The impact of board attributes on earnings management in state-owned enterprises in South Africa.

Abstract

State-owned enterprises (SOEs) in South Africa (SA) have been the centre of attention of the media, regulators, oversight bodies, and the public due to a lack of good corporate governance, transparency, and accountability. With the persistent financial pressures and the lack of corporate governance of state-owned enterprises in South Africa, the study aimed to ascertain the effect of board independence, CEO duality, and board size on earnings management in South African SOEs. The sample consisted of 15 SOEs in Schedule 2 of the Public Finance Management Act, 1 of 1999 (PFMA), excluding financial and insurance companies from 2016 to 2020. The measurement of earnings management is discretionary accruals, which was calculated using the Kothari model. The study found that board independence had a statistically significant adverse impact on earnings management for the SOEs over the period under review (2016-2020). There was no statistically significant adverse association between board size and earnings management for the SOEs over this same period. The findings indicate that there is no correlation between CEO Duality and EM in the SOEs in SA as none of the SOEs had a board chairman who also acted as CEO. Overall, the three variables did not statistically significantly show a negative or positive relationship with earnings management on the SOE. The study's findings suggest that, of the three variables, only board independence decreases the likelihood of earnings management practices. A study on earnings management and directors' attributes suggests that robust board independence and the characteristics of a company's board can considerably affect the degree to which management engages in earnings management. The study's conclusions give investors helpful information when evaluating how board composition affects EM. Regulators could think about enacting a good corporate governance standard into PFMA, such as King IV, to compel the SOE to follow.