CHAPTER ONE 1. 1BACKGROUND TO THE STUDY The original need for corporate governance stems from the separation of ownership and control in publicly held companies in the 19th century, it is pertinent at this point to note that this separation has brought about overzealous managers and passive owners. Investors seek to invest their capital in profit-making firms so that they can enjoy these profits in the future. Yet many investors lack the time and expertise necessary to operate a firm and ensure that it provides an investment return.

As a result, investors hire individuals with management expertise to run the company on a daily basis to see to it that the firm’s activities enhance the company’s profitability and long-term performance. In order to have the assurance on the money invested, investors look to the published annual reports and accounts of the business and other information releases that the company might make. The recent spate of corporate debacles have damaged seemingly unassailable corporate reputations and undermined the confidence of investors and the general public in the international financial system.

It has been as a result of these corporate failure that corporate governance has take center stage drawing the attention of the international financial services industry to the increasing significance of corporate governance and opened the subject to intensive and extensive discussions and debate at various international financial and economic fora. In 1999 alone there were 274 conferences in 39 countries on the subject. (Mansur, 2007) These high profile corporate debacles have arisen despite the fact that the annual reports and accounts seemed fine.

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These corporate debacles have had an adverse effect on many people: Shareholders, Government, Employees and the company itself. Examples of such include; Enron in the United States Of America, World Com in the United States of America, Parmalat in Italy, Barings Bank of the United Kingdom, Cadbury Nigeria, and a host of others. Moreover, these high-profile scandals have emerged in markets held to be the world’s most transparent, amply demonstrating that there’s no such thing as a regional exclusive on ethics. Ethical values can be seen to provide a framework upon which any civilized society exists.

Ethics has become a topical issue in many societies with particular reference to Nigeria, where our value system as individuals and as a people have been misplaced. The fruits of these have been expressed in fraudulent accounting practices, misstatement of financial figures, income smoothing, creative accounting and a host of other unethical behaviours which have in time past led to the collapse of seemingly infallible organizations. The channels through which these unethical acts are expressed are in the financial reports which lack the due objectivity, accountability, transparency that is expected.

There has been a great demand on those entrusted with directing and controlling companies for transparency, requiring more reliable and accurate financial statements that will ensure adequate protection to shareholders. This is because, it is generally believed that the financial scandals in which people have lost billions of naira were majorly caused by non compliance with ethical values. The dire need for quality financial reporting has come to fore, the need to ensure the accuracy, objectivity and credibility of financial reporting.

The cases that will be referred to in this work have been known as major business disasters instead of typical ethical issues within corporations. The reason for this being that many of them started as small issues until mismanagement, denial, or other more malevolent motives caused these seemingly minor situations to mushroom into huge legal, ethical and public relations nightmare. This saliently can translate to the fact that if ethical behaviour was rewarded in direct proportion to the punishment of unethical behaviour, it could help deter such unethical behaviors.

The question of ethics usually arises due to the fact that despite the legal framework already set in place to govern and direct how companies are run, financial manipulations still sip into the organization. 1. 2STATEMENT OF THE PROBLEM Over the past years, we’ve seen huge corporate collapses caused directly by the unethical behaviour of senior executives – and huge losses for investors who relied on the financial information produced by those corporations. As a result, public trust towards corporations, their managers, their directors and their auditors has been damaged.

And, public expectations regarding honesty, integrity and transparency have increased considerably. Despite serious efforts by regulatory bodies and governmental agencies to curb this ill in the society, current trend shows that the subject of ethically sound reporting by organizations to their shareholders, the government as well as the entire public portray the scenario of a battle yet to be won as the level of compliance by the primary stakeholders of these firms as well as its consequent effectiveness remain of utmost concern.

For the record, reported cases of poor and fraudulent financial reports and governance issue have cut across both large and small firms, worldwide and otherwise, in almost all these scenarios, the board of directors have had an active role to play, whether directly or indirectly. An example can be seen in Parmalat, an Italian company specializing in long life milk, was founded by Calisto Tanzi. It seem to be a marvelous success story although, as it expended by acquiring more companies, its debt increased and in the late 2003, Parmalat had difficulty making a bond payment despite the fact that it was supposed to have a huge cash reserve.

After various investigations had been carried out, it transpired that the large cash reserves were nonexistent and Parmalat went into administration. With debts estimated at 10 Billion Pounds, Parmalat had also earned itself the name “European Enron”. Callisto Tanzi was a central figure in one of Europe’s largest trials started during 2005. He was accused of providing false accounting information and misleading the Italian stock market regulator. ( Mallin, 2007) Governance failures can have a devastating effective on an organization and could lead to its death, such as Enron in the United States of America.

Governance failures can arise from strategic failure, where the board gives approval for management to execute faulty strategy. It could be as a result of control failure, where the board oversees an inadequate risk management system that results to losses to the company. Governance failures can also arise from ethical failures which could lead to reputation damage of the company. Cadbury Nigeria deliberately overstated its financial position over a number of years (2004-2006) to the tune of between N13 and N15 billion.

Over this number of years, Cadbury Nigeria had assigned itself an ambitious growth target. To achieve these targets, several systems abuses occurred and the overstatements were directly traceable to these systems abuses. In the light of these, the under listed have served as an impetus prompting this research work, -The poor disclosure on corporate governance by manufacturing companies. -Low level of compliance to the provisions of the code of corporate governance by manufacturing companies. -Weakness of Board of directors in the administration of their oversight function. Unethical behaviour with respect to financial reporting and how the company directed and controlled -The failure of legal compliance to the code of corporate governance in eradicating ethical challenges. -The challenges in the implementation of corporate governance in Nigeria After all has been said, a dearth of an adequate system of punishment in Nigeria for the perpetrators or top executives with unethical behaviour leaves the system of governance open for more attack. 1. 3AIMS AND OBJECTIVE OF STUDY The objectives that this research work therefore seeks to achieve include the following: 1.

