Earnings Management and Financial Performance of Listed Non-Financial Firms in Nairobi County, Kenya

Abstract

Earnings management practices have taken center stage in most businesses; today, most firms 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 firms to boost performance. It is in this light that this study sought to determine the effect of earnings management practices on financial performance of firms in Nairobi. 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 non-financial firms listed with NSE in Nairobi. The study was anchored on: signaling theory which enable firms 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 firms interact with environment. This study is useful to the management and shareholders of firms in Kenya, Institute of Certified Public Accountants of Kenya [ICPAK]. Using descriptive and inferential research designs, the study sampled 164 senior managers drawn from accounts departments in 41 non-financial firms listed with NSE in Nairobi 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 firms and that the firms 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 non financial firms listed with NSE and that good expense management practices involving recognition of expenses, reserves and inventory as well as reduction in discretionary expenditures influenced the firms’ performance. The study found assets and liability management by firms does not promote financial performance of firms and that overstating assets and understating liabilities, and concealment of liabilities negatively affected financial performance of firms. However, it was also found that proper inventory management practices, proper management of accrued payable expenses and accounts payable promotes profitability performance of firms. Further, the study found that accounting regulations did not fully mediate in the relationship between earnings management practices and firms’ financial performance and that accounting flexibilities allowed firms to engage in inappropriate earnings management. The study recommends that firms need to come up with appropriate rules and guidelines on earnings management practices. It further recommends that ICPAK to develop policies supporting appropriate earnings management practices by firms so as to promote financial performance.