Accounting Conservatism and Earnings Management: Evidence From Nigeria's Corporate Sector

The prevalence of earnings management practices and the role of accounting conservatism in shaping financial reporting integrity remain key concerns in corporate finance literature, particularly within developing economies like Nigeria. Despite its importance, empirical investigations on the nexus between accounting conservatism and earnings management are sparse, and those that exist present conflicting findings. This study investigates the effect of accounting conservatism on the incidence of earnings management among 50 stratified randomly selected quoted non-financial firms in Nigeria, covering the period from 2014 to 2022. Using a robust panel dataset and employing both descriptive and inferential statistical techniques, the study explores two primary dimensions of earnings management—discretionary accruals and real activities manipulation. Hypotheses were tested at a 5% level of significance. Findings indicate that both earnings management and accounting conservatism are prevalent among Nigerian non-financial firms. More importantly, the analysis reveals a statistically significant and positive relationship between accounting conservatism and both measures of earnings management. Specifically, accounting conservatism accounts for 34% of the variation in discretionary accruals and 52% of the variation in real earnings management. These results challenge the conventional wisdom that accounting conservatism inherently improves the quality of financial reporting. Instead, they suggest that conservatism may be exploited opportunistically by managers to obscure underlying economic performance, thereby facilitating rather than curbing earnings management. The study concludes that while conservatism may serve certain prudential purposes, its excessive application may undermine the transparency and reliability of financial reports. Accordingly, it is recommended that regulatory bodies and standard-setters in Nigeria critically reassess the extent and application of conservative accounting practices. Curtailing their use or implementing stricter oversight could serve to enhance the overall quality and credibility of financial statements in the Nigerian corporate environment.