To determine the level of disclosure on corporate governance and the level of compliance with the provisions of the code of corporate governance. 2. To look into the Board of directors, their various board committees and how they affect the governance of a manufacturing company 3. To access and explain the need for a sound and ethically based system of corporate governance and financial reporting in manufacturing companies 4. To determine the challenges of implementation of corporate governance in manufacturing companies in Nigeria. . 4RESEARCH QUESTIONS Below are a series of questions which this project is poised to provide suggested solutions or answer to; 1. Do manufacturing companies disclose on corporate governance? 2. Are manufacturing companies duly complying with the provisions of the code of Corporate Governance? 3. Are the necessary Board committees constituted, and who effective are these committees? 4. Are there ethical issues in the system of corporate governance and financial reporting in manufacturing companies? 5.

Does legal compliance with the codes of corporate governance translate to more ethical manufacturing companies? 6. What are the challenges manufacturing companies face in implementing proper corporate governance? 1. 5HYPOTHESIS A hypothesis is a conjecture of a definite statement used for further investigation. It is of two types: 1. The Null H (0) Hypothesis 2. The Alternate H (1) Hypothesis The null hypothesis states a conjecture in a negative form while the alternate states a conjecture in a positive form, Izedonmi (2005).

For the purpose of this study, the hypothesis testing shall be stated thus: Hypothesis 1 H0The Nigerian environment is not a suitable ground for the implementation of sound corporate governance H1The Nigerian environment is a suitable ground for the implementation of sound corporate governance Hypothesis 2 H0Compliance with provisions of the code by directors and managers of manufacturing companies does not salvage ethical issues in the companies. H1Compliance with provisions of the code by directors and managers of manufacturing companies will salvage ethical issues in the companies.

Hypothesis 3 H0The weakness of boards and board committees do not increase the chances of corporate governance failure H1The weakness of boards and board committees increase the chances of corporate governance failure 1. 6SIGNIFICANCE AND RELEVANCE OF THE STUDY This study as with any other research must have been prompted by a gap in knowledge and a perceived benefit that can be added. It is without doubt worthy of note that ethical lapses are not limited to the manufacturing industry but also the governmental agencies and the government in itself, hence the significance of this study.

Upon completion, this will immensely add to the existing knowledge and be of assistance to the following: 1. Directors:This work will be of great significance to the directors of manufacturing companies who have and oversight function and are responsible for financial reporting. 2. Accounting Profession:This work will upon completion add to the existing literature on corporate governance, considering its relative newness in the field of Accounting and therefore expand the frontier of knowledge. . This project, upon completion will also open a doorway for numerous other publications to be written on corporate governance. 4. The project will be significant to the shareholders of manufacturing companies, as it will enlighten them their powers as shareholders. 5. This project will particularly be relevant to the numerous shareholders whose monies are put in the furtherance of the manufacturing company’s goals, and to whom the financial reports are tailored. 6. The Government.

This work will help the government establish policies to ensure sound reporting by manufacturing companies and also remedial action against unethical behaviours by directors. 1. 7 SCOPE OF THE STUDY. This research work will focus on all manufacturing companies in the country, that have been in existence for nothinng less than ten (10) years. The size covers all the states in the federation but the sample representative are four manufacturing Companies namely, Cadbury Nigeria Plc, Bagco Super Sacks, Nestle Nigeria Plc and Nigerian Bottling Company Plc. The random sample size of (100) respondents will be used.

The scope, geograpically of this research work shall be limited to Lagos state and the estimated time expcted to carry out this work shall be 6 months. The situs of the project shall be Covenant University, Ota Ogun State. 1. 8 LIMITATION TO THE STUDY The likely limitations to this study will include but are not limited to the following under listed factors: 1. Financial Constraint: The researcher has speculated that considering the nature of material needed for this project, it will be rather expensive to obtain data, Cost of transportation, cost of printing the researchers findings 2.

Time Constraints: The Researcher has envisaged the limited time available to the researcher in the conduct of the research considering the fact that he will have to attend to lectures and other extra-curricular activities in the school as this will most likely be a possible limitation. 3. Difficulty in obtaining relevant information. The nature of confidentiality which is found in most companies will pose a serious limitation to the gleaning of relevant information. 1. 9 RESEARCH METHOD

For this project, with regards collection of data, the research anticipates employing the following: Questionnaire: The type of questionnaire to be administered shall contain both structured and Unstructured questions relevant to the research topic. The questionnaire shall be Structured in simple language, uncomplicated and its intention clear enough for easy Understanding and response. This will be targered at the management and staff of the Manufacturing companies. 1. 10 DEFINITION OF TERMS

Board of Directors:Refers to the managing board of a corporate organization comprising executive and non executive directors, whose responsibility it is to manage on behalf of and report to the owners of the organization. Corporate Governance:This refers to the system by which companies are directed and managed in the best interest of the owners and investors. It refers to the role of the Board of Directors, Executive and non – Executive, Shareholders’ right and to other actions taken by shareholders to influence corporate decision.

Corporate Governance Failure: This represents a chaotic failure in a corporate organization usually as a result of mismanagement or outright fraud. This is usually perpetrated by to management. In most cases the organization dies or takes a long period to recover. Creative Accounting:The incentive use of accounting rules by enterprise in order to present misleadingly good financial statements. Financial Report:These include all instruments employed in communicating financial information to the owners of a business which include the profit and loss statement, Balance sheet, Five year financial summary, annual reports and so on.

Financial Reporting:This is the system on employing financial reports, in a bid to effectively represent to the owners of a business, the true state of affairs of that business. IFRS:International Financial Reporting Standard, these are policy documents usually issued by recognized and authorized bodies. This was developed to replace the International Accounting Standards Board (IASB). Integrity: The principle that the company as well as its key personnel will conduct itself in accordance with clearly defined principles and values consistently in all areas of its activities and in its dealings with all stakeholders.

Transparency: The principle of openness and consistent application of due process, or voluntary disclosure of relevant and sufficient information to all parties REFERENCE Gbede G. O. (2007). Securities Analysis and Portfolio Management, Westborne Business School, Lagos. Izedonmi, P. F. (2005). A Manual for Academic and Professional Research. (2nd edition ed. ) Bamadex Prints. Lagos Mallin, C. A. (2007). Corporate Governance (2nd Edition), Oxford University Press. London Mansur A. (2007). Corporate Governance: A New Fad or an important Development Prerequisite.

