CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The purpose of International Financial Reporting Standard (IFRS) is to ensure high degree of transparency and comparability of financial statements. The harmonization or convergence to International Financial Reporting Standard from domestic GAAP or IAS in some African countries has some impact on the effectiveness of International Financial Reporting Standard to improve accounting disclosure and earnings quality in the region. Accounting disclosure quality, itself, is a function of several factors including timely loss recognition, earnings quality, value relevance, quality of legal enforcement, etc. (Dechow et al, 2010). This study isolates earnings quality in order to focus on the impact of International Financial Reporting Standard adoption on earnings quality in Nigeria. By earnings quality, I mean reported earnings that exhibit reduced earning management via lower abnormal discretionary accruals, reduced earnings smoothing, higher earnings informativeness, etc. (Dechow et al, 2008). Earnings quality is a function of several factors and International Financial Reporting Standard adoption is one important factor (Dechow et al, 2010); therefore, it is important to isolate International Financial Reporting Standard effect on earnings quality from other effects. In addition to International Financial Reporting Standard effect, multiple factors also work together to improve the quality of reported earnings among firms such as: strong firm monitoring by equity holders/debt holders and strict investor protection laws (Leuz et al, 2003), strong corporate governance mechanisms (Shleifer and Vishny, 1997), cash flow content of earnings (Ohlson, 2001), multiple decision models,etc.
However, I do not discuss these factors in order to narrowly focus on earnings quality in relation to International Financial Reporting Standard adoption. Financial information quality in Nigeria remains weak compared to many advanced jurisdictions. This resulted in the hampering of the growth of efficient equity markets. A common complaint among investors in Nigeria is that financial information on company performance is either unavailable or, if provided, lacks reliability (Shehu, 2011). Analysts following in Nigerian market are far fewer than in the developed ones. Also, the Nigerian settings in terms of accounting standards, institutional structure, and corporate governance are expected to be different from those in the developed countries in terms of advancement and compliance. Given all these presumptions, it is not clear that the evidence from Nigerian firms, especially deposit money banks in respect of financial information quality is consistent with those in the developed or other developing nations (Shehu and Abubakar, 2011).
Therefore, a comprehensive study anchoring firms attribute after the adoption of International Financial Reporting Standard and earnings quality is necessary which will be of interest to investors. This study will be of interest to investors since the level of pervasiveness of earnings management and associated International Financial Reporting Standard adoption using firm attributes can help investors assess the overall quality of earnings. Rational investors make investment decisions that are primarily based on the expectation of firms’ future performance and quality of earnings. Managers manage earnings and, in eect manage expectations of future earnings prospects, regardless of whether earnings management is beneficial or harmful to investors. The main objective of this study is to examine the impact of International Financial Reporting Standard adoption on the quality of earnings of listed deposit money banks in Nigeria. It is therefore posited that the adoption of International Financial Reporting Standards has no significant impact on the earnings quality of listed deposit money banks in Nigeria. The reason why banks manipulate earnings is supported by three arguments: signaling argument, income smoothing or earnings management argument and capital management argument (Zhou and Chen, 2004). The signaling argument suggests that banks use discretionary loan loss provision to insinuate that earnings will be higher in subsequent periods (Wahlen, 1994). Contrary to the signaling argument, earnings management argument holds that managers increase the provision for loan losses during periods when earnings are high, under the assumption of income smoothing (Beatty, Chamberlain & Mogliolo, 1995: Collins, Shackleford & Wahlen, 1995: Rivard, Bland & Morris, 2003). This implies that earnings management in this area can improve a bank’s cash flow, capital adequacy, market value and overall performance. While the capital management argument suggests that since an increase in loan loss provision increases regulatory capital, management exercises discretion over its provision (Ahmed, Takeda & Thomas, 1999: Beatty et al., 1995).
1.2 STATEMENT OF THE PROBLEM
The poor earning quality of business organizations in Nigeria has contributed to the current economic situation and the poor remuneration of workers which has unfortunately increased poverty in the land has led to the cal in comparing earning quality of companies and business organizations before and after the adoption of IFRS in Nigeria with a view to stem in current poor earnings in the Nigeria corporate world in the bud. The poor earning quality of corporate organizations has contributed to the poor performance of and growth of business organizations which has also snow balled to the poor remuneration for workers thus leading to the current poor living standard of Nigerians.
