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Board Attributes and Financial Reporting Quality of Listed Deposit Money

Banks (DMBs) in Nigeria

Article · December 2019

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International Journal of Economics and Business Administration
Vol. 5, No. 4, 2019, pp. 185-192
http://www.aiscience.org/journal/ijeba
ISSN: 2381-7356 (Print); ISSN: 2381-7364 (Online)

Board Attributes and Financial Reporting Quality

of Listed Deposit Money Banks (DMBs) in Nigeria
Mohammed Ibrahim*, Dauda Abubakar

Department of Accounting, Faculty of Arts and Social Sciences, Gombe State University, Gombe, Nigeria

Abstract
This study examines the impact of board attributes on the financial reporting quality of listed Deposit Money Banks (DMBs) in
Nigeria. The study utilized documentary data collected from annual report and accounts of the sampled Deposit Money Banks
(DMBs) for the periods 2007 to 2018. The study used board size and board independence as proxies for board attributes, while
discretionary accruals was used to measure financial reporting quality. Data was analyzed by means of descriptive statistics
and regression. The study revealed that board size and board independence has positive but not significant effects on the
quality of financial reports. Thus the study concluded that board attributes have positive and insignificant effects on the
financial reporting quality of DMBs in Nigeria. The study therefore, recommended that in order for the Securities and
Exchange Commission (SEC) and Central Bank of Nigeria (CBN) to improve the quality of financial reporting in DMBs in
Nigeria, good corporate governance (CG) practices must be implemented, this should includes improving board attributes,
especially the functional background of the directors and also the appointment of independent directors on the board should be
based on the their reputation and accounting knowledge rather than emphasizing on the proportion to total number of directors
on the board. In order to have proper monitoring by independent directors, SEC should also require additional disclosure of
financial or personal ties between directors (or the organizations they work for) and the company or its CEO. By so doing, they
will be more completely independent.

Keywords
Board Attributes, Board Independence, Board Size, Financial Reporting Quality, Deposit Money Banks

Received: October 4, 2019 / Accepted: November 24, 2019 / Published online: December 25, 2019
@ 2019 The Authors. Published by American Institute of Science. This Open Access article is under the CC BY license.
http://creativecommons.org/licenses/by/4.0/

situations impose some questions like why the board of

1. Introduction directors did not do anything [1].
The beginning of the twenty-first century started with some Financial reporting is the means of communicating
scandals in important world companies, like Enron, information on the activities of the company to the users of
WorldCom and Xerox in the United States, Parmalat in Italy accounting information; and the quality of financial reporting
and many other big companies around the world confirmed is a function of the quality of accounting standards and the
that there was opaqueness in financial reporting that had corresponding regulatory enforcement of the standards [2].
hitherto not been penetrated, among many other situations. In Financial reporting quality can be influenced by three variables
general, the stock prices of these companies were very high namely: standard setters’ decision; accounting method used by
and suddenly they have fallen down. The reasons behind management; and management judgment and estimates in
these bankruptcies are associated with fraud that derived applying the selected substitutes [2]. Therefore, enforcement is
from the manipulation of accounting statements. These an important mechanism of enhancing financial reporting

* Corresponding author
E-mail address:
 International Journal of Economics and Business Administration Vol. 5, No. 4, 2019, pp. 185-192 186