Management Express Forum of the British Council. . ? CHAPTER TWO LITERATURE REVIEW 2. 0INTRODUCTION. This chapter discloses or brings to light the literature of scholars, journal, internet materials and other literature documents in text as regards the subject of corporate governance and financial reporting. In essence, all relevant literature both past and contemporary shall be employed to trace its origin, progression and current status. This chapter contains the Conceptual Framework, Theoretical Framework and the Legal Framework. 2. 1CONCEPTUAL FRAMEWORK

Over the last two decades, corporate governance has attracted a great deal of public interest because of its apparent importance for the economic health of corporations and society in general. The headlines of the previous years in particular, portrayed a sad story of corporate ethics (or lack thereof): WorldCom, Anderson, Merrill Lynch, Enron, Martha Stewart, Global Crossing, Qwest Communications, Tyco International, Adelphia Communications, Merck, Computer Associates, Parmalat, Putnam, Boeing, Rite Aid, Xerox, ASEA Brown Boveri, Kmart, Swiss Air, and so on.

Falling stock markets, corporate failures, dubious accounting practices, abuses of corporate power, fraud, criminal investigations, mismanagement, excessive executive compensation indicate that the entire economic system upon which investment returns have depended is showing signs of stress that have undermined investors’ confidence. Some corporations have grown dramatically in a relatively short time through acquisitions funded by inflated share prices and promises of even brighter futures.

In others, it seems as if the checks and balances that should protect shareholder interests were pushed to one side, driven by a perception of the need to move fast in the pursuit of the bottom line. While some failures were the result of fraudulent accounting and other illegal practices, many of the same companies exhibited actual corporate governance risks such as conflicts of interest, inexperienced directors, overly lucrative compensation, or unequal share voting rights (Anderson and Orsagh, 2004). In the face of such scandals and malpractices, there has been a renewed emphasis on corporate governance.

Arguably, failures of governance can often be linked to the failure to disclose the “whole picture”, particularly where off-balance sheet items are used to provide guarantees or similar commitments between related companies. It is therefore important that transactions relating to an entire group of companies be disclosed in line with high quality internationally recognized standards and includes information about contingent liabilities and off-balance sheet transactions, as well as special purpose entities. 2. 1. 0VIEWS ON THE CONCEPT OF CORPORATE GOVERNANCE

The issues of corporate Governance has been given the front burner status by all sectors of the Nigerian economy, this is in the recognition of the critical role it plays in the success or failure of companies. According to Unegbu,(2004) “Corporate Governance refers to the processes and structures by which the business and affairs of an institution are directed and managed, in order to improve long term shareholder value by enhancing corporate performance and accountability, while taking into account, interest of other stakeholders.

Corporate Governance is therefore about building credibility, ensuring transparency and accountability as well as maintaining an effective channel of information disclosure that will foster good corporate performance” The significance of Corporate Governance cannot be overemphasized as it is an important component of the international financial architecture and a necessary mechanism for ensuring the efficient, responsible, honest and transparent governance of economic entities- whether private or public, profit or not- for- profit and large or small.

This can be summed up in the words of James Wolfensohn, the former World Bank President who suggested that: “The proper governance of companies will become as crucial to the world economy as the proper governance of countries. ” In relating corporate governance to ethics, it was R. Kumar (2007) who said that “Corporate governance is about ethical conduct in business. Ethics is concerned with the code of values and principles that enables a person to choose between right and wrong, and therefore, select from alternative courses of action. Further, ethical dilemmas arise from conflicting interests of the parties involved.

In this regard, managers make decisions based on a set of principles influenced by the values, context and culture of the organization. Ethical leadership is good for business as the organization is seen to conduct its business in line with the expectations of all stakeholders. What constitutes good Corporate Governance will evolve with the changing circumstances of a company and must be tailored to meet these circumstances” in his opinion also, Corporate Governance is nothing but the moral or ethical or value framework under which corporate decisions are taken.

It is quite possible that in the effort at arriving the best possible financial results or business results there could be attempts at doing things which are verging on the illegal or even illegal. There is also the possibility of grey areas where an act is not illegal but considered unethical. These raise moral issues. 2. 1. 1WHAT IS CORPORATE GOVERNANCE Corporate governance refers to the way in which companies are governed, and to what purpose. It is concerned with practices and procedures for trying to nsure that a company is run in such a way that it achieves its objectives. This could be to maximize the wealth of its owners (the shareholders), subject to various guidelines and constraints and with regard to the other groups with an interest in what the company does. Guidelines and constraints include behaving in an ethical way and in compliance with laws and regulations. Other groups with an interest in how the company acts include employees, customers and the general public.

Some other definitions that have been provided are as follows: ‘Corporate governance is the system by which companies are directed and controlled. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. ’ (Cadbury Report, 1992). ‘If management is about running businesses, governance are about seeing that it is run properly. All companies need governing as well as managing’ (Professor Bob Tricker, 1984).

Corporate governance is, then, concerned with how powers are shared and exercised by different groups to ensure that the objectives of the company are achieved. Aspects of corporate governance are: the rights of shareholders and other interest groups such as the employees, how powers are shared and exercised by the directors, how the holders of power in a company should be held accountable for what they do. Other factors to take into account are that: A company is a legal entity or ‘legal person’. As a person, it is able to enter into contracts and make business transactions.

It can own assets and owe money to others, and it can sue and be sued in law. Human beings have to make decisions and arrange transactions in the company’s name. The members of a company are its owners, the ‘equity’ shareholders. However, membership changes continually as investors buy and sell the company’s shares. Shareholders have relatively few powers, which are restricted mainly to certain voting rights. Power is in the hands of the board of directors, or perhaps just one or two individual directors on the board.

To appreciate what corporate governance is, it is helpful to be aware of what it is not: Corporate governance is not primarily concerned with day-to-day management of operations by business executives. The powers of executive managers to direct business operations are one aspect of governance, but management skills are not. Similarly, corporate governance is not concerned with formulating business strategy, although the responsibility of the board of directors and executive managers for taking strategic decisions is. Anonymous (n. d4) 2. 1. 2WHY IS CORPORATE GOVERNANCE IMPORTANT

Few topics are more central to the international business and development agendas than corporate governance. A series of events over the last two decades have placed corporate governance issues as a top concern for both the international business community and the international financial institutions. Spectacular business failures such as the infamous Bank of Credit and Commerce International scandal, the United States savings and loan crisis, and the gap between executive compensation and corporate performance drove the demand for change in developed countries.

