ABSTRACT
This
research project investigated the effect of accounting standards on the quality
of financial statements by commercial banks in Nigeria. In order to achieve the objectives of the study, two hypotheses were proposed and data collected
through the issue of structured questionnaires to 60 staff of 6 commercial
banks. the data which was analyzed using simple regression analyses showed
that: There is a positive and significant relationship between accounting
standards and the disclosure requirements of financial reports of commercial
banks in Nigeria. The findings also show that there is positive and significant
relationship between value relevance of financial statements and accounting
standards in commercial banks in Nigeria. Given the findings, we make the
following conclusions: The disclosure requirements in accounting standards are
an important determinant of the quality of financial statements. The value
relevance of financial statements also determines the quality of financial
statements made public by commercial banks in Nigeria. More stringent measures
be put in place to ensure that commercial banks in Nigeria follow laid down
rules and regulations in disclosing items that will be adjudged to of high
quality in order to aid investors and other stakeholders make informed
decisions based on the financial statements. Uniform standards should be
established across banks to ensure that the contents of financial statements
different banks can easily be objectively compared in order to measure the
performance of banks across board.
72 Pages
Project
Reference Code: C067
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
Julia
Zacke: 2004 rightly stated that the accounting community is interested with how
accounting standards should be designed to achieve the objectives of financial
reporting. True to this, a lot of effort have been put in by the International Accounting
Standards Board (IASB) in reviewing and modifying the stipulated accounting
standards to better serve the need of the users of financial reports.
In
view of the private sector, the Generally Accepted Accounting Principles(GAAP)
was imposed on companies so that investors would have a minimum level of
consistency in the financial statements they use when analyzing companies for
investment purposes but the resultant
discrepancies that existed in the financial reports of several nations (since
each country is mandated to report its accounts in accordance with the
stipulated accounting standards peculiar to it) led to the globalization of
accounting standards.
Nicholas
Pologeorgis 2012 examined the outcome of this discrepancies thus, “the
different accounting standards of different countries brought about a lot of
problems for investors trying to identify accounting reporting differences when
they are considering providing funding to capital- seeking companies that
follow the accounting and financial reporting in the country in which they are
doing business. Robert Casey also identified international companies desire to
use one set of reporting standards throughout the world, growth in capital markets
(since International Financial Reporting Standards (IFRS) enhances the ability
of firms to raise capital outside their borders), reduction in cost of capital
and reporting cost as some of the reasons for global harmonization and
convergence of accounting standards by the introduction of IFRS on the 1st
of April 2001.
On
July 2010,the Nigerian Federal Executive Council approved 1st
January 2012 as the effective date for convergence of accounting standards in
Nigeria with IFRS. Consequently, in June 2011, legislative changes were enacted
under which the FRCN replaced the Nigerian Accounting Standards Board as the
entity responsible for setting financial reporting standards in Nigeria.
Pologeorgis (2012) compared GAAP to IFRS and posited that the main difference
between them is the approach each takes to the standards; the GAAP is
rule-based while the IFRS is a principle-based methodology.
The GAAP comprises of a complex set of guidelines
attempting to establish rules and criteria for any contingency while the IFRS
begins with the objectives of good reporting and then provides guidance on how
the specific objectives relates to a given situation. However, it is imperative
to probe the effect of this transition on the quality of financial reporting
since financial statements are relied upon by corporate management, investors,
stock markets, accounting professionals, accounting regulators, creditors
etcetera for the purposes of investment decisions and corporate planning.
1.2 STATEMENT OF
PROBLEM
With
the mandate of effecting IFRS for the private sector on the 1st of
January 2012 in Nigeria, it is important to note how the transition from NGAAP
to IFRS will affect the quality of financial reporting in terms its disclosure
requirements and value relevance. Will these new and promising accounting
standards be able to serve accounting and non-accounting users better than the
NGAAP in terms of providing a higher quality of financial reports for their
consumption? Bearing in mind that the IFRS is a more summarized version of accounting
standards compared to the voluminous nature of GAAP guidelines. Will IFRS for
the private sector and IPSAS for the public sector aid the preparation and
presentation of accounting reports in a manner that will be more relevant to
accounting users on a global scale? Has the transition improved the quality of
financial reports in terms of disclosure requirements, value relevance, what
are some of the challenges that firms face in implementing new accounting
standards? What is the effect of accounting standards on the quality of
financial reporting? the provision of answers to these questions would
reinforce the confidence of the users of the accounting information in the
financial reports on which their decisions are based and it would curb their
skepticism towards the transition from GAAP to IFRS.
