have consequently suggested that, corporate governance is the system by which corporate organization are led and controlled noting the peculiar leadership and organizational attributes which the main objective is the fundamental need to enhance all stakeholders’ value and also to balance other pluralistic interest within and outside the corporate organization.

          The board of directors is an important input organ for the execution of this corporate responsibility and the oversight function required by the firm in its activities. Therefore, board size, board independence, board gender structure, board remuneration and financial expertise attributes are readily the proxies to look out for in measuring corporate governance characteristics (Masood, 2011). In this vein, Abindin, Kamal and Jusoff (2019) declared that, to ensure a balance structure adherence must be observed of the provisions of local and international codes regulating the corporate governance practice in each case as indicated in the measurement proxies above. The aim to gain maximum financial performance of the firm in view such that the various stakeholders are going to be satisfied at the outcome of the firm’s performance. Relatively, Ehikioya (2021) argued that, a good corporate governance attribute is the balance structure adopted in an organizational composition which tends to increase efficiency and reduce the likely negative effects on the earnings or revenue of a particular corporate body.

          On the other hand, Financial performance has been opined by Benjamin (2019) to mean the complete economic and accounting evaluation of firm’s standing in areas of financial indexes like assets and liabilities, equity, expenses, revenue and the overall profitability result of firm at a given period in time. It can be said to mean simply the measure which indicates how well a firm has used it scarce resources to earn additional value for itself, which also include the process of evaluating the results of company’s policies and its operation in terms of the decision-making inputs or qualities. According to Eshna (2021) measurement of corporate governance categories, depending on the type of industry and the result which is being sorted about a particular firm. Some of the general categories of financial performance are: the gross profit, net profit margin, working capital current ratio, quick ratio, leverage measurement and debt to equity ratio. (Eshna, 2021). Muideen (2019) and Ifeoma (2020) both documented that, consumer goods companies are companies or firms producing consumable products (Household product), which requires regular replacement and consist of food, packaged goods, clothing, beverages, cosmetics, automobiles, electronics, drinks, etc. the contribution of this sub sector to Nigeria’s economy is significant, put at about 24.3% of the $514.3 billion dollars GDP of the country. It makes it the third largest sector in Nigeria and providing millions of jobs opportunities for the teeming citizens (Muideen, 2019). Nigeria has the largest GDP in Africa and the most populous. Given the burgeoning growth in the population size and couple with the rapid increase in the nation’s demographic status (i.e. Market size, western culture influence on the population and changes in consumer taste, etc) the demand for households goods will be high there is the need therefore for a strategic and quality decision making mechanism anchored on a balanced corporate attributes in terms of Board Size (BS), Board Independence (BI), Board Audit Committee (BAC), Board Diversity (BD), rested on race and gender, and the Leadership Structure (LS), etc. Essentially, Pania, Rivelles and Sapena (2018) have suggested that the above, are readily the proxies for measuring corporate governance attributes. Consumer goods firms are majorly concern with the decision making mechanism which concerns corporate operation and the policies to be made in terms of corporate marketing strategies, innovative product design, branding decision, etc. Therefore, a consumer goods from must have a balance mechanism in the decision input to achieve good financial performance.

          However, there is no system or mechanism of corporate governance attributes that can fully protect and guarantee full effective corporate financial performance due to the dynamic nature and trends associated with the target markets. Hence the need for a continuous study to review and update the existing decision-making mechanism so as to reduce the risk in financial performance link to consumer goods firms in Nigeria. It is based on this background that the present study seeks to examine the impact of corporate governance and accounting conservatism of listed consumer goods companies in Nigeria.

1. Statement of Problem

Despite the significance of conservatism as a governance tool employed by directors, most studies on corporate governance mechanisms in Nigeria are sparse and fragmented. More so, deploying conservatism might be influenced by the corporate governance structures of adopting companies (Adindu, Ekung& Ukpong, 2022). Exploring the linkages between corporate governance (CG) and conservatism opens up companies to not just the impact of conservatism on earnings, but the impact of CG on conservatism. Conservatism is an accounting principle that tends to generate profit and asset values. Conservatism slows revenue recognition and accelerates cost recognition which arises from the application of the principle of conservatism. Conservatism critics argue that this principle causes the financial statements to be biased so it cannot be used as a tool to evaluate corporate risk (Hansen, Hong, & Park, 2018). Particularly, corporate governance comprises all the provisions and mechanisms that guarantee that the assets of the firm are managed proficiently and in the interest of the providers of finance (Uford, 2017), moderating the unsuitable usurpation of resources by managers or any other party to the firm. The acceleration in the recognition of bad news provides the board of directors with early cautioning signals to investigate the origin of such news (Ahmed, Alabdullah, Thottoli, &Maryanti, 2020). A corporate governance structure combines controls, policies and guidelines that drive the organization toward its objectives while also satisfying stakeholders' needs (Uford& Duh, 2021).

