Risk management committee and earnings management: evidence from an emerging market

Abstract

Purpose

This study examines whether the risk management committee (RMC) mitigates earnings management (EM) in Nigeria.

Design/methodology/approach

The study used a sample of 365 firm-year observations of Nigerian-listed nonfinancial companies from 2018 to 2022. Driscoll and Kraay’s fixed-effect standard error regression model is used to test the hypotheses.

Findings

The study finds that RMC size, expertise, meeting frequency and membership overlapping with the audit committee have a negative effect on both accrual earnings management (AEM) and real earnings management (REM). While RMC independence is found to have a negative effect on REM. Moreover, additional tests reveal that RMC effectiveness is significantly associated with lower EM practices. Further analysis using the industry level finds that RMC attributes mitigate EM practices in some industries. The results remain after rigorous, robust analysis for endogeneity and alternative regressions.

Research limitations/implications

This study is limited to a sample of Nigerian-listed nonfinancial service companies for a period of five years, resulting in the non-generalizability of the findings to different contexts as the countries’ internal policies and regulations varied.

Practical implications

The findings have important implications for regulators, policymakers and investors that a stand-alone RMC can effectively help to evaluate potential risk activities and implement a proper risk management system, thereby mitigating EM practices. The result can help investors, analysts and other stakeholders across the international community in considering RMC information to evaluate potential risk and earnings management practices.

Originality/value

Following the NCCG 2018 reform in Nigeria that requires listed firms to create a standalone RMC, this study is among the earliest that examines the effect of RMC attributes on EM practices and emerging markets. As such, the findings may draw the attention of regulators and policymakers across the African market and the international community to the monitoring role of RMC attributes in mitigating EM practices.

Citation

Musa, A., Abdul Latif, R. and Abdul Majid, J. (2024), "Risk management committee and earnings management: evidence from an emerging market", Journal of Accounting in Emerging Economies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JAEE-07-2023-0212