1.3 PURPOSE OF
THE STUDY
1.4 RESEARCH
QUESTIONS
1.5 RESEARCH
HYPOTHESIS
1.6 SIGNIFICANCE
OF THE STUDY
1.7
SCOPE OF THE STUDY
1.8 LIMITATION
OF THE STUDY
1.9
DEFINITION OF OPERATIONAL TERMS
CHAPTER
TWO
LITERATURE
REVIEW
2.0
INTRODUCTION
This chapter reviews
the related literature on Accounting Standards and Quality Financial Reporting.
It is intended to position this research in relation to past studies on the subject
matter while defining the boundaries that the research would cover.
2.1
Conceptual Framework
2.1.1
Measurement of Quality Financial Reporting
The
primary objective of financial reporting is to provide high-quality financial reporting
information concerning economic entities, primarily financial in nature, useful
for economic decision making (FASB, 1999; IASB, 2008). Providing high quality
financial reporting information is important because it will positively
influence capital providers and other stakeholders in making investment,
credit, and similar resource allocation decisions enhancing overall market
efficiency (IASB, 2006; IASB, 2008). Although both the FASB and IASB stress the
importance of high-quality. In 2002, the IASB and the FASB showed their
commitment towards developing acommon set of high-quality accounting standards,
which could be used worldwide. As aconsequence of the joint project to converge
the more principles-based IFRS and themore rules-based US GAAP, both boards
agreed to develop new joint Conceptual Framework, which includes the objectives
of financial reporting and the underlyingqualitative characteristics on which
accounting standards ought to be based. In May 2008, the FASB and the IASB
therefore published an exposure draft of ‘An improved Conceptual Framework for
Financial Reporting’ [ED] (IASB, 2008; FASB, 2008a). This Conceptual Framework
represents the foundations of the accounting standards. “The application of
objectives and qualitative characteristics should lead to high-quality accounting
standards, which in turn should lead to high-quality financial reporting information
that is useful for decision making” (FASB, 1999; IASB, 2008). Furthermore, the
conceptual framework ought to contribute to decision making of constituents,
when transactions or events occur for which no accounting standards are
available (yet).According to the ED, providing decision-useful information is
the primary objective of financial reporting. Decision-useful information is defined
as “information about the reporting entity that is useful to present and
potential equity investors, lenders and other creditors in making decisions in
their capacity as capital providers” (IASB, 2008: 12). In line with the ED and
recent literature, we define financial reporting quality in terms of decision
usefulness (e.g. Beuselinck & Manigart, 2007; Jonas & Blanchet, 2000; McDaniel
et al., 2002). To assess the quality of financial reporting, various
measurement methods have been used. Table 1 provides a non-exhaustive classification
of types of methods most widely used in prior literature to assess financial
reporting quality, i.e. accrual models, value relevance models, research
focusing on specific elements in the annual report, and methods
operationalizing the qualitative characteristics.
Accrual
and value relevance model focus on earnings quality measurement. Accrual models
are used to measure the extent of earnings management under current rules and legislation.
These models assume that managers use discretionary accruals, i.e. accruals over
which the manager can exert some control, to manage earnings (Healy &
Wahlen, 1999; Dechow et al., 1995). Earnings management is assumed to
negatively influence the quality of financial reporting by reducing its
decision usefulness (e.g. Brown, 1999; VanTendeloo & Vanstraelen, 2005).
The main advantages of using discretionary accruals to measure earnings
management is that it can be calculated based on the information in the annual
report. In addition, when using regression models it is possible to examine the
effect of company characteristics on the extent of earnings management (Healy
&
Wahlen
1999; Dechow et al. 1995). Moreover, this type of research is
replicable. The main difficulty when using accrual models, however, is how to
distinguish between discretionary and non-discretionary accruals (Healy &
Wahlen, 1999). Furthermore, it is Examples of measurement tools used in prior
research which are outside the scope of this paper are Leuz (2003) who uses
bid-ask spread and trading volume as proxies of information asymmetry to
measure financial reporting quality, and Roychowdhury (2006), who uses real
activity manipulation to measure the extent of earnings management only an
indirect proxy of earnings quality, excluding non-financial information. Therefore,
conclusions concerning the quality of financial reporting information based on accrual
models do not provide direct and comprehensive evidence concerning the quality of
financial reporting information and its dimensions of decision usefulness
(Healy &Wahlen, 1999). Value relevance models measure the quality of financial
reporting information by focusing on the associations between accounting
figures and stock-market reactions (e.g. Barth et al., 2001; Choi et
al., 1997; Nichols & Wahlen, 2004). The stock price is assumed to
represent the market value of the firm, while accounting figures represent firm
value based on accounting procedures. When both concepts are (strongly) correlated,
i.e. changes in accounting information correspond to changes in market value of
the firm, it is assumed that earnings information provides relevant and
reliable information (Nichols & Wahlen, 2004). This method is also used to
examine earnings persistence, predictive ability, and variability, as elements
of earnings quality (Schipper & Vincent, 2003; Francis et al.,
2004). The focus of value relevance literature on relevance and faithful
representation (reliability) is consistent with the ED, as these notions are
defined as the fundamental qualitative characteristics. However, this
literature does not distinguish between relevance and reliability, i.e. does
not explicitly show whether or not tradeoffs have been made when constructing
accounting figures. In addition, the stock market may not be completely
efficient. As a consequence, stock prices may not represent the market value of
the firm completely accurate (Nichols &
Wahlen,
2004). Accrual models and value relevance literature focus on information
disclosed in financial statements to assess the financial reporting quality
(e.g. Healy & Wahlen, 1999; Dechow et al., 1995; Barth et al.,
2001; Choi et al., 1997; Nichols & Wahlen, 2004; Leuz, 2003).
