INTERNATIONAL FINANCIAL REPORTING STANDARDS AS A TOOL FOR THE MEASUREMENT OF THE QUALITY OF THE FINANCIAL STATEMENTS OF ORGANIZATIONS IN NIGERIA

INTERNATIONAL FINANCIAL REPORTING STANDARDS AS A TOOL FOR THE MEASUREMENT OF THE QUALITY OF THE FINANCIAL STATEMENTS OF ORGANIZATIONS IN NIGERIA

The main aim of this study is to empirically examine the relationship between international financial reporting standards as a tool for the measurement of the quality of the financial statements of organizations in Nigeria.

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CHAPTER ONE

INTRODUCTION

• Background of the Study

The consistent problem overtime regarding the quality of the financial statement of oil and gas organizations in Nigeria resulting from the non-adoption of IFRS or compliance to IFRS standards has become a great concern to me, which gave me the drive to carry out a research on IFRS and the quality of financial statement in oil and gas organizations. Most of the issues that were consistent in the financial statements of organizations in Nigerian due to the non-adoption or compliance to IFRS standards are the financial statement being subject to fraud which can be caused when the management of company may deliberately skew the results presented by phantom revenue posting, asset manipulation, altered accounting results, inflated company valuation. Then we also have window dressing problems, manipulation of the figures in the financial statements which can be caused by the auditors which can conflict its interest because he wants to please the management of the organization by changing the financial condition of the financial statement.The events that have happened that led me towards my research topic is the reason why organizations in Nigeria do not comply with the disclosure requirements of IFRS. The financial statement of an organization are summaries of monetary data about an enterprise. The most common financial statements include the balance sheet, the income statement, the statement of changes of financial position, and the statement of retained earnings. These statements are used by management, labor, investors, creditors, and government regulatory agencies, primarily. Financial statements may be drawn up for private individuals, non-profit organizations, retailers, wholesalers, manufacturers, and service industries. The nature of the general purpose of the financial statements is to provide information about the results of operations, financial position, and cash flows of an organization (Ben Best). This information is used by the readers of financial statements to make decisions regarding the allocation of resources. At a more refined level, there is a different purpose associated with each of the financial statements. The income statement informs the reader about the ability of a business to generate enterprise involved dramatically affects the kind of data available in the financial statements.  The balance sheet provides the user with data about available resources as well as the claims to those resources. The income statement provides the user with data about the profitability of the enterprise detailing sources of revenue and the expenses which reduce profit. The statement of changes in financial position shows the sources and uses of a firm’s financial resources, demonstrating trends in the alteration of its capital structure. The statement of retained earnings reconciles the owners’ equity section of successive balance sheets, showing what has happened to generated revenue. Also, the financial statement which is being communicated to users to enhance decision making needs to be consistent, transparent, and reliable. Financial statements apart from stating the financial position of an organization provide other information such as the value-added, changes in equity if any, and cash flows of the enterprise within a defined period time to which it relates (Iyoha and Faboyede, 2011).In addition, the adoption of international financial reporting standards has come into place to improve the financial statements of an organization in the or to lead to greater transparency and understandability, lower cost of capital to companies and higher share prices (due to greater confidence of investors and transparent information), reduced national standard-setting costs, ease of regulation of securities markets and to nullify inconsistencies, lack of accountability and transparency, distortion in financial reports, which in turn results into poor financial reporting practices and dissemination of accounting information that is of less value to any particular group of users. This is because the preparation and presentation of financial statements will be bereft of objectivity, reliability, credibility, and comparability, and thus results in fraudulent business practices which subsequently lead to business failure and become devastating on the national economy (Atu et al., 2014).This information is useful to a wide