More recently, high profile scandals, financial crises and/or institutional failures in Russia, Asia and the United States have brought corporate governance issues to the fore in developing countries, transitional economies, and emerging markets. These incidents illustrate that the lack of corporate governance enables insiders, whether they be company managers, company directors or public officials, to ransack companies and/or public coffers at the expense of shareholders, creditors and other stakeholders (employees, suppliers, the general public, and so forth).

Yet, in today’s globalized economy, companies and countries with weak corporate governance systems are likely to suffer serious consequences above and beyond financial scandals and crises. What is increasingly clear is that how corporations are governed commonly referred to as corporate governance largely determines the fate of individual companies and entire economies in the age of globalization. Globalization and financial market liberalization have opened up new, international markets with the possibility of reaping stunning profits.

Yet it has also exposed companies to fierce competition and to considerable capital fluctuations. National business communities and company managers are learning that in order to expand and be internationally competitive they need levels of capital that exceed traditional funding sources. Failure to attract adequate levels of capital threatens the very existence of individual firms and can have dire consequences for entire economies. Lack of sufficient capital, for example, erodes firm’s competitiveness eliminating jobs and hard-won social and economic gains thereby exacerbating poverty.

Firms unable to attract capital run the risk of becoming suppliers and vendors to the global multinationals or, worse yet, being unable to compete and thus left out of international markets entirely, while entire economies run the risk of not being able to take advantage of globalization. Yet, recent financial crises provoked by corruption and mismanagement have made attracting sufficient levels of capital particularly challenging these days.

These crises cost investors billions of dollars and sabotaged company’s financial viability. They also contributed to increased shareholder activism and competition for investment. Investors, especially institutional investors, are now making it clear that they are not willing to foot the bill for corruption and mismanagement. Before committing any funds, investors increasingly require evidence that companies are run according to sound business practices that minimize the possibilities for corruption and mismanagement.

Moreover, investors and institutions in Bogot or Boston, Beijing or Berlin, want to be able to analyze and compare potential investments by the same standards of transparency, clarity and accuracy in financial statements before investing. In fact, being a credible business that can withstand the scrutiny of international investors is more than just a matter of global marketing: it has become essential for local companies and for entire economies to grow and prosper. The bottom line is that investors seek out companies that have sound corporate governance structures.

Corporate governance is the body of “rules of the game” by which companies are managed internally and supervised by boards of directors, in order to protect the interests and financial stake of shareholders who may be located thousands of miles away and far removed from the management of the firm. Just as good government requires transparency so that the people can effectively judge whether their interests are being served, corporations must also act in a democratic and transparent manner so that their owners can make educated decisions about heir investments. This is what corporate governance is all about. What is often overlooked is that corporate governance is just as important for public sector firms as for private sector companies. Instituting corporate governance within public sector firms has recently begun to receive increased attention. This is particularly the case when countries are attempting to curb widespread corruption within the public sector, or when they are preparing public enterprises for privatization.

In either scenario, sound corporate governance measures help to ensure that the public gets a fair return on their national assets. (CIPE 2002) 2. 1. 3REVIEW OF DEVELOPMENTS OF GOOD CORPORATE GOVERNANCE PRACTICES IN NIGERIA The Director General of the Securities and Exchange Commission, Musa Al-Faki(2007), in outlining the importance of Good corporate governance and tracing its development the said “Before the introduction of the code of corporate governance in Nigeria in November 2003, the following legislations influenced operations of corporate enterprises.

Companies and Allied Matters Act (CAMA) 1990: The Act prescribes the duties and responsibilities of managers of all limited liability companies. Investment and Securities Act (ISA) 1999 and earlier legislations. The Act requires the Securities and Exchange Commission (SEC) to regulate and develop the capital market, maintain orderly conduct, transparency and sanity in the market in order to protect investors. Banks and other Financial Institutions Act 1991 as subsequently amended: The Act empowers the CBN to register and regulate Banks and other Financial Institutions.

In spite of the above provisions, there is unanimity that lack of proper coordination, uniformity in standards of best practices and enforcement of the various laws were contributory to the failure of many companies in the banking sector and to some extent, in other sectors of the economy. In an attempt to redress these inadequacies and to align with International best practices, the SEC inaugurated a seventeen (17) man Committee on corporate governance headed by Mr. Atedo Peterside (OON), in June 2000.

The Committee’s terms of reference among others were to identify weaknesses in the current corporate governance practices in Nigeria with respect to public companies and make appropriate recommendations. The report of the Committee was published to elicit comments by all stakeholders after which seminars were held in Lagos, Abuja and Port Harcourt to discuss the report. The final report was launched in November 2003. The code is applicable to quoted companies and public companies with multiple ownership”. . 1. 4ETHICS IN CORPORATE GOVERNANCE “Given emerging societal sophistication expressed in the people, technology, relevant laws, human rights and consumer charters etc. ethics as an inseparable factor in good corporate governance should be appreciated, understood and embraced by those who govern”(Egwuonwa, 1997) He went further to suggest the corporate governors in Nigeria should fashion out acceptable codes of ethics and push for the promulgation of a law to embrace its content.

In his opinion,” a uniform code should prescribe the minimum acceptable behaviour” and not the individualistic approach that some have used overtime. Further into his review however, the subject of how effective these codes are would bring to light the subsisting deviations in view over this subject. Nevertheless, whether as codes, laws or moral values, there appears to be an agreement as to the need for sound ethical conduct in the governance of firms, most especially in the manufacturing sector. 2. 1. 4. 1WEAKNESS IN CORPORATE GOVERNANCE

The Central Bank of Nigeria (2006), which is the apex bank in Nigeria in its publication on the code of corporate governance for banks in the post consolidation period outlined certain weakness of corporate governance in the banking sector which also apply to the manufacturing industries, such weakness include but are not limited to: 1. Disagreements between Board and Management giving rise to Board squabbles. 2. Ineffective Board oversight functions. 3. Fraudulent and self-serving practices among members of the board, management and staff. 4.

