CORPORATE GOVERNANCE AND FINANCIAL REPORTING IN NIGERIAN BANKING INDUSTRY

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CORPORATE GOVERNANCE AND FINANCIAL REPORTING IN NIGERIAN BANKING INDUSTRY

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The concept of corporate governance has attracted a good deal of public interest in recent years, because of its apparent importance on the economic health of corporations and society in general. Basically, corporate governance in the banking sector requires judicious and prudent management of resources and the preservation of resources (assets) of the corporate firm; ensuring ethical and professional standards and the pursuit of corporate objectives, it seeks to ensure customer satisfaction, high employee morale and the maintenance of market discipline, which strengthens and stabilizes the bank Recently, the banking industry in Nigeria has been undergoing serious reforms over the past couple of years arising from the central bank of Nigeria’s requirement for banks to increase their capital base (share) to a minimum level of twenty five billion naira (N25B), (Ogbeche, 2006:1). This triggered off several mergers and acquisitions that have reduced the number of players from eighty nine (89) to twenty five (25) banks as at the beginning of 2006 (Kama, 2006; 66). It is imperative to note that at the end of the consolidation exercise, the total capitalization (the value of all equities of the banks came to N775.0 billion compared to the figure of N327 billion before the commencement of this program in July 2004. (Adedipe, 2004: 52). The issue of corporate governance has recently been given a great deal of attention in various national and International forays. This is in recognition of the critical role of corporate governance in the success or failure of companies. Corporate governance refers to the processes and structures by which the business and affairs of an institution are directed and managed. In order to improve long-term shareholder value by enhancing corporate performance and accountability, while taking into account the interest of other stakeholders. Corporate governance is therefore about building credibility, ensuring transparency and accountability as well as maintaining an effective channel of information disclosure that would Foster good corporate performance.

The strategy for addressing the challenges of corporate governance has taken various forms at both the national and International levels and have culminated in initiatives such as: the OECD Code; the Cadbury Report; the Basel Committee Guidelines on Corporate Governance; the King‟s Report of South Africa etc. It is therefore necessary to point out that the concept of corporate governance of banks and very large firms have been a priority on the policy agenda in developed market economies for over a decade. Further to that, the concept is gradually warming itself as a priority in the African continent. Indeed, it is believed that the Asian crisis and the relative poor performance of the corporate sector in Africa have made the issue of corporate governance a catchphrase in the development debate (Berglof and Von -Thadden, 1999).

Performance may be defined as the reflection of the way in which the resources of a company (bank) are used in the form which enables it to achieve its objectives. According to Heremans, (2007), financial performance is the employment of financial indicators to measure the extent of objective achievement, contribution to making available financial resources and support of the bank with investment opportunities.

These are factors which play a role in shaping the financial status of a company. Most studies divide the determinants of commercial banks’ financial performance into two categories, namely internal and external factors. Internal determinants of profitability, which are within the control of bank management, can be broadly classified into two categories, i.e. financial statement variables and nonfinancial statement variables, (Linyiru, 2006). While financial statement variables relate to the decisions which directly involve items in the balance sheet and income statement; non-financial statement variables involve factors that have no direct relation to the financial statements. The examples of non-financial variables within the this category are number of branches, status of the branch (e.g. limited or full-service branch, unit branch or multiple branches), location and size of the bank, Sudin (2004).

Several events are therefore responsible for the heightened interest in corporate governance especially in both developed and developing countries. The subject of corporate governance leapt to global business limelight from relative obscurity after a string of collapses of high profile companies. Enron, the Houston, Texas based energy giant and WorldCom the telecom behemoth, shocked the business world with both the scale and age of their unethical and illegal operations. In developing economies, the banking sector among other sectors has also witnessed several cases of collapses, some of which include the Alpha Merchant Bank Ltd, Savannah Bank Plc, Societe Generale Bank Ltd (all in Nigeria), The Continental Bank of Kenya Ltd, Capital Finance Ltd, Consolidated Bank of Kenya Ltd and Trust Bank of Kenya among others (Akpan, 2007). In Nigeria, the issue of corporate governance has been given the front burner status by all sectors of the economy. For instance, the Securities and Exchange Commission (SEC) set up the Peterside Committee on corporate governance in public companies. The Bankers‟ Committee also set up a sub-committee on corporate governance for banks and other financial institutions in Nigeria. This is in recognition of the critical role of corporate governance in the success or failure of companies (Ogbechie, 2006:6). Corporate governance therefore refers to the processes and structures by which the business and affairs of institutions are directed and managed, in order to improve long term share holders‟ value by enhancing corporate performance and accountability, while taking into account the interest of other stakeholders (Jenkinson and Mayer, 1992)

1.2 STATEMENT OF THE PROBLEM

With the increasing dynamism and complexity of modern business operations, coupled with the ever-present accounting scandals of high profits companies such as Cadbury plc and Enronlinc have questioned the effectiveness of corporate governance mechanism and the quality of financial reports and the credibility of audit functions. Since ownership is separated from in their own interest, rather than the interest of shareholders whom they represent. They could manipulate financial statements, giving investors misleading impression about the financial position of the corporation. As a result, financial reports in most cases, do not reflect the true and fair position of the corporation. Therefore. The need for accurate, reliable, timely and accessible financial reports is imperative in order to maintain corporate accountability so as to achieve organizational goals and quick decision making.

1.3 OBJECTIVE OF THE STUDY

The followings are the purpose of the study:

. To establish the relationship that exist between corporate governance and financial reporting

. To establish the relationship between management and shareholders’ interests.

. To ensure that the financial reports in most cases reflect the true and fair position of the corporate.

. To enhance the need for accurate, reliable, timely and accessible financial reports necessary for corporate accountability so as to achieve organizational goals and quick decision making.

1.4 RESEARCH QUESTIONS

Olannye, (2016) defined research questions as the major questions to which the researcher seeks to provide answers to, in the course of the investigation. It is for this reason that this research is being designed to provide answers to the following research questions:

. What are the relationship that exist between corporate governance and financial reporting?

. What are the relationship between directors’ and shareholders’ interests?

. How does corporate governance influence financial reporting?

. Does accurate corporate accountability affects organizational goals and quick decision making?

1.5 RESEARCH HYPOTHESIS

Hypotheses are tentative statement about expected relationship(s) between independent and dependent variables (Olannye, 2006). In order to successfully find solution to the problem of the study, some tentative statements known as research hypothesis had been formulated. They include the following:

1. Ho1: There is no significant relationship between corporate governance and financial reporting.

2. Ho2: Corporate governance does not enhance management and shareholders relationship through transparency and accountability.

3. Ho3: Financial reports are not used for quick decision making

1.6 SCOPE OF THE STUDY

The scope of this research work on corporate governance and financial reporting in the Nigerian Banking Industry is to provide the reader with a detailed understanding of the relationship between corporate governance and financial reporting. In the same vein, in attempting to resolve the statement of research problems, I shall deal with the relationship that exist between the management of corporations and their shareholders. In a bid to ensure that the financial statement prepared by the directors reflects a true and fair view of the financial position of the corporation, so as to achieve maximum organizational goals and quick decision making.

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