range of users making informed economic decisions. The quality of financial reporting is indispensable to the need of users who requires them for investment and other decision-making purposes. Financial reports can only be regarded as useful if it represents the “economic substance” of an organization in terms of relevance, reliability, comparability, and aids interpretation simplicity (Penman, 1984). Ahmed (2003), stated that useful accounting information derived from qualitative financial reports helps inefficient allocation of resources by reducing dissemination of information asymmetry and improving the pricing of securities (Spiceland et al., 2001). To prepare and audit financial statements, some accounting convention and principles known as standards have been put in place by appropriate bodies set up for the purpose to encourage uniformity and reliability (Stainbank and Peeles, 2006), also as a result of the increasing volume of cross border capital flows and the growing number of foreign investments via mergers and acquisitions in the globalization era, the need for the harmonization of different practices in accounting and the acceptance of worldwide standard has arisen. This worldwide standard is the international financial reporting standards which reduce information irregularity and strengthen the communication link between all stakeholders (Bushman and Smith, 2001).  It also reduces the cost of preparing a different version of financial statements where an organization is a multi-national (Healy and Palepu, 2001). Accounting standards ensure that important matters regarding preparation and presentation of financial statements as well as auditing the same are not left to the whim of the preparers and auditors. This accounting standard is referred to that has helped companies in their financial statement by bringing about more understandable information in the financial statement and has also helped in the information being communicated to the shareholders, investors and which has also helped in irregularities in the financial statement above is known as international financial reporting standards which were adopted by the international accounting standard board on 1 April 2001he standards were adopted by over 90 countries around the world. International financial reporting standards (IFRS) was established and approved by the International Accounting Standards Board (IASB). The goals of the IFRS Foundation and the IASB is to develop, in the public interest, a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles. < http://www.ifrs.org> In pursuit of this goal, the IASB works in close cooperation with stakeholders around the world, including investors, national standard-setters, regulators, auditors, academics, and others who have an interest in the development of high-quality global standards. Nigeria’s fast growth in the global business community necessitates that regulators and operators in the Nigerian financial system take proactive steps to ensure a seamless migration to the IFRS Reporting Framework. On 28 July 2010, the Nigerian Federal Executive Council approved 1st January 2012 as the effective date for convergence of accounting standards in Nigeria with International Financial Reporting Standards (IFRS). The Council directed the Nigerian Accounting Standards Board (NASB), under the supervision of the Nigerian Federal Ministry of Commerce and Industry, to take further necessary actions to give effect to Councils’ approval. On 3 September 2010, the Nigerian Accounting Standards Board (NASB) announced a staged implementation of IFRS, as follows: Publicly listed entities and significant public interest entities are expected to implement IFRS by 1 January 2012, Other public interest entities are expected to implement IFRS by 1 January 2013 and Small and medium-sized entities are expected to implement by 1 January 2014. On 20 July 2011 a workshop was held in Abuja Nigeria and the workshop was about attracting investments into Nigeria. During the workshop, the Nigerian Federal Minister of Trade & Investment, Dr. Olusegun Aganga, announced the signing of the law necessary for Nigeria to implement International Financial Reporting Standards (IFRSs) in Nigeria. On 28 July 2010, the Nigerian Federal Executive Council announced a ‘Road Map’ for Nigeria’s staged adoption of IFRS, commencing from 1 January 2012. The necessary law to enact the changes in the Financial Reporting Council of Nigeria Act 2011, had previously been passed by the Nigerian legislature but had not been signed into law by the Nigerian President. With the Nigerian President signing the act into law, the final processes for Nigeria’s adoption of IFRS can now be put in place. The effect of the law is to create a new Financial Reporting Council, incorporating and replacing the existing Nigerian Accounting Standards Board (NASB), which will issue and regulate accounting, actuarial, valuation and auditing standards. http://www.iasplus.com/country