Overbearing influence of chairman or MD/CEO, especially in family-controlled banks (Also manufacturing companies). 5. Weak internal controls. 6. Non-compliance with laid-down internal controls and operation procedures. 7. Ignorance of and non-compliance with rules, laws and regulations guiding banking business (Also manufacturing companies).. 8. Passive shareholders. 9. Sit-tight Directors – even where such directors fail to make meaningful contributions to the growth and development of the Bank (Also manufacturing companies). 10. Succumbing to pressure from other stakeholders e. g. shareholder’s appetite for high dividend. 1. Technical incompetence, poor leadership and administrative ability. 12. Inability to plan and respond to changing business circumstances. 13. Ineffective management information system. 2. 1. 5VIEWS ON THE CONCEPTS OF FINANCIAL REPORTING The traditional function of financial reporting was to provide business owners with information about the companies that they owned and operated. Once the delegation of managerial responsibilities to hired personnel became a common practice, financial reporting began to focus on stewardship—that is, on the managers’ accountability to the owners.

Its purpose then was to document how effectively the owners’ assets were managed, in terms of both capital preservation and profit generation. Once businesses were commonly organized as corporations, the appearance of large multinational corporations and the widespread employment of professional managers by absentee owners brought about a change in the focus of financial reporting. Although the stewardship orientation did not become obsolete, financial reporting beginning in the mid-20th century became somewhat more geared toward the needs of investors.

Because both individual and institutional investors view ownership of corporate stock as only one of various investment alternatives, they seek much more future-oriented information than was supplied under the traditional stewardship model. As investors relied more on financial statements to predict the results of investment and disinvestment decisions, accounting became more sensitive to their needs. One important result was an expansion of the information supplied in financial statements. The proliferation of mandated notes that accompany financial statements is a particularly visible example.

Such notes disclose information that is not already included in the body of the financial statement. One of the very first notes identifies the accounting methods adopted when acceptable alternative methods also exist, or when the unique nature of the company’s business justifies an otherwise unconventional approach. The notes also disclose information about lease commitments, contingent liabilities, pension plans, stock options, and the effects of translating foreign currency amounts, as well as details about long-term debt, such as interest rates and maturity dates.

A public company having a widely distributed ownership includes among its notes the income amounts that it earned in each three-month fiscal period known as a quarter. It also includes quarterly stock market prices of its outstanding shares of common stock and information about the relative sales and profit contributions of the different operating components that make up a diversified company. (Meyer, 2007) 2. 1. 5. 1 OBJECTIVE OF FINANCIAL REPORTING Goal of presenting useful information to financial statement users so that proper decisions can be made.

Data presented should be comprehensive so that a good understanding of the entity’s activities is possible. Financial information should aid in the evaluation of the amounts, timing, and uncertainties of cash flows. Also, financial reporting should furnish information about the firm’s economic resources, claims against those resources, owners’ equity, and changes in resources and claims. Financial reporting should provide information about financial performance during a period and management’s discharge of its stewardship responsibility to owners.

It should likewise be useful to the managers and directors themselves in making decisions on behalf of the owners. Anonymous (n. d3) 2. 1. 5. 2 FINANCIAL REPORTING IN NIGERIA The issue of financial reporting in Nigeria cuts across both the private and public sector and all such activities that take place must comply with the provisions of Companies and Allied Matters Act 1990 regarding the preparation of financial reports to the owners of companies and other interested parties.

The Companies and Allied Matters Act 1990 requires every company to keep financial records and prepare and publish the annual financial report. It is expected by Companies and Allied Matters Act 1990 that the financial report state the significant changes in the activities of the company over the years, an indication of the likely future development of the company, directors interest in the company, money given out as donations to charity organizations, policy and practice of the company.

Section 335 (2) of Companies and Allied Matters Act 1990 expressly requires that the balance sheet should give a true and fair view of the state of affairs of a company as at the end of the year and the profit and loss account shall give a true and fair view of the profit and loss of the company for the year. Osisioma opined that the true and fair view is both statutory and professional requirement, which in their standard requirement disclose sufficient information which in quality and quantity satisfies the reasonable expectations of users of financial reports.

According to him, he suggested that such acts should address the five basic issues of information disclosed; 1. For whom is the information to be disclosed? 2. What is the purpose for the information? 3. How much information should be disclosed? 4. How should the information be disclosed? 5. When should the information be disclosed? He further noted that true and fair statements are generally regarded to have met Generally Accepted Accounting Principles (GAAP). 2. 1. 6THE NEED FOR REGULATION OF FINANCIAL REPORTING Regulation involves the adjusting, organizing, or controlling of something.

Regulation also involves making sure that something will work (Collins et al 2001) (As cited in Ofoegbu and Okoye (2006: 47-48). Regulating corporate financial reporting involves not only setting up disclosure requirements but also providing adequate mechanisms to monitor the adherence to the standards of disclosure required of companies in financial reporting activities. Once the disclosure requirements are stipulated, punishment should be meted for non-compliance with the requirements. Financial reporting is a regulated activity. Its regulation is justified as far as it is in the interest of the public.

Wolk and Teamey, (1997) (as cited in Ofoegbu and Okoye 2006), identified three reasons why financial reporting should be regulated thus: 1)To prevent low quality financial information 2)Underproduction of accounting information 3)To avoid monopoly of information supply 1. TO PREVENT LOW QUALITY FINANCIAL INFORMATION Arguments occurred due to a number of factors which includes lot of flexibility in the choice of accounting policies by management; existence of poor accounting standards, frequently occurred laxity on the part of the auditors etc.

As a result of the regulation of financial reporting, investors build more confidence in the market. Regulation is necessary to raise the quality of financial reporting so that the public can be protected from failures as well as fraud. 2. UNDERPRODUCTION OF ACCOUNTING INFORMATION According to them, accounting information is regarded as public goods and as such there are free riders. Free riders can be said to be those who consume the public goods at no cost.