quality whose absence will make the best accounting standards while section five deals on conclusion and recommendations.
incapable of providing credible and reliable accounting
information to various users [3].
2. Literature Review
The introduction of code of corporate governance (CG)
(2003) in Nigeria is expected to mitigate corporate scandals This section review relevant and related literature on board
and other associated problems. However, corporate failures attributes and financial reporting quality.
and scandals are increasing. For example the cases of Wema
2.1. The Concept of Board Attributes
Bank Plc. and Spring Bank Plc. in Nigeria (the Case of
Mismanagement of Capital) suffered from the poor corporate Board attributes have been defined by many authors in
governance practice [4]. A committee was inaugurated to different ways. The main function of the board is to set
review the code of CG (2003) for further improvement. After company’s goals and ensure that set objectives are achieved,
the review, some new issues were raised; for example, i.e. to make sure that human and financial resources are
differentiating between independent director and executive properly utilized toward achieving the overall strategic goals
director, training of directors, evaluations of the board of the firm effectively [7]. The structure and composition of
performance by an independent outside consultant, the board of directors should have diversity of directors. The
separation of functions of chairperson of the board and chief number of the directors in the board should not be less than
executive officer among others. Furthermore, the new five directors and the majority should be non-executive with
amendments fixed in the new code of CG (2011) to improve at least one independent director. Some of the board
the quality of reported financial information. Due to the characteristics considered is board size and board
short-comings and inconsistencies of the code of CG (2011), independence. Board attributes can be seen as a dynamic
for example, the code of CG (2011) did not consider process which involves a strategy that leads to policy making
unquoted and private firms. Another similar code was and planning, monitoring and supervising executive
launched in 2013 by the Financial Reporting Council of performance, providing accountability which forms the basis
Nigeria (FRCN) which harmonized all CG codes in Nigeria. for reviewing strategy [8].
This new code of CG (2013) is applicable to all firms The principles of agency theory imply that agents (that is
whether quoted or unquoted, private or public. The code of management) may be reluctant to impose strict and binding
CG (2013) was introduced to strengthen the quality of mechanisms of corporate governance that may limit the agents’
financial report and previous’ codes of CG shortcomings. ability to act in their own best interest. As a result, there arises
The weakness of CG is perhaps the most important factor a need for stakeholders to have an entity on the inside to play a
blamed for the corporate failure consequences from the role in governing and monitoring the firm’s actions on the
economics and corporate crises. There is much that can be stakeholder’s behalf that is, the board of directors [9]. Prior
done to improve the integrity of financial reporting through research established that boards face a dual set of
greater accountability, the restoration of resources devoted to responsibilities which can, and do, compete with one another
audit function, and better CG policies. It has been established to serve as the board’s primary area of focus [10, 11]. In
that investors require audited financial report of companies particular, companies elect a board in order to provide
for them to be able to pass their judgment. There were quite a operating guidance to the firm’s management team and/or
number of such audited financial reports that were totally serve as a monitoring mechanism over firm management [10-
misleading. Inadequate or even misleading financial 12]. Boards focused on either monitoring management or
statement is almost always involved in virtually any providing guidance to management. Boards do not treat these
corporate failure. The impact of CG on the quality of two objectives as being mutually exclusive [11], nor is there a
financial reporting in the consumer goods industry in Nigeria “one-size fits all” model applicable to all boards [13, 14]. As a
was examined [5]. Also, the influence of CG mechanism on result, there is clearly overlap in the characteristics of
firms’ performance in Nigeria was investigated [6]. The importance to both the monitoring and the guidance functions.
afore-mentioned studies did not consider board attributes in Thus, the same basic characteristics are of significant
their studies. Thus, this study therefore, investigated the importance regardless of the board’s primary focus [11, 14, 15].
effect of board attributes on financial reporting quality of Board attributes is an aspect of CG and is generally regarded
Deposit Money Banks (DMBs) in Nigeria. as a driving force in CG. It also determined the efficiency
The study is therefore divided into five sections. Section one and otherwise of CG which is identified as a major factor
is the introduction, section two deals with the review of responsible for corporate distress among companies in
related literature, section three captures the methodology of Nigeria. The role of the board in monitoring and strategic
the study, section four deals with the results and discussions decision has gained wider attention in the developed nations
187 Mohammed Ibrahim and Dauda Abubakar: Board Attributes and Financial Reporting Quality of Listed Deposit
Money Banks (DMBs) in Nigeri