• Statement of the problem

The mandatory and voluntary disclosure of financial information in corporate annual reports and their determinants have attracted considerable research attention in the developed countries than developing ones (Akhtaruddin, 2005:40; Barako, 2007:114), which has led to the problem of which I want to find out on why organizations in Nigeria do not comply to the full disclosure of international financial reporting standards in Nigerian. Emerging nations have been under pressure to improve their quality of corporate financial reporting. According to Ali et al. (2004:183), the government regulatory bodies and the accountancy profession of emerging nations suffer from structural weaknesses and often take a lenient attitude towards the default of accounting regulations. The problem is the default in regards to the compliance to the full disclosure requirement to the international financial reporting standard has become so critical now because the transparency and accountability of the financial statement have been questioned worldwide. overtime due to the non-compliance to the full disclosure requirement of international financial reporting standards, the financial statement of such companies has been suffering from the dissemination of information asymmetry, lop-sidedness and improving pricing of securities and also reduce irregularity, lack of transparency, non-uniformity in the accounting information presented from the financial statement in an organization. Emerging nations have been under pressure to improve their quality of corporate financial reporting. According to Ali et al. (2004:183), the government regulatory bodies and the accountancy profession of emerging nations suffer from structural weaknesses and often take a lenient attitude towards the default of accounting regulations. Consequently private and institutional investors (local and foreign) are hesitant in investing in such emerging economies due to lack of transparency.

Re-vamping age-old company legislations and developing accounting and reporting regulations acceptable and understandable to users have become an important policy issue confronting emerging nations including Nigeria.  In a study conducted by the World Bank Group on the observance of standards and codes for Nigeria, it is observed that the Nigerian financial reporting practices are deficient (World Bank, 2004:1). The Statements of Accounting Standards (SASs) seem to be incomplete because there are many accounting issues not yet covered in these standards which had been addressed by the International Financial Reporting Standards (IFRSs). Over the years, extensive revisions have been conducted on the IFRSs which have not been reflected in the SASs; large sections and paragraphs in IFRSs which are newly included cannot be found in the SASs. According to Impey (n.d.), the SAS disclosure requirements have remained unchanged and they are partly based on old IASs that had been withdrawn by IASB. The SASs does not cover all the aspects of financial reporting and are not sufficient to form a basis for preparing a high-quality financial statement, in accordance with the IFRS.

Accounting reports of Nigerian companies have been found to be deficient over time (Wallace, 1988:352; Adeyemi, 2006:193, Nzekwe, 2009:1), in the sense that they lack vital information that will enable stakeholders to make informed decisions.  Apart from the studies conducted by the World Bank, disclosure practices by Nigerian companies had been empirically investigated by Wallace (1988:352), Okike (2000:39), Adeyemi (2006:1), and Ofoegbu and Okoye (2006:45).The compliance to the full disclosure requirement to international financial reporting standards is aimed at bringing about accounting quality improvement through a uniform set of standards for financial reporting. Land and Lang (2002) opined that accounting quality has improved worldwide since the beginning of the 1990s and attributed it to factors such as globalization and anticipation of international accounting harmonization. IFRS is contingent on at least two factors. First, improvement is based upon the premise that change to IFRS constitutes a change to a GAAP that induces higher quality financial reporting. For example, Barth, Landsman, & Lang (2006) find that firms adopting IFRS have fewer earnings management, more timely loss recognition, and more value relevance of earnings, all of which they interpret as evidence of higher accounting quality. Second, the accounting system is a complementary component of the country’s overall institutional system (Ball, 2001) and is also determined by the firm’s incentives for financial reporting. Various literature document improvements in accounting quality following voluntary IFRS adoption (Barth, et al 2006; Gassen & Sellhorn, 2006., Hung &Subramanyam,2007) to reduce information asymmetry between managers and shareholders and it can be evidenced by proper assets and earnings management, lower cost of capital, and high forecasting capability by the investors about firm’s future earnings. Barth et al. (2006) suggest that accounting quality could be improved when alternative accounting methods used by managers to manage earnings are eliminated. Also With more reliable and credible financial statements, the propensity to attract foreign direct investments will increase as the nation’s risk profile would be known and predictable. In other words, investors are attracted to environments where the rewards are high relative to risks. The availability of reliable information contributes to the lowering of this risk (Abel, 2011). This view is in consonance with Okpala (2012) who found out that there is a significant relationship between IFRS adoption by companies and FDI in Nigeria which in turn will improve the economy. Credible financial information which makes investment decisions efficient crucially depends on the qualitative and quantitative characteristics of information including relevance, reliability, comparability, understandability full disclosure of underlying accounting policies, etc. As companies seek investment opportunities in other countries or within the country, their financial statement must be accurate and comparable across industries and jurisdictions to attract the right investment and financial support. Thus, the goal of credible financial reporting must be pursued conscientiously such that no doubts exist about the quality of the financial statements produced by companies in Nigeria. As Harteneck (1997) observed, in countries where “doubts exist as to the quality, consistency or transparency of their rules, a price must be paid for the shortcomings namely lower market values for their shares and/or higher interest rates for their financing. Also, the cost of raising funds depends significantly on the quality of information available to potential and existing investors as well as the basis of accounting policies applied. Indeed, the lack of knowledge of the basis of accounting implies higher risks and higher costs of raising funds. Accordingly, the cost of raising funds will be much lower with IFRS statements. Indeed, the use of IFRS will facilitate greater acceptability of financial reports by regulators and this can enhance secondary listings of companies in global stock markets. Inevitably, the local stock exchange will become busier and more active as entities with IFRS-based financial reports continue to attract FDIs. The compliance to the disclosure requirement stipulated by regulatory agencies in the international financial reporting standard has a great deal in the improvement of the financial statement of an organization with respect to all that has been listed above. Hence this research tends to empirically examine the extent of corporate compliance and mandatory IFRS adoption by Nigerian firms and their disclosure practices.