However, a comprehensive measurement tool of financial reporting quality would
at least include the complete annual report, including both financial and
nonfinancial information. The third realm of research focuses on assessment
tools that measure the quality of specific elements of the annual report in
depth and includes both financial and non-financial information. It evaluates
the influence of presenting specific information in the annual report on the
decisions made by the users.
2.1.2 THE EFFECTS OF
IFRS ON DISCLOSURE REQUIREMENTS
2.1.3
THE
EFFECTS OF IFRS ON VALUE RELEVANCE
2.2
THEORETICAL FRAMEWORK
2.2.1
Comparison Between GAAP and IFRS
2.2.2 IFRS ADOPTION IN NIGERIA
2.2.3 IFRS AND ACCOUNTING QUALITY
2.2.4
Regulatory Framework of Financial Reporting in Nigeria
2.2.5 BENEFITS OF ADOPTING IFRS IN NIGERIA
2.2.6 CHALLENGES TO IFRS ADOPTION IN NIGERIA
2.3
EMPIRICAL FRAMEWORK
CHAPTER THREE
RESEARCH
METHODOLOGY
3.1 INTRODUCTION
This
chapter borders on the research methods and the study procedures employed in
this research work. It highlights and explains the research design, the
population and sampling design, the sources and methods of data collection and
the technique of data analysis.
3.2 RESEARCH DESIGN
This study adopted the
cross-sectional field survey (i.e. an examination of annual financial reports
of quoted commercial banks) of the quasi-experimental research design by
examining the interrelationship between the dependent and independent variables
during pre and post IFRS adoption in Nigeria. This study use a number of
financial reporting characteristics; value relevance and disclosure
requirements to determine the impact of IFRS on the
reporting quality. The correlational method is employed in order to ascertain
whether a relationship exists between Accounting Standards and Quality
Financial Reporting and to probe on the impact of Accounting Standards on
Financial Reporting whether it improves its quality or not.
3.3 POPULATION AND
SAMPLING DESIGN
3.4 SOURCES AND METHODS
OF DATA COLLECTION
3.5
DATA ANALYSIS TECHNIQUE
3.6 VALIDITY AND RELIABILITY TEST
CHAPTER FOUR
DATA PRESENTATION,
ANALYSES AND DISCUSSION OF FINDINGS
4.0 INTRODUCTION
In this chapter, data collected for
the purpose of the study will be analyzed using the appropriate statistical
methods and tools. For clarity and ease of understanding, this chapter will
comprise of three sections. These are: Data Presentation, Data Analyses and
Hypotheses testing. All data collected for the study will be analyzed using
simple percentages and hypotheses tested using Simple Regression analyses on
Statistical Package for Social Sciences (SPSS)
4.1 DATA PRESENTATION
4.2 DATA
ANALYSES AND TEST OF HYPOTHESES
CHAPTER FIVE
SUMMARY OF
RESULTS, CONCLUSION AND RECOMMENDATIONS
5.1 SUMMARY
OF RESULTS
The
findings are enumerated thus:
i.
There is a positive and
significant relationship between accounting standards and the disclosure
requirements of financial reports of commercial banks in Nigeria. This result implies that increased disclosure
requirements as a result of accounting standards significantly improve the
quality of financial reports of banks. The findings further implies that increase
in disclosure requirements as a result improved standards is an important
determinant of the quality of financial reports among banks in Nigeria.
ii.
The findings also show that
there is positive and significant relationship between value relevance of
financial statements and accounting standards in commercial banks in Nigeria.
The implication of this result is that as value relevance of financial reports
increases as result of accounting standards, the quality of financial
statements is bound to also increase. The finding further implies that value
relevance of financial reports is an important determinant of the quality of
financial reports of commercial banks in Nigeria.
5.2 CONCLUSIONS
5.3 RECOMMENDATIONS
REFERENCES
QUESTIONNAIRE
Project Reference Code: C067
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