If the producers of the accounting information cannot absorb the cost alone or impose it on consumers that may lead to externalities or the production of inadequate accounting information. 3. AVOIDANCE OF MONOPOLY OF INFORMATION SUPPLY They argued that the firm is a monopoly supplier of information about itself If the information market is not regulated, then the firm will supply and anybody or investor desiring more information would have to obtain it at all cost. They affirmed that mandatory disclosure would result in more information and lower cost to the investor that would be achieved in an unregulated market. . 1. 7VIEWS ON THE CONCEPT OF ETHICS The term ethics is commonly perceived to mean the code or rule of behaviour, however, in this context, (Business) Ethics, can be defined as written and unwritten codes of principles and values that govern decisions and actions within a company. In the business world, the organization’s culture sets standards for determining the difference between good and bad decision making and behavior. In the most basic terms, a definition for business ethics boils down to knowing the difference between right and wrong and choosing to do what is right.

The phrase ‘business ethics’ can be used to describe the actions of individuals within an organization, as well as the organization as a whole. There are two schools of thought regarding how companies should approach a definition for business ethics: the shareholder perspective and the stakeholder perspective. The first school of thought, the shareholder perspective to business ethics are those who approach ethical decision making from a shareholder perspective focus on making decisions that are in the owners’ best interest. Decisions are guided by a need to maximize return on investment for the organization’s shareholders.

Individuals who approach ethics from this perspective feel that ethical business practices are ones that make the most money, while the second school of thought, the stakeholders perspective, this school is of the opinion that companies should consider the needs and interests of multiple stakeholder groups, not just those with a direct financial stake in the organization’s profits and losses. Organizations that approach business ethics from a stakeholder perspective consider how decisions impact those inside and outside the organization.

Stakeholders are individuals and groups who affect or who are affected by a company’s actions and decisions. Shareholders are definitely stakeholders, but they are not the only ones who fall under the definition of stakeholder. Stakeholders may include: employees, suppliers, customers, competitors, government agencies, the news media, community residents and others. The idea behind stakeholder based ethical decision making is to make sound business decisions that work for the good of all affected parties.

It is pertinent to note that a company’s managers or directors play an important role in establishing its ethical tone. If managers (Directors) behave as if the only thing that matters is profit, employees are likely to act in a like manner. A company’s leaders are responsible for setting standards for what is and is not acceptable employee behavior. It’s vital for managers to play an active role in creating a working environment where employees are encouraged and rewarded for acting in an ethical manner. Managers (Directors) who want employees to behave ethically must exhibit ethical decision making practices themselves.

Managers (Directors) have to remember that leading by example is the first step in fostering a culture of ethical behavior in their companies. No matter what the formal policies say or what they are told to do, if employees see managers behaving unethically, they will believe that the company wants them to act in a like manner. It is without doubt fair to say at this point that the issue of ethics cannot be overemphasized when it comes to issues of business decisions as Companies and businesspeople who wish to thrive long-term must adopt sound ethical decision-making practices.

Companies and people who behave in a socially responsible manner are much more likely to enjoy ultimate success than those whose actions are motivated solely by profits. Knowing the difference between right and wrong and choosing what is right is the foundation for ethical decision making. In many cases, doing the right thing often leads to the greatest financial, social, and personal rewards in the long run. Anonymous (n. d1) 2. 1. 7. 1 IMPORTANCE OF ETHICS. According to Adewunmi (1998), “Ethics is one of the nebulous concepts that do not lend themselves to a broadly and generally accepted definition.

What seems to be consensual about is that it has to do with what is good or not good, what is right or wrong what is acceptable in a given environment or not, that is expected or not of a person and generally means the guidelines, rules of conduct by which we aim to live, work and socialize” Ethics is undoubtedly rooted in philosophy. The importance of ethics can be seen to be of serious importance in all facets of business life and personal life, however, the importance will be base specifically on how manufacturing companies are directed and controlled and how this affects its financial reporting.

According to Abass (2007) cited in Akpan E. J (2008). The importance of ethics in an organization can be seen as follows: 1. It serves as guidance to the staff in an organization. By far the most fundamental question about this subject is; what has business go to do with ethics? Sometimes it is put cynically: can a moral person succeed in business. 2. It helps to secure shareholders value. 3. It helps to guide the reputation of the organization 4. It shows the company is responsible 2. 1. 7. 2 ETHICAL ISSUES IN CORPORATE GOVERNANCE

According to Unebgu, The issue of ethics is so very important in business, that once it is absent, the corporation is doomed. There are many examples around the world why ethics in corporate governance is very necessary. The collapse of the “Asian Tigers” showed that if there was lack of corporate governance based on ethics, there will be a very adverse impact on business and investment. The recent destruction of Enron has brought into sharp focus the fact that if there is lack of proper corporate governance, a very “Successful” company, like Enron, can also be led to disastrous consequences.

The issue of good corporate governance based on ethical values becomes very important as far as global business is concerned because investment in goods and services takes place across borders. This is why corruption in a nation deters direct foreign investment. As already pointed out, it will be difficult to have good governance practices if the business environment is one besotted by poor governance and corruption. In recent years, corporate dishonesty, has been encouraged by the availability of easy money, the finance industry (as well as the manufacturing) is more given to hard like behaviours than any other.

Its bosses always imagine that their rivals down the street have just stumbled on upon the perfect way to make risk free profits. Corporate governance depends on the commitment of the board and management of the company, for the principle of integrity and transparency in the running of the business and also depends on the legal and administrative framework created by the government. Where public governance is poor, we cannot have good corporate governance.

In the place of Corporate Nigeria, we must strive to put in place global practice standards so that at least while some level of corruption and business scam ma still exist, we can minimize the incidence of the scams. The ethical standards of any business depend on the sense of value of the individual and social values accepted by the society and the business community. 2. 1. 7. 3ETHICS IN FINANCIAL REPORTING Fraudulent financial reporting, financial statements with errors so material as to require restatement, and biased reporting marred by defects such as managed earnings have plagued financial reporting in many countries in recent years.