•  Aim and Objectives of the study

The main aim of this study is to empirically examine the relationship between international financial reporting standards as a tool for the measurement of the quality of the financial statements of organizations in Nigeria.

The main aim of this study is to

1. To investigate the influence of international financial reporting standards as a tool for the measurement of the quality of financial statements of oil and gas organizations in Nigeria.
2. To ascertain the relationship between international financial reporting standards as a tool for the measurement of the quality of financial statements of oil and gas organizations in Nigeria. Specifically, the following objectives or relationships are to;
3. Examine the effect to which pre IFRS adoption affects the value relevance of financial statements.
4. Identify the effect of pre IFRS adoption on the faithful representation of financial statements.
5. Determine the influence of post IFRS adoption on the value relevance of financial statements.
6. Examine the effect to which post IFRS adoption affects the faithful representation of financial statements.

•  Research Questions

In line with the research objectives, the following research objectives are guided with the following research questions;

1. What extent does pre IFRS adoption affect the value relevance of financial statements?
2. Does pre IFRS adoption influence the faithful representation of financial statements?
3. How does post-IFRS adoption have an effect on the value relevance of financial statements.
4. What extent does post-IFRS adoption affect the faithful representation of financial statements?

• Research Hypothesis

In this study, five hypotheses are formulated to achieve the research objectives I to iii respectively. The hypotheses are hereby stated in the null forms, they are

HO₁: There is no significant relationship between pre-IFRS adoption and the value relevance of financial statements.

HO₂: There is no significant relationship between pre-IFRS adoption and the faithful representation of financial statements.

HO₃: There is no significant relationship between post-IFRS adoption and the value relevance of financial statements.

HO₄: There is no significant relationship between post-IFRS adoption and faithful representation of financial statements

• Significance of the study

The main purpose of this study is to determine the extent to which international financial reporting standards have an effect on the quality of financial reporting in oil and gas organizations in Nigeria. This study also reveals how international financial reporting standards help to make the corporate reporting of oil and gas organizations accurate which is a necessary tool for short and long term survival of any nation which aids budgeting, planning, and decision making. Research on disclosure practices in a country like Nigeria will enable us to have a thorough understanding of the nature of corporate reporting in developing countries. The study is significant to government, investors, business management, regulatory bodies, educators, researchers, accountants, auditors, and scholars particularly in the field of accounting. This research seeks to make theoretical and practical contributions to the field of accounting in the area of accounting disclosures. It will particularly enhance the quality of literature in the field of accounting in Nigeria. Researchers in this field would benefit from the study because it can serve as a benchmark for future research on corporate disclosure. It throws more light and adds to an understanding of the corporate disclosure practices which would be of advantage to educators and students.

