IMPACT OF INTERNATIONAL FINANCIAL REPORTING STANDARD EARNING MANAGEMENT IN NIGERIA PUBLIC SECTOR

1.1 Introduction

Nigeria adopted IFRS for quoted companies in the year 2012 to replace the Nigerian Statements of Accounting Standards (SAS). Okafor and Ogiedu (2011) found evidence that IFRS have the potential for yielding greater benefits such as better information for equity holders and regulators, enhanced comparability and improved transparency of results, improve business performance management and impact on other business functions apart from financial reporting. IFRS application is more beneficial to countries with more developed stock markets and better institutional framework than in countries without these characteristics. This is contrary to public expectation because IFRS suppose to be more beneficial to emerging economies than developed capital markets because of low quality standards in those economies (Rudra and Bhattacharjee, 2012).

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.

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1.2 Background of Study

IFRS is a globally-accepted set of accounting Standards and Interpretations established by International Accounting Standards Board (IASB) and International Financial Reporting Interpretation Committee (IFRIC) which was actually created as a common global language for accountants all around the world and it was expected to become the key financial reporting standards for all business entities. The fundamental objective of IFRS is to develop, in the public interest, a single set of high quality, globally accepted financial accounting standards based upon clearly articulated principles (IASB, 2012).

Prior to the adoption of IFRS in Nigeria, all companies in Nigeria have been complying with Standards issued by The Nigerian Accounting Standards Board (NASB) which has now metamorphosed to Financial Reporting Council of Nigeria (FRCN). The NASB announced its Roadmap to convergence with IFRS in September 2010. The Roadmap requires publicly Listed Companies and significant public interest entities to comply with IFRS commencing from 1st January, 2012.While other public interest entities have been required to comply starting from 1st January, 2013 and small and medium sized entities expected to comply for period ending after 1st January, 2014. Despite the belief by some of the inevitability of the global acceptance of IFRS, it is has been argued that Nigerian GAAP is still the better standard, and that a certain level of quality will be lost with full adoption of IFRS (Barth, 2007). In addition, certain companies without significant customers or operations outside their home countries may resist IFRS because they may not have the capability and a market incentive to prepare IFRS financial statements (Tanko, 2012).

The implementation of IFRS in Nigeria was motivated by the need to develop high quality financial reporting in order to enhance sound financial and healthy economy and in the wave of globalization; multi-national companies and investment are on the increase. Therefore, the adoption of IFRS in Nigeria is expected to advance the compilation of meaningful data of reporting entities’ performance for comparability and reliability, facilitate and enhance effective decision making, attract foreign investment, enhance easy access to external capital and low cost of doing trans-border businesses (Madawaki, 2014). The decision to adopt IFRS in a wide and important economic area such as Nigeria cannot be over – emphasized, However, to achieve that the government need to consider several factors that may affect the adoption of IFRS in developing countries (Zeghal & Mhedbi, 2006), in which Nigeria is among.

IFRS Standards which are usually regarded as principle-based system were established to ensure a high degree of transparency of financial statements, to get better corporate transparency and to enhance the usefulness of financial reporting (Budrina, 2014; Chen, Tang, Jiang & Lin 2010; IASB 2012). The central focus is to meet the needs of the wide range of users in economic decisions and contribute positively to a healthy financial market. However, the major concern about the conversion to IFRS is that it is more principle-based and there is a fear that the companies may apply the same rules differently thereby causing varying results. Furthermore, principle-based standards give managers more flexibility to engage in earnings management and consequently resulting in high level of earnings manipulation (Callao, 