Beneish Model, Corporate Governance and Financial Statements Manipulation

Abstract

This paper examined corporate governance and financial statements manipulation in Nigeria, using the Beneish model. To this end, the Beneish Model was employed to predict the likelihood of financial statements manipulation among the companies in Nigeria while the role of corporate governance variables to this manipulation was examined, using logistic regression analysis. In specific terms, the corporate governance variables of Board Composition, Board Gender Composition, Audit Committee Composition, and Board Dominance were examined as determinants. The data used were extracted from sixty-five (65) quoted companies in the Nigeria Stock Exchange for a 6-year period of 2009-2014. This period a near-crash in the Nigerian stock market with the consequential low ebb in economic activities in Nigeria. Preliminary analysis reveals that most of the companies quoted in the Nigeria Stock Exchange and sampled for this study, based on the Beneish Model, have the probability of manipulating their annual financial statements. Furthermore, results revealed that an increase in the Board Composition defined in the proportion of the Non-Executive Director (NED) on the Board, will increase the likelihood of detecting, preventing and investigating financial statements manipulation in the quoted companies in Nigeria. In addition, it was discovered that, in the Board Gender Composition, an increase in the proportion of female gender in the entire board will increase the likelihood of detecting, preventing and investigating financial statements manipulation. Meanwhile, it was revealed that an increase in the effectiveness and efficiency of the composition of the audit committee may reduce the likelihood of financial statements manipulation in Nigeria companies. Lastly, it was discovered that a decrease in Board Dominance will increase the likelihood of detecting, preventing and investigating misstatements in the annual financial statements of Nigeria companies. It is recommended. in the meantime, to use the Beneish model as a norm to assess the possibility of financial statements manipulation. More stringent measures, such as whistleblowing, ethics, value system, zero tolerance to fraud, just to mention a few, are to be effectively enforced by external regulatory authorities (such as Central Bank of Nigeria, Securities and Exchange Commission and the Nigerian Stock Exchange) to control the activities of the company's board of directors, as well as the application of Beneish model, would aid the detection of financial statements manipulation.

Corporate governance and financial fraud occurrence – case study on Romanian companies

“…An AQI variable value greater than 1 can signal the presence of financial fraud. AQI has a higher value when accountants resort to revaluation techniques of assets/fixed assets, research and development and advertising costs are capitalized as intangible assets (Ibadin and Aimienrovbiye, 2019). The outcome of the last techniques might be to increase the assets while preserving the profitability of the company by using the manipulation techniques (Ibadin and Aimienrovbiye, 2019).…”

“…AQI has a higher value when accountants resort to revaluation techniques of assets/fixed assets, research and development and advertising costs are capitalized as intangible assets (Ibadin and Aimienrovbiye, 2019). The outcome of the last techniques might be to increase the assets while preserving the profitability of the company by using the manipulation techniques (Ibadin and Aimienrovbiye, 2019). In short, a high value of this variable indicates the presence of creative accounting/fraud by using excessive capitalization of expenditure (Ibadin and Aimienrovbiye, 2019…”

Fraudulent financial reporting and related party transactions

“…In Nigeria Ibadin and Ehigie (2019) found that Beneish M-score was able to predict FSM by listed companies and Hasan et al, (2017) using the Beneish M-score found that companies from Asian countries were significantly involved in FSM. In Indonesia Ratmono et al, (2020) used the Dechow F-score and Beneish M-score and found that both tools were able to detect FSM.…”

Internal Corporate Governance Mechanism: A Review

“…An independent board can be a useful company governance tool for improving financial reporting quality. According to recent studies, financial statement fraud has a negative association with board independence (Ibadin & Ehigie, 2019;Razali & Arshad, 2014;Anichebe, Agbomah, & Agbagbar, 2019;Nasir, Ali, & Ahemed, 2018). In contrast, from the standpoint of stewardship theory, inside directors have the potential to perform better than outside directors since they have a greater understanding of the business strategies and direction.…”

“…Similarly, other research has found that independent audit committee members' lack of understanding about the company can cause them to be unaware of internal control weaknesses and increase the likelihood of not identifying mistakes in financial information (Ahmad-Zaluki & Wan-Hussin, 2010). Prior literature indicates that there is no meaningful association between audit committee independence and earnings management (Uwuigbe et al, 2019;Ibadin & Ehigie, 2019;Oussii & Taktak, 2017;Yew, 2013).…”