          However, it has been argued that prudence and conservatism are not desirable qualities of reported information and are considered to be inadequate ways of dealing with uncertainty, due to the consistent undervaluation of net assets. It was asserted that accounting conservatism biases financial statement numbers and results in inefficient decision-making (Jun, Pinghsun, & Yan, 2020). Thus, empirical evidence has shown a direct association between corporate governance mechanisms and the implementation of conservative accounting policies. In spite of the importance of these two issues and their significant advantages as well as robust international literature, there is a paucity of literature in, Nigeria (Shiiyanbola, Folajimi, & Rafiu, 2019). Looking at the studies, time lag, and different proxy selected as well as techniques for data analyses. This study filled the gap in academic research by ascertaining Corporate Governance mechanism and accounting conservation of listed manufacturing companies in Nigeria.

1. Objectives of the Study

The main objective of this study is to examine the impact of corporate governance and accounting conservatism of listed consumer goods companies in Nigeria. Specific objectives of the study include;

1. To determine the impact of board size on accounting conservatism of listed consumer goods companies in Nigeria
2. To determine the impact of board independence on accounting conservatism of listed consumer goods companies in Nigeria
3. To ascertain the impact of audit committee effectiveness on accounting conservatism of listed manufacturing firms in Nigeria
4. To determine the impact of ownership structure on  accounting conservatism of listed consumer goods companies in Nigeria
   1. Research Questions

The following questions guided this study;

1. What is the impact of board size on accounting conservatism of listed consumer goods companies in Nigeria?
2. What is the impact of board independence on accounting conservatism of listed consumer goods companies in Nigeria?
3. What is impact of audit committee effectiveness on accounting conservatism of listed manufacturing firms in Nigeria?
4. What is the impact of ownership structure on accounting conservatism of listed consumer goods companies in Nigeria
   1. Research Hypotheses

The following were hypothesized in this study;

Hypothesis 1

H0: There is no significant impact of impact of board size on accounting conservatism of listed consumer goods companies in Nigeria

H1: There is a significant impact of board size on accounting conservatism of listed consumer goods companies in Nigeria

Hypothesis 2

H0: There is no significant impact of board independence on accounting conservatism of listed consumer goods companies in Nigeria

H1: There is a significant impact of board independence on accounting conservatism of listed consumer goods companies in Nigeria

Hypothesis 3

H0: There is no significant impact of audit committee effectiveness on accounting conservatism of listed manufacturing firms in Nigeria

H1: There is a significant impact of audit committee effectiveness on accounting conservatism of listed manufacturing firms in Nigeria

Hypothesis 4

H0: There is no significant impact of ownership structure on accounting conservatism of listed consumer goods companies in Nigeria

H1: There is a significant impact of ownership structure on accounting conservatism of listed consumer goods companies in Nigeria

1.6 Significant of the Study

          This study has the potential to make a positive social change in company management by clarifying the importance of corporate governance practices in corporations’ organizational performance. The findings of this study will provide investors, financial analysts, and regulators with early warning signals of potential problems in an organization and aid stakeholders in assessing corporate performance.

The results of this study could also help corporate managers to use organizational resources more effectively by understanding the important variables that affect their firms’ long-term financial performance.

Regulators in Nigeria may also benefit from the findings of this study by recognizing important corporate governance mechanisms that promote organizational effectiveness and the country’s economic growth.

The results of this inquiry can provide insights into the factors that are decisive in predicting organizational performance from a combination of corporate governance mechanisms that affect a firm’s efficiency and the effectiveness of resource utilization. Many research studies have been conducted with a view to finding the correlation between corporate governance components and firm performance.

The results of this study will contribute to the body of research by examining whether the size and age of the firm mediates the relationship between each of the corporate governance mechanisms and firm performance.

The insights gained from this study may provide investors, financial analysts, and regulators with early warning signals of potential problems in an organization and also help stakeholders in their assessment of corporate performance.

The study could also help corporate managers to use organizational resources more effectively by devoting more resources to the most important factors that are critical to financial performance. Business organizations are important engines of growth in many communities, and their continued growth is essential for the growth of the national economy.

Companies are important forces for social change and improvement in their performance will ensure better employment prospects and increase in the welfare and wellbeing of individuals and the whole society.

1. Scope of the Study

This study is limited to the impact of corporate Governance on accounting conservation of listed consumers companies in Nigeria. Participants in this study consisted of Nestle Nigeria Plc, Champion Breweries Plc and Nascon Allied Industries plc.

1. Operational Definition of Terms

Corporate Governance: Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. It involves balancing the interests of shareholders, management, and other stakeholders, such as customers, suppliers, employees, regulators, and the community.

Accounting Conservation: Accounting conservation is intended to protect the users of financial information from inflated revenues and to ensure that all possible risks are accounted for. It also helps to avoid overstating the net income and the book value of the company.