EARNINGS MANAGEMENT AND FINANCIAL PERFORMANCE OF SELECTED DEPOSIT MONEY BANKS IN NIGERIA

ABSTRACT: Earnings management practices have taken center stage in most businesses; today, most banks have adopted various practices to enhance financial performance. Even though these practices have in some instances been used for wrong reasons that have led to business failures, the practices are still embraced by most banks to boost performance. It is in this light that this study sought to determine the effect of earnings management practices on financial performance of selected commercial banks in Lagos. The specific objectives of the study were to determine the effect of revenue management, expense management and assets and liability management on financial performance of selected commercial banks in Lagos. The study was anchored on: signaling theory which enable banks to send signals to stakeholders on financial health, performance and future prospects; agency theory which explains the relationship between principles and agents and; institutional theory which looks at how banks interact with environment. This study is useful to the management and shareholders of banks in Nigeria, Institute of Certified Public Accountants of Nigeria. Using descriptive and inferential research designs, the study sampled 164 senior managers drawn from accounts departments in 8 selected commercial banks in Lagos using stratified sampling procedures with 80 responding to questionnaires. Data analysis was done by use of SPSS version 21.0. Both descriptive and inferential analyses were done. The study found that revenue management enhanced financial performance of selected commercial banks and that the banks undertook various revenue management practices among them revenue timing, revenue projections, shifting of earnings and revenue recognition to enhance financial performance. The study also found that expense management practices promoted financial performance of selected commercial banks and that good expense management practices involving recognition of expenses, reserves and inventory as well as reduction in discretionary expenditures influenced the banks’ performance. The study found assets and liability management by banks does not promote financial performance of selected commercial banks and that overstating assets and understating liabilities, and concealment of liabilities negatively affected financial performance of selected commercial banks. However, it was also found that proper inventory management practices, proper management of accrued payable expenses and accounts payable promotes profitability performance of selected commercial banks. Further, the study found that accounting regulations did not fully mediate in the relationship between earnings management practices and banks’ financial performance and that accounting flexibilities allowed banks to engage in inappropriate earnings management. The study recommends that banks need to come up with appropriate rules and guidelines on earnings management practices. It further recommends that ICPAN to develop policies supporting appropriate earnings management practices by banks so as to promote financial performance.