The Moderating Effect of Audit Committee on the Relationship between Board Diversity and Earnings Management of Banks in Nigeria

The increasing need for an improved quality of financial reporting is becoming a key challenge for stakeholders in the Nigerian corporate setting because the consistent failure being witnessed by many organizations. The presence of loan loss provision in the banking sector has paved the way for the managers to manipulate accounting earnings which have compelled the need for this research in order to examine factors that could help mitigate or curtail managers’ tendencies to engage in earnings manipulation. Therefore, the study examines the effect of the board diversity and audit committee on the earnings management of listed Deposit Money Banks in Nigeria. Board diversity variables include women director, board ownership, foreign director, board size, and board composition, while a composite index of audit committee size, composition and meeting were used to moderate two (women director and board ownership) of the board diversity variables. Earnings Management was represented by Chang, Shen, and Fang (2011) model. The population consists of fifteen banks and all were used for the analysis. Secondary data were collected from the annual reports and accounts of the banks during the period 2008-2015. Multiple regression techniques were adopted and Stata 13 was used as the tool of data analysis. The findings revealed that all the variables before the moderation have a significant effect on earnings management of banks except for board size. Meanwhile, after the moderation, the findings revealed that explanatory variables explained the extent of earnings management better than before moderation. However, among all explanatory variables used during the moderation, only three variables (foreign director, board composition and audit committee) have a significant effect on the earnings management. Based on the above findings, the study recommended amongst others that the percentage of women director, shares held by directors, and the number of foreign directors should be increased, while the number of non-executive directors and audit committee should also be improved in order to mitigate the tendencies for earnings management in banks. Use of audit committee as a moderating variable and the test of applicability and the usefulness of Chang, Shen, and Fang (2011) model in Nigerian Banking Sector.