All of those failures are ethics failures that represent breaches of fiduciary duties by individuals who accepted responsibilities but did not fulfill them. The financial reporting system practiced in America is viewed by the parties involved in it as generally satisfactory. However, according to another view, the interests of those primarily and secondarily responsible for those reports conflict with the interests of the intended beneficiaries, or users, of the corporate financial statements. A more realistic view of the actual operation of that reporting system shows that it is fundamentally flawed.

Primary responsibility for failures rests with top management and financial management of the reporting corporation who are so strongly motivated to render favorable reports on their stewardship that they neglect their fiduciary responsibilities to investors. Secondary responsibility falls on ‘independent’ auditors who are so heavily influenced by enterprise management that they, too, fail in carrying out their responsibilities to users of the audited financial statements. Ethics compromises are also found in the performances of academic accountants and members of accounting standards-setting bodies.

The conflict between management’s interest in reporting its performance in a favorable light and investors’ interest in decision-useful financial information will always exist and require regulation. However, changes in those regulations and in the basic governance arrangements involving shareholders, management, and auditors could reduce the opportunities and temptations for failures in carrying out fiduciary responsibilities. Most importantly, the close relationships between auditors and management must be loosened in favor of closer relationships between auditors and investors. 2. 1. 7. CASE OF ETHICAL LAPSE IN MANUFACTURING COMPANY The celebrated case of Enron is seemingly present in any discussion on the subject of corporate governance, however, there have been various other cases of corporate governance failure across the world, which include WorldCom, Anderson, Merrill Lynch, Enron, Martha Stewart, Global Crossing, Qwest Communications, Tyco International, Adelphia Communications, Merck, Computer Associates, Parmalat, Putnam, Boeing, Rite Aid, Xerox, ASEA Brown Boveri, Kmart, and the likes, Here in Nigeria, there is an indigenous case, the case of Cadbury Nigeria Plc.

Cadbury Scheweppes plc, a group that owns a number of confectionery and soft drink brands in 200 countries of the world, is seriously considering whether Cadbury Nigeria plc would continue to exist as a business or not. This follow the stunning revelation associated with the company’s financial statements. The British confectionery giant feels thoroughly embarrassed by the outcome of its instigated investigation, which revealed the overstatement of accounts by up to N15-billion. This led to the sack of Bunmi Oni, the managing director and his finance director, Ayo Akadiri.

Industry sources revealed that Cadbury Nigeria’s account was not overstated by only three years, as the investigation revealed, but that the company had been overstating its account since 1997. That year, when it declared a turnover of N5. 7-billion, its average collection period was about 26 weeks, the highest in the sector, compared to Nestle Nigeria’s four weeks; Lever Brothers’ (Unilever), two weeks; Nigerian Breweries, two weeks; Guinness, one week; WAPCO, one week, and Dunlop Nigeria, three weeks. The normal thing is 30 days stock or 30 days trade debtors.

What Cadbury Nigeria did, according to industry sources, was to ship out goods in order to show very good turnover for that year and the goods got stock in customers’ warehouses for six months. In 1999, when its turnover shot up to N8. 9-billion, following improved demand for goods and services generally in the country, Cadbury’s average collection period was still as high as 12 weeks with Unilever and Nigerian Breweries recording virtually zero collection period. Nestle recorded 1. 5 weeks average collection period that year with profit before tax (PBT) over shareholders fund of 127 percent.

Cadbury had achieved 50. 8 percent in PBT over shareholders’ fund, which showed it was performing excellently although not as well as Nestle. Cadbury Schweppes plc was, perhaps, before now, looking elsewhere and could not be bothered about the integrity of its subsidiary’s financial statement. It was obviously more interested in the dividends it was getting and in the trading relationships. When it increased its shareholding and decided to consolidate its accounts in Cadbury Nigeria, it became more involved and this was essentially what necessitated the financial investigations.

The new finance director of Cadbury Nigeria plc, Martyn J. Newlands, arrived Nigeria September, and this, the acting managing director, Wallace Garland, who was seconded from Cadbury Egypt is only going to spend three months in Nigeria. This gives the impression of some difficulty in attracting an expatriate successor for Bunmi Oni. Cadbury Nigeria has however done so much of community service and has rendered a share of social responsibility. It has also had its share price on the increase over the earsand patronage has never declined.

Despite its achievement, it was discovered that Cadbury Nigeria has not had the interest of the public in the true sense of it. This is stated thus because public interest does not just cover social responsibility and community service, it goes further than that, it also covers being truthful, honest and upholding integrity in the disclosure of profit and loss. Hence, where is seems that a company tries to influence public perception by overstating profit and understating losses, then such company is not operating with the public interest in mind.

This was the case with Cadbury Nigeria Plc and now Cadbury Schweppes Plc is seriously considering whether Cadbury Nigeria Plc will continue to exist as a business or not. IMPLICATIONS OF THE CADBURY NIGERIA SCANDAL By the time it increased its shareholdings and decided to consolidate its accounts in Cadbury Nigeria Plc, financial investigations sprang up. The scandal caused the following to occur: 1. Removal of Managing Director and Financial Director with both facing trials. 2. Reputation damage to a well patronized beverage manufacturing company. 3. Loss of trust and withdrawal of stakes by stakeholders . Reduction in value of shares and share price. THE AFTERMATH OF THE CADBURY NIGERIA CASE The Securities and Exchange Commission (SEC) has released its final decisions on the financial misstatements in the published annual Accounts and Reports of Cadbury Nigeria plc between 2002 and 2005. Consequently, the company’s former managing director, Bunmi Oni and former executive director, Ayo Akadiri have been banned from operating in the Nigerian capital market, being employed in the financial services sector and holding directorship positions in any public company in Nigeria.

Also Cadbury Nigeria Plc, and all the officials involved in the saga including Bunmi Oni, Ayo Akadiri, J. S. T Bogunjoko, Abiodun Jaji, Andrew Baker, Christopher Okeke, Olatunde Falase, Raymond Ihyembe, Gabriel Onabote, Olusegun Oyewole, Matthew Shattock, Uduimo Itsueli, Olusegun Aina, Akinbode Gbolahan and Tunde Egbeyemi have been referred to the Economic and Financial Crimes Commission (EFCC) for further investigation and prosecution.