1.3 AIMS AND OBJECTIVES OF THE STUDY
The main objective of this study is to compare the earning quality before and after the adoption of IFRS in Nigeria. Other specific objectives of the study are;
1. To examine the need for an improved earning quality in the Nigeria corporate world.
2. To determine the importance of earning quality to the economy of Nigeria.
3. To assess the need for the assessment of earning quality on the growth and development of business organizations in Nigeria.
4. To examine the level of IFRS adoption among corporate organizations in Nigeria.
5. To examine the difference between earning quality before and after the adoption of IFRS in Nigeria.
6. To recommend ways of improving the earning quality of business organizations in Nigeria.
1.4 RESEARCH QUESTIONS
1. What is the need for an improved earning quality in the Nigeria corporate world?
2. What is the importance of earning quality to the economy of Nigeria?
3. What is the need for the assessment of earning quality on the growth and development of business organizations in Nigeria?
4. What is the level of IFRS adoption among corporate organizations in Nigeria?
5. What is the difference between earning quality before and after the adoption of IFRS in Nigeria?
6. What are the ways of improving the earning quality of business organizations in Nigeria?
1.5 RESEARCH HYPOTHESIS
H0: There is no significant difference between earnings quality before and after the adoption of IFRS in Nigeria.
H1: There is a significant difference between earnings quality before and after the adoption of IFRS in Nigeria. 1.6 SIGNIFICANCE OF THE STUDY
This study would be of immense importance to the business environment as it would compare the difference in earnings quality between and after the adoption of IFRS in Nigeria with the sole purpose of improving the earning quality in Nigeria. The study would also benefit students, researchers and scholars who are interested in developing a further study on the subject matter through the provision of related literature review on the subject matter.
1.7 SCOPE AND LIMITATION OF THE STUDY
The study is on the comparative analysis of earning quality before and after the adoption of IFRS in Nigeria using the selected money deposit banks in Abuja as the case study.
1.8 LIMITATION OF STUDY
Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The purpose of International Financial Reporting Standard (IFRS) is to ensure high degree of transparency and comparability of financial statements. The harmonization or convergence to International Financial Reporting Standard from domestic GAAP or IAS in some African countries has some impact on the effectiveness of International Financial Reporting Standard to improve accounting disclosure and earnings quality in the region. Accounting disclosure quality, itself, is a function of several factors including timely loss recognition, earnings quality, value relevance, quality of legal enforcement, etc. (Dechow et al, 2010). This study isolates earnings quality in order to focus on the impact of International Financial Reporting Standard adoption on earnings quality in Nigeria. By earnings quality, I mean reported earnings that exhibit reduced earning management via lower abnormal discretionary accruals, reduced earnings smoothing, higher earnings informativeness, etc. (Dechow et al, 2008). Earnings quality is a function of several factors and International Financial Reporting Standard adoption is one important factor (Dechow et al, 2010); therefore, it is important to isolate International Financial Reporting Standard effect on earnings quality from other effects. In addition to International Financial Reporting Standard effect, multiple factors also work together to improve the quality of reported earnings among firms such as: strong firm monitoring by equity holders/debt holders and strict investor protection laws (Leuz et al, 2003), strong corporate governance mechanisms (Shleifer and Vishny, 1997), cash flow content of earnings (Ohlson, 2001), multiple decision models,etc.
However, I do not discuss these factors in order to narrowly focus on earnings quality in relation to International Financial Reporting Standard adoption. Financial information quality in Nigeria remains weak compared to many advanced jurisdictions. This resulted in the hampering of the growth of efficient equity markets. A common complaint among investors in Nigeria is that financial information on company performance is either unavailable or, if provided, lacks reliability (Shehu, 2011). Analysts following in Nigerian market are far fewer than in the developed ones. Also, the Nigerian settings in terms of accounting standards, institutional structure, and corporate governance are expected to be different from those in the developed countries in terms of advancement and compliance. Given all these presumptions, it is not clear that the evidence from Nigerian firms, especially deposit money banks in respect of financial information quality is consistent with those in the developed or other developing nations (Shehu and Abubakar, 2011).
