Study of relationship between earnings management and corporate governance case: Nairobi all share index banks
Due to the intense competition in Kenya's banking industry there is increased possibility of compromising the corporate governance actions. One of the main controversial corporate governance actions is earnings management. Therefore, this research seeks to find out whether there is presence of earnings management in Kenya's banking industry. In addition, the research also tries to detennine if there is a relationship between earnings management and the corporate governance arm in banks. The study was carried out by assessing a sample of 8 listed banks in the Nairobi All Share Index (NASI) over a period of7 years: 2007 to 2013 . The level of earnings management was measured using discretionary accruals that were estimated by the Modified Jones Model. The corporate governance variables chosen include age of CEO, board size and board meetings that were regressed against discretionary accruals. Overall it was found there is presence of earnings management in the banks listed in NASI. Another finding was that there exists a relationship between earnings management and corporate governance in the listed banks in NASI. At a 95% confidence level the older the CEO the higher the level of earnings management with the intention of trying to secure a high compensation at retirement. Additionally, at a 5% level of significance the higher the number of board meetings the lower the level of earnings management, due to the intense scrutiny of financial reports done by members of the board. The research recommends an increase in board meetings for some banks and a ceiling in the age limit of CEOs to prevent higher levels of earnings management. Further study could also be done by analyzing other corporate governance variables such as institutional ownership, board structure and CEO ownership and their effect on earnings management.