ENHANCING PUBLIC CONFIDENCE FINANCIAL REPORTING: THE ROLE OF CORPORATE GOVERNANCE.
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ENHANCING PUBLIC CONFIDENCE FINANCIAL REPORTING: THE ROLE OF CORPORATE GOVERNANCE

 

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Corporate governance involves a system by which governing institutions and all other organizations relate to their communities and stakeholders to improve their quality of life (Ato, 2002). In this regard, corporate governance is not only concerned with corporate efficiency, it relates to a much wider range of company strategies and lifecycle development (Mayer, 2007). It is also concerned with the ways parties (stake holders) interested in the wellbeing of firms ensure that managers and other insiders adopt mechanism to safeguard the interest of the shareholders (Ahmaduand & Tukur, 2005). Corporate governance is based on the level of corporate responsibility a company exhibits with regard to accountability, transparency and ethical values. Thus, a governance system that will promote ethical value, professionalism and transparent application of best practices is desirable.

The management has multiple objective functions to optimize which might conflict with those of the shareholders. In the search for a set of socially legitimate objective functions that would resolve these conflicts, management may focus on short term outcomes and loses sight of ethical issues such as efficient corporate management, professionalism, transparency, accountability, compliance with regulatory requirements and adequate supervision.

Inadequate consideration for ethical values and good governance hinders banks’ performance as experienced in the failures of All States Trust Bank Plc, Lead Bank Plc, Assurance Bank Nigeria Limited, Trade Bank Plc, Metropolitan Bank Limited, City Express Bank Limited, Hallmark Bank Plc., Societe Generale Bank of Nigeria Plc., African Express Bank Plc., Gulf Bank of Nigeria Plc etc. Whose licenses were revoked by the Central Bank of Nigeria (CBN) in 2006 and the recent failures of Intercontinental Bank Plc, Oceanic Bank Ltd, Bank PHB in 2011.

The impact of good governance on a firms’ reputation cannot be over emphasized. Good corporate governance promotes goodwill and confidence in the financial system. Recent studies from academic researches shows that good corporate governance lead to increased valuation, higher profit, higher sales growth and lower capital expenditure (Wolfgang, 2003). This view was supported by Gompers et al. (2003), Klapper & Love (2004).

The turmoil in the Nigerian banking system has required the Government to set up some policies in form of corporate governance to stem the tide of bank failures and distress in Nigeria. Therefore the CBN in conjunction with other supervisory institutions has decided to place emphasis on the monitoring of credit risk and provide incentives on prudent management of banks to aid transparency in the banking system, so that the Nigerian economy can forge ahead.

Corporate Governance in the banking system has assumed heightened importance and has become an issue of global concern because it is required to lead to enhanced services and deepening of financial intermediation on the part of the banks and enables proper management of the operations of banks. To ensure this, both the board and management have key roles to play to ensure the institution of corporate governance. Governance and performance should be mutually reinforcing in bringing about the best corporate governance. Transparency and disclosure of information are key attributes of good corporate governance which banks must cultivate with new zeal so as to provide stakeholders with the necessary information to judge whether interest are being taken care of.

Sound corporate governance, therefore, enhances corporate performance, value as well as providing meaningful and reliable financial report on firms operations. Given this background, this study examines the efficacy of corporate governance with a view to determine its impact on firms’ performance and provides measures to enhance corporate financial performance and sound business practices. 

1.2 Statement of the Problem

The consistent bank failures and financial crisis during the last two decades has raised questions on the consistency of the Corporate Governance practices in the banking system.In the Nigerian financial sector, poor corporate governance is identified as one of the major factors in virtually all known instances of a financial institution’s distress in the country. Research had shown that two-thirds of mergers, world-wide, fail due to inability to integrate personnel and systems as well as due to irreconcilable differences in corporate culture and management, resulting in Board and Management squabbles. In addition, the emergence of mega banks in the post-consolidation era is bound to task the skills and competencies of Boards and Managements in improving shareholder values and balance against other stakeholder interests in a competitive environment.

The consequences of institutional failure (considering the multiplier effect of financial institutional failure on the real sector of the economy) are unacceptably costly to a developing country like Nigeria. This affects the level of confidence the public has in various corporate establishments. The consequences of ineffective governance systems leading to corporate failure will not only affect the shareholders but also, the employees, suppliers, consumers and the nation as a whole. 

1.3 Research Objectives

i. To ascertain the relationship between the board structure, role /responsibilities and credibility of financial reports.

ii. To determine if audit committee plays a significant role in monitoring and promoting the credibility of financial reports.

iii.   To ascertain if ownership structure of the firm has significant impact on the credibility of financial reports.

iv.   To identify if effective coordination and supervision of the compensation committee has an impact on the credibility of financial reports.

v.   To identify if competent and helpful institutional shareholders are vital in improving the credibility of financial reports.

1.4 Research Hypotheses

Hypothesis One

HI: There is significant relationship between the board structure, role /responsibilities and credibility of financial reports.

H0: There is no significant relationship between the board structure, role /responsibilities and credibility of financial reports.

Hypothesis Two

HI: Audit committee plays a significant role in monitoring and promoting the credibility of financial reports.

H0: Audit committees do not play a significant role in monitoring and promoting the credibility of financial reports.

Hypothesis Three

HI: Ownership structure of the firm has significant impact on the credibility of financial reports.

H0: Ownership structure of the firm has no significant impact on the credibility of financial reports.

Hypothesis Four

HI: Effective coordination and supervision of the compensation committee has an impact on the credibility of financial reports.

H0: Effective coordination and supervision of the compensation committee has no impact on the credibility of financial reports.

 Hypothesis Five 

HI: Competent and helpful institutional shareholders are vital in improving the credibility of financial reports.

H0: Competent and helpful institutional shareholders are not vital in improving the credibility of financial reports.

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