Therefore, a comprehensive study anchoring firms attribute after the adoption of International Financial Reporting Standard and earnings quality is necessary which will be of interest to investors. This study will be of interest to investors since the level of pervasiveness of earnings management and associated International Financial Reporting Standard adoption using firm attributes can help investors assess the overall quality of earnings. Rational investors make investment decisions that are primarily based on the expectation of firms’ future performance and quality of earnings. Managers manage earnings and, in eect manage expectations of future earnings prospects, regardless of whether earnings management is beneficial or harmful to investors. The main objective of this study is to examine the impact of International Financial Reporting Standard adoption on the quality of earnings of listed deposit money banks in Nigeria. It is therefore posited that the adoption of International Financial Reporting Standards has no significant impact on the earnings quality of listed deposit money banks in Nigeria. The reason why banks manipulate earnings is supported by three arguments: signaling argument, income smoothing or earnings management argument and capital management argument (Zhou and Chen, 2004). The signaling argument suggests that banks use discretionary loan loss provision to insinuate that earnings will be higher in subsequent periods (Wahlen, 1994). Contrary to the signaling argument, earnings management argument holds that managers increase the provision for loan losses during periods when earnings are high, under the assumption of income smoothing (Beatty, Chamberlain & Mogliolo, 1995: Collins, Shackleford & Wahlen, 1995: Rivard, Bland & Morris, 2003). This implies that earnings management in this area can improve a bank’s cash flow, capital adequacy, market value and overall performance. While the capital management argument suggests that since an increase in loan loss provision increases regulatory capital, management exercises discretion over its provision (Ahmed, Takeda & Thomas, 1999: Beatty et al., 1995).
1.2 STATEMENT OF THE PROBLEM
The poor earning quality of business organizations in Nigeria has contributed to the current economic situation and the poor remuneration of workers which has unfortunately increased poverty in the land has led to the cal in comparing earning quality of companies and business organizations before and after the adoption of IFRS in Nigeria with a view to stem in current poor earnings in the Nigeria corporate world in the bud. The poor earning quality of corporate organizations has contributed to the poor performance of and growth of business organizations which has also snow balled to the poor remuneration for workers thus leading to the current poor living standard of Nigerians.
1.3 AIMS AND OBJECTIVES OF THE STUDY
The main objective of this study is to compare the earning quality before and after the adoption of IFRS in Nigeria. Other specific objectives of the study are;
1. To examine the need for an improved earning quality in the Nigeria corporate world.
2. To determine the importance of earning quality to the economy of Nigeria.
3. To assess the need for the assessment of earning quality on the growth and development of business organizations in Nigeria.
4. To examine the level of IFRS adoption among corporate organizations in Nigeria.
5. To examine the difference between earning quality before and after the adoption of IFRS in Nigeria.
6. To recommend ways of improving the earning quality of business organizations in Nigeria.
1.4 RESEARCH QUESTIONS
1. What is the need for an improved earning quality in the Nigeria corporate world?
2. What is the importance of earning quality to the economy of Nigeria?
3. What is the need for the assessment of earning quality on the growth and development of business organizations in Nigeria?
4. What is the level of IFRS adoption among corporate organizations in Nigeria?
5. What is the difference between earning quality before and after the adoption of IFRS in Nigeria?
6. What are the ways of improving the earning quality of business organizations in Nigeria?
1.5 RESEARCH HYPOTHESIS
H0: There is no significant difference between earnings quality before and after the adoption of IFRS in Nigeria.
H1: There is a significant difference between earnings quality before and after the adoption of IFRS in Nigeria. 1.6 SIGNIFICANCE OF THE STUDY
This study would be of immense importance to the business environment as it would compare the difference in earnings quality between and after the adoption of IFRS in Nigeria with the sole purpose of improving the earning quality in Nigeria. The study would also benefit students, researchers and scholars who are interested in developing a further study on the subject matter through the provision of related literature review on the subject matter.
1.7 SCOPE AND LIMITATION OF THE STUDY
The study is on the comparative analysis of earning quality before and after the adoption of IFRS in Nigeria using the selected money deposit banks in Abuja as the case study.
1.8 LIMITATION OF STUDY
Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.
