Does whistleblowing framework influence earnings management? An empirical investigation

Abstract

In this study, we investigated the impact of whistleblowing framework on earnings management of Nigeria’s financial firms listed on the Nigerian Stock Exchange for the period of 2013–2017. This is necessitated by the increase in whistleblowing activities around the globe. With a sample of 50 firms operating in the financial institutions in Nigeria, we drew insights from the legitimacy theory to examine the effect of whistleblowing framework on earnings management. We developed whistleblowing index to measure whistleblowing framework and accounted for other determinants of whistleblowing framework like audit committee size, risk committee independence, audit committee independence, external audit size, board composition, firm size and international ownership. While earnings management was measured through discretionary accruals. We analysed the data using both content analysis and generalized method of moments. The findings empirically revealed that most Nigerian financial firms intensified efforts towards whistleblowing disclosure, which has a significant impact on the reduction of earnings management practices. This study’s findings call for clear responsibility and a strong drive for whistleblowing disclosure by corporate institutions in Nigeria and other emerging economies. The result of this study provides practical implication in the areas of business ethics, good governance and corporate transparency. The empirical approach used in this study emphasizes the need for corporate organizations to embrace whistleblowing practices and integrate whistleblowing information into their reporting cycle. The finding implies that non-compliance with whistleblowing reporting or disclosure by corporate organizations may have an adverse effect on corporate growth, corporate sustainability and corporate reputation in the long run. A major contribution of this study is the construction of a comprehensive whistleblowing index capable of guiding policy makers, managers and researchers in measuring their whistleblowing activities and reporting.