but remained neglected in the developing nations as a result 2.4. Financial Reporting Quality
of the developing nations placing little importance to the role
Reporting is one way of demonstrating the accountability and
of the corporate board in relation to monitoring and strategic
transparency of a company. The annual report is the means of
decision especially financing decision.
communication between companies and their stakeholders
2.2. Board Size particularly on current activities of the companies to enable
them make useful decisions. Financial reporting entails
Determining the ideal board size for organizations is very
disseminating accounting information to furnish current and
important because the number and quality of directors in a
potential users to enable them assess financial position and
firm determines and influences the board functioning and
cash flow potentials of the firm [27]. The primary objective
hence corporate performance. Board size refers to the total
of financial reporting is to provide high-quality financial
number of directors on the board of any corporate
reporting information concerning economic entities,
organization [16]. Board size is the total number of directors
primarily financial in nature, useful for economic decision
that a firm has in its board structure [17]. Large boards were
making [28]. Providing high quality financial reporting
supported on the ground that they would provide greater
information is important because it will positively influence
monitoring and advice [14, 18, 19]. Going by this, this study
capital providers and other stakeholders in making
consider that firms benefit in having more directors for
investment, credit, and similar resource allocation decisions
monitoring, resource provision and also to provide
enhancing overall market efficiency [28]. Although both the
representation for different stakeholders in the firm.
FASB and IASB stress the importance of high-quality
2.3. Board Composition (Board financial reports, one of the key problems found in prior
Independence) literature is how to operationalize and measure this quality.
Because of its context-specificity, an empirical assessment of
Board composition mean different thing to different authors. financial reporting quality inevitably includes preferences
The composition may be easily differentiated into inside among a myriad of constituents [29, 30].
directors, affiliated directors and outside directors [9]. This
distinction is derived from the extent of their participation Good quality financial reporting provides shareholders and
in firm management. Inside directors are those directors other stakeholders in understanding and absorbing the
that are also managers and/or current officers in the firm information through financial statements and hence lowering
while outside directors are non-manager directors. Among the information asymmetry. Management could disguise the
the outside directors (also known as external or non- quality of financial reporting more difficult to be understood
executive directors), there are directors who are affiliated, by investors and other stakeholders, so that they cannot assess
and others that are independent. Affiliated directors are future cash flow implications of accounting transactions. Some
non-employee directors with personal or business scholars found that increase in financial reporting quality can
relationship with the company while independent directors have an important economic implication such as increase
are those that have neither personal nor business investment efficiency [31, 32]. Thus, higher financial reporting
relationships with the company. Board composition quality will decrease information asymmetry, which can
involves both the size (number of directors that serve on the consequently enable investors to improve their ability to
board) and director types (widely recognized dichotomy monitor managerial investment activities.
between inside and outside directors) [20].
2.5. Empirical Review on Board Attributes
Furthermore, board composition refers to the distinction and Financial Reporting Quality
between inside and outside directors, and this is
The board is the firm’s highest-level control mechanism, with
traditionally measured as the percentage of outside directors
ultimate responsibility of overseeing the activities of the firm
on the board [21]. Although inside and outside directors
[33]. The literature on restatement, fraudulent financial
have their respective merits and demerits, most authors
statements, and financial reporting quality in general
favour boards that are dominated by outside directors [22].
indicates that the composition and characteristics of the board
Board composition is the total number of directors brought
influence its effectiveness in this regard. Board size is
from outside the company to sit on the board divided by the
another determinant of financial reporting quality, the larger
board size in a given period [17]. However, some stream of
the board the more complex it will be as regard decision
researchers refer to board composition as the number of
making. The size of the board of directors is often used by
non-executive directors on the board of a company [23-26].
some scholars to measure the quality of CG. In addition, it
In essence, board independence means majority of the
was suggest that larger boards are able to commit more time
board of directors are non-executive.
and effort to monitor management [34]. Another board
 International Journal of Economics and Business Administration Vol. 5, No. 4, 2019, pp. 185-192 188