With the outcome of this research, the regulatory authorities, such as the Nigerian Accounting Standards Board (NASB), Nigerian Stock Exchange (NSE), and Securities and Exchange Commission (SEC) would be able to ascertain the extent of compliance with the mandatory national standards. This will help them to issue out necessary compliance directives and improve the compliance mechanisms to ensure a reasonable level of compliance by all companies. With the knowledge of the extent of compliance with the IASs/IFRSs, the government will enforce directives that would help in facilitating the harmonization process with the international standards.

The disclosure index generated in this study and the factors influencing disclosure are expected to assist local and foreign investors in making more informed decisions. In previous research, it was discovered that the quality of corporate disclosure influenced the quality of investment decisions made by investors (Singhvi and Desai, 1971: 129). Adequate corporate disclosure will raise the confidence of current and potential investors in the Nigerian economy. The managers of listed companies can assess their present level of compliance using the disclosure index generated by this research. This will help them to improve their disclosure practices. It will enable the listed companies to compete globally and facilitate free flow capital across the Nigerian borders. Accountants, the preparers of financial statements and auditors can also utilize the disclosure index developed in this study to assess the extent of compliance by organizations.

• Scope of the study

The study will center on these aspects of scope:

1. Unit scope: The study will focus on international financial reporting standards and the measurement of the quality of financial statements in oil and gas organizations in Nigeria.
2. Content scope: The study will focus on the dimensions of international financial reporting standards and the measure of financial statements.
3. Geographical scope: The study will bother on the oil and gas organizations listed in my research work.

• Limitation of the study

My research study was an extraordinary one, despite all the limitations on which somewhere measurement of the variables, statistical tools to be adopted. In line with all these limitations, the measurement of my variables was still a success and I also got the statistical tool to be adopted in my study.

• Definition of terms

International financial reporting standards. International Financial Reporting Standards is a set of accounting standards established by an independent, not for profit organization called the International Accounting Standard Board (IASB).

Corporate compliance: This refers to when an organization or corporate entity agrees to certain rules or regulations provided by various professional standards (IFRS, GAAP)

Relevance

This means that the information generated from the financial statement should be material enough to enable the users of the information to make decisions.

Faithful Representation

This means that the information presented in the financial statement should accurately reflect the condition of the business.

Disclosure requirements: These are rules that must be abided by in disclosure statements provided to clients, shareholders, or customers.

Reliability: This means that the result from the posting in the financial statement and the calculations there are dependent to be accurate.

Comparability: This refers to a quality of accounting information that hastens the comparison of financial reporting of one company to the financial reporting of another company.

Understandability: This refers to when the financial statements of an organization are easy to understand by the various users of accounting information presented from the financial statement. An example of a user is the shareholders of a company.

• Organization of the Study

Chapter one provides the introductory aspect of the study, which is divided into the following Introduction, statement of the problem, aim/objectives of the study, research questions, research hypotheses, significance of the study, the scope of the study, limitation of the study, definition of terms, Organization of the Study

Chapter two focuses on the view of related literature on the subject matter which is divided into the theoretical framework, conceptual framework, and empirical review reflecting the concepts, theories, and empirical studies relating to the research problems respectively.

Chapter three attempts to center on the methodology employed. Here, emphasis will be made to describe the research design, population, sampling procedure, and sample size determination, data collection methods, data analysis technique and model specification

Chapter four deals with the presentation and analysis of data used in this study

Finally, chapter five presents a summary of findings, conclusions, and recommendations