A statement from the commission yesterday, which was signed by the head of media, Lanre Oloyi, indicated that the administrative proceedings committee (APC) had confirmed that the Bunmi Oni, the company’s former managing director in concert with the company’s Board since year 2002 used stock buy backs, cost deferrals, trade loading and false suppliers stock certificates to manipulate its financial reports that were issued to the public and filed with the Commission.

Both Oni and Akadiri, a had stated that the use of the sale and stock buy-back as well as the issuance of false stock certificates schemes were motivated by what they called “profit management desire/action” and that off-shore payments were made to executive directors to cushion the devaluation of their pay by soaring inflation. Also, other directors including the chairman, Uduimo Itsueli, Olatunde Falase, Raymond Ihyembe, Gabriel Onabote, Olusegun Oyewole, Matthew Shattock, Thomas Ayorinde, Z.

C. Enuwa and S. J. Balogun were suspended from operating in the Nigerian capital market, being employed in the financial services sector and holding directorship positions in any public company in Nigeria for a period of one year from the date of the decision. Some other directors and officials of the company found culpable were suspended for a period of between three and five years.

External auditors to the company during the period, Akintola Williams, Deloitte was ordered to pay a fine of N20 million within 21 days of the decision for its failure to handle the accounts of the company with high level of professional diligence failing which its registration with the commission shall be cancelled. Cadbury was ordered to pay specific fines to the commission. It would be recalled that the commission in June 2006 received a copy of Cadbury’s Annual Reports and Accounts for 2005.

Upon review of the report, the Commission wrote to Cadbury via a letter dated September 22, 2006 to express concern on issues arising from the report in the areas of declining profitability, worsening leverage ratio, deteriorating cash flow, inadequate disclosure, non-compliance with Corporate Governance Code, and obtaining loans for the payment of dividends to shareholders contrary to SEC regulations.

Thereafter, the chairman of Cadbury Nigeria Plc, Uduimo Itsueli, through a letter to the Commission dated November 16, 2006 reported the engagement of an independent firm, Price Waterhouse Coopers (PWC), to investigate the allegation of overstatement in the company’s financial statements for the period 2003 to September 30, 2006. Subsequently, the commission constituted an in-house committee, which carried out a thorough investigation on the matter and confirmed the report of misstatements in the account of Cadbury to the tune of approximately N13 billion. Consequently, the directors, some management taff of the company, its external auditor, Akintola Williams Delloite (AWD) and the Registrars, Union Registrars Limited were invited before the Administrative Proceedings Committee (APC) of the Commission to explain why sanctions should not be imposed on them for violating the provisions of the Investments and Securities Act 1999, the SEC Rules and Regulations 2000 (as amended), Code of Conduct for Capital Market Operators and their Employees and the Code of Corporate Governance in Nigeria. The APC sat on May 21, 2007, February 13 and 14 2008 to hear the matter.

At its sitting on March 27 and 28, 2008, the committee arrived at its findings and decisions. Ogbuotob (2006) 2. 1. 8AGENTS OF GOOD GOVERNANCE IN FINANCIAL REPORTING Good governance is the product of the primary effort of all directors and executives of an organization as well as all other stakeholders in the immediate and remote environment of the company. According to Rezaee, (2003) Quality financial reports, including reliable financial statements free of material misstatements due to errors and fraud, can be achieved when there is a well-balanced, functioning system of corporate governance.

Corporate governance is a mechanism of managing, directing, and monitoring a corporation with the goal of creating shareholder value while protecting the interests of other stakeholders (such as creditors, employees, and customers). For good corporate governance, companies should develop a “six-legged stool” model that supports responsible and reliable financial reports. Each participant in the process is a leg of the stool, supporting the one top goal of producing high-quality reports. The model is based on the active participation of all parties and fosters continuous improvements.

It consists of six groups: * Board of Directors * Audit Committee * Top Management Team * Internal Auditors * External Auditors * Governing Bodies Management accountants play an important role in helping corporate governance participants fulfill their responsibilities. The 1999 report of the Blue Ribbon Committee on “Improving the Effectiveness of Corporate Audit Committees” suggested a “three-legged stool” involving the chief financial officer, independent auditor, and audit committee.

Now, however, more emphasis is being placed on the entire corporate governance responsibility. BOARD OF DIRECTORS Aligning the interests of managers and shareholders requires vigilant, independent, effective boards. A board of directors doesn’t get involved in day-to-day management, yet it has the unique role of overseeing, monitoring, and controlling management activities. It should monitor management plans, decisions, and activities and act independently. The tone set by the board usually influences the behavior of others within the company.

Ineffective boards make financial statement fraud possible. A board can be rendered ineffective when management overrides the board’s monitoring responsibility, influences the selection of outside directors, controls meetings and agendas, and delivers inside information to certain members. The two biggest corporate failures of recent times, Enron and WorldCom, raised concerns about the lack of vigilant oversight. Enron’s board allowed the creation and operation of special-purpose entities designed to overstate earnings and assets and understate liabilities.

Congress enacted the Sarbanes-Oxley Act of 2002 to improve corporate governance, and the Securities & Exchange Commission (SEC) imposed new rules as well. Sarbanes-Oxley requires the board to either form an audit committee or take on its responsibilities. It also prohibits directors and officers from fraudulently influencing, coercing, manipulating, or misleading auditors. They’re also barred from purchasing, selling, or transforming any equity security during a pension fund blackout. AUDIT COMMITTEES

The audit committee (composed of nonexecutive and independent board members) oversees corporate governance, financial reporting, internal control, and audit functions. The more vigilant the audit committee, the lower the probability of financial statement fraud. Members must be financially literate, professionally qualified, operationally knowledgeable, and functionally independent. They’re directly responsible for the appointment, compensation, and oversight of external auditors, and they must pre-approve all audit and any permissible non-audit services external auditors provide.

They should establish procedures for whistleblowers to submit their concerns without fear of retribution, and at least one committee member should be a financial expert. The success of audit committees depends on their working relationships with other corporate participants. When audit committees receive information about possible fraud, they should investigate thoroughly and report to the board. Enron’s a

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