attribute is board independence which means majority of the listed entities, the Board independence (BI) makes its unique
board of directors are non-executive. The board must contribution in influencing the quality of the financial
comprise executive and non-executive directors [7]. For any reporting process.
board to be independent, majority of the directors must be More so, the impact of corporate governance on financial
non-executive or independent directors. One of the most
reporting quality of 40 companies listed on the Nigeria Stock
important factors influencing the integrity of the financial Exchange (NSE) from 2006 to 2015 was investigated [41].
accounting process involves board of directors whose Board characteristics, audit committees, board independence,
responsibility is to provide independent oversight of
board size and growth were used as corporate governance
management performance and to hold management
variables. The results of the multiple regression analysis
accountable to shareholders for their actions.
revealed that corporate governance improves the financial
The impact of CG attributes on financial reporting quality in reporting quality in Nigeria. In contrast, the impact of
Iran was investigated using multiple regression analysis and corporate governance on financial reporting quality of 15
the findings showed that there is no relationship between CG quoted companies quoted on the Nigerian Stock Exchange
mechanisms (board size, board independence, ownership market under the consumer goods sector in Nigeria for the
concentration, institutional ownership) and financial period 2012-2016 was investigated [42]. Corporate
reporting quality [35]. The effect of board composition on the governance was proxied by board size and audit committee
informativeness and quality of annual earnings was independence and financial reporting quality was represented
investigated [36]. The research covers a period of 5 years by audit delay. In testing the research hypothesis, the study
(2000-2004). The result revealed that the informativeness of adopted simple regression technique and the findings
annual accounting earnings is positively related to the revealed that audit committee independence does not exert
fraction of outside directors serving on the board but not significant effect on audit delay of corporate firms. Also,
related to board size. The relationship between financial board size has a significant negative relationship with audit
reporting quality and CG of Portuguese firms was delay of corporate firms in Nigeria. In addition, the impact of
investigated using multivariate regression model [37]. The board characteristics on financial reporting quality of 37
research evidence showed that board composition changes listed manufacturing firms on the Nigerian Stock Exchange
and its degree of independence do not produce any influence from 2013-2017 was investigated [43]. Descriptive and
on the quality of the accounting information in Portugal. inferential statistics were employed to summarize the data
Similarly, a study using 12 listed insurance companies for the and to draw inference on the population studied and the
period of 2004 to 2009 found a negative and significant Generalized Linear Model Regression in testing the
relationship between board composition and firm hypotheses stated. Findings revealed that board expertise was
performance measured by Tobin’s Q and ROE [38]. This statistically significant and positively related to financial
indicate that benefit of board independence, objectivity and reporting quality at 5% level of significance, while board
experience expected from the representation of outside independence and board diversity was found to be
directors to influence board strategic decision appears to hold insignificantly related to financial reporting quality at 5%
back managerial initiative through too much monitoring. level of significance.
Furthermore, the impact of monitoring characteristics on 2.6. Theoretical Framework
financial reporting quality of the Nigerian listed oil
marketing firms for the period 2000 to 2011 was examined In investigating the effect of board attributes on the financial
[39]. Financial reporting quality is represented with the reporting quality of DMBs in Nigeria, two theories are found
qualitative characteristics of financial statement. Multiple relevant. These are the agency and stakeholder theories.
regression was used to analyzed the data and it was
2.6.1. Agency Theory
discovered that power separation, independent directors,
managerial shareholdings and independent audit committee Agency theory having its roots in economic theory was
are all significant implying monitoring characteristics is developed by [44]. Agency theory is simply the relationship
influencing financial reporting quality of quoted oil between the principal and the agent such as shareholders and the
marketing firms in Nigeria. In the same vein, the correlation company executives or managers. In the agency theory,
between specific corporate governance attributes and the shareholders who are the owners or principals of the company,
quality of financial reporting process of 50 non-financial hires the gents to perform work. Principals delegate the running
Romanian entities listed on the Bucharest Stock Exchange of business to the directors or managers, who are the
for the period 2011-2013 was investigated [40]. The main shareholder’s agents. The agency theory states that shareholders
finding of this study revealed that in the case of Romanian expect the agents to act and make decisions in the interest of the
189 Mohammed Ibrahim and Dauda Abubakar: Board Attributes and Financial Reporting Quality of Listed Deposit
Money Banks (DMBs) in Nigeri

principal. On the contrary, the agent may not necessarily make of DMBs, the agency theory, as well as, the stakeholder
decisions in the best interests of the principals [44]. According to theory best explained the study.
the agency theory, the basic agency problem in modern firms is
primarily due to the separation of ownership from management.
The roles of board can be explained within the framework of
3. Methodology
agency theory whereby the contract between principal and agent The population of this study consists of 15 listed DMBs on
allows the agent to conduct the business on behalf of the the floor of the Nigeria Stock Exchange-NSE during the
principal [33]. Agency theory suggests that shareholders require period of 2007-2017. However, due to availability of data, 6
protection because management (agents) may not always act in DMBs were selected for the study using purposive sampling
the interests of the absentee owners (principals) [33, 44]. technique which represents 40% of the population.
Secondary data were collected from the annual report and
2.6.2. Stakeholder Theory
accounts of the sampled DMBs for various years. Descriptive
Stakeholder theory suggest that managers in organizations research design was used for this study and information on
have a network of relationships to serve this include the board attributes and financial reporting quality can best be
suppliers, employees and business partners. And it was obtained by examining the annual report and accounts of the
argued that this group of network is important other than sampled DMBs. There are two sets of variables covered by
owner-manager-employee relationship as in agency theory this study. These are the dependent and the explanatory
[45]. The theory argued that the firm is a social person and variables. The dependent variable is the financial reporting
therefore, is responsible and accountable not only to the quality measured using discretionary accruals [46]. This uses
shareholders but to numerous other stakeholders. The the standard deviation of the residuals or error term as a
management of companies has the responsibility of measure of financial reporting quality and the large value of
furnishing report that satisfies not only the interest of the the residual implies a considerable level of discretionary
shareholders but also employees, suppliers, government and accrual thereby resulting to a poor quality financial reporting
the general public. [35, 47].
Considering the objective of the study which is to examine The model is given as:
the effect of board attribute on the financial reporting quality
∆
= + + + + + +

Where: Thus, the model based on the variable of the study is stated
as follows:
= Total Current Accrual
= Operating Cash Flows of the Current Period FRQit = β0 + β1 BSit + β 2 BIit + β3 FSIZEit + β 4 AGEit + ε it
= Operating Cash Flows of the Previous Period Where:
= Operating Cash Flows of the Next Period FRQ = Financial reporting quality
! = Total Assets of the Previous Period BS = Board size
∆"#$ = Charge in Revenue BI = Board independence
%%# = Level of Property, Plant and Equipment FSIZE = Size of the company
µt = Stochastic error term AGE = Age of the company
All the variables are scaled by lagged total asset. β0 = Parameters to be estimated (is the average amount the
The independent variable is board attributes represented by dependent variable increases when the independent increases
board size and board independence. Board size is measured by one unit, other independents variables held constant).
by the number of directors on the board, while board eit = Error term assumed to satisfy the standard OLS
independence is measured by dividing the number of outside assumption.
or non-executive directors by the aggregate number of
β1-β4 = Partial derivatives or the gradient of the independent
directors on the board [47]. The control variables included in
variables.
the model are size and age. Size is measured by taking the
natural log of total assets [2, 47]. Age was proxied as the
number of years passed since listed [2, 47].
 International Journal of Economics and Business Administration Vol. 5, No. 4, 2019, pp. 185-192 190

4. Results and Discussions between board attribute and financial reporting quality in
Nigeria. Table 2 showed the coefficient of determination (R2)
Table 1. Descriptive Statistics. of 0.3304 which signifies that 33% of total variation in
Obs Mean Std. Dev. Min Max financial reporting quality of DMBs in Nigeria is caused by
Frq 60 0.6331667 0.0232041 0.5763571 0.6850644 board size, board independence, age of banks and the size of
bs 60 16.18333 2.746287 12 21 the banks. Similarly, the result of the F- statistics value of
bi 60 0.6331667 0.0552802 0.53 0.82
age 60 21.8333 15.00753 3.00 47 6.78 and its corresponding P-value of 0.0002 implies that the
fsize 60 9.34709 0.2475629 8.404763 9.853737 model is fit. Table 2 also showed that board size has a
Source: STATA Output 14.0 positive and insignificant effect on the financial reporting
quality of sampled DMBs in Nigeria this evidenced by the
Table 1 presents the descriptive statistics of the data for the coefficient of 0.0005521 with t-value of 0.40 which is
variables of the study. The table showed that the sampled statistically not significant at all levels of significance (P-
DMBs during the period has an average financial reporting value of 0.692). This suggests that, as board size increases by
quality (frq) of 63.32% with standard deviation of 2.32% 1 member, financial reporting quality decrease by 0.05521%,
with minimum value of 57.64% and maximum value of but the result is statistically not significant at all levels. The
68.51%. The standard deviation of 2.32% implies that the study therefore, inferred that size of the board of banks in
data do not vary as it is lower than the mean value. Table 1 Nigeria has no significant influenced on financial reporting
also showed that the average board size (BS) of the sampled quality during the period under review. The finding is
DMBs is 16, with standard deviation of 3, and the minimum however consistent with prior studies [35, 47].
and maximum board size of 12 and 21 members respectively.
The results from Table 2 also showed that, board
The standard deviation of 3 implies that there is low variation
independence has a positive effect on the financial reporting
because it is lower than the mean value. Furthermore, Table 1
quality of the DMBs in Nigeria, from the coefficient of
showed that on average 63% of the composition of the board
0.0864047 with t value of 1.45 which is not statistically
of the sampled DMBs are outside/independent directors (BI)
significant at all levels of significance (P-value of 0. 0.153).
during the period of the study, from the mean value of
This suggests that, the independent directors have the ability
0.6331667 with standard deviation of 0.0552802. The
to monitor and control the excesses of the executive directors,
minimum and maximum board independence is 53% and 82%
thereby protecting and defending the interests of the
respectively. This implies DMBs comply with the
shareholders and other stakeholders. In addition, this study
requirement of the CBN code of CG during the period under
finds that the increase in the percentage of non-executive
review, because the results indicated that outside/independent
directors on the board has a positive effect in determining the
directors are more than the executive/inside directors on the
quality of earnings of DMBs in Nigeria. The finding is in line
boards. It is also evidenced from Table 1 that age has a mean
with previous [36, 47].
value of 22 years and a minimum and maximum of 3 and 47
years respectively. This means that all the sampled Furthermore, Table 2 showed that age has a positive and
companies were listed before the 2006 financial year. Finally, significant effect on the quality of financial reporting at 1%
firm size, measured by the natural logarithm of total assets with positive coefficient. This confirms that as a reputation
has a mean of 9.34709, but the standard deviation of variable, the older the firm, the greater the shareholders’
0.2475629 suggests a low level of dispersion in size during confidence in its strength, growth and survival. In addition,
the study period because it is lower than the mean. size of the firm measured by the natural log of the total asset
expectedly has negative relationship and is statistically not
Table 2. Regression Result. significant at all the level of significance. This means that
Frq Coef. Std. Err. t P>|z| larger firms produce more reliable and qualitative
cons 0.5697955 0.0986792 5.77 0.000 information in their financial statements /higher quality
bs 0.0005521 0.0013845 0.40 0.692
bi 0.0864047 0.0596406 1.45 0.153
financial report than the smaller ones. This implies that an
age 0.0006209 0.00022 24 2.79 0.007 increase in the size of the firm by one unit, other variables
fsize -0.0014794 0.0104899 -0.14 0.888 remaining constant, will decrease the financial reporting
F value 6.78
Prob > F 0.0002
quality. The implication of this findings are that, if banks
R-squared 0.3304 regulators in Nigeria do not improve on the attributes of the
Adj R-squared 0.2817 board of DMBs in Nigeria, there could be problem that may
Source: STATA Output 14.0 likely be thread to the financial reporting quality of the banks.

Multiple regressions have been used to test the relationship

191 Mohammed Ibrahim and Dauda Abubakar: Board Attributes and Financial Reporting Quality of Listed Deposit
Money Banks (DMBs) in Nigeri

Quality of Financial reporting”. research work submitted to

5. Conclusion and the department of accounting Bayero University Kano:
Recommendations unpublished.
[6] Bako, M. A. (2018). The Impact of Corporate Governance on
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quality of deposit money banks in Nigeria during the period 123-135.
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the study concludes that there is positive and not significant Best Practices on Corporate Governance of Nigeria. Nigeria.
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and financial reporting quality after controlling for the firm and Practices (3rd ed):. Oxford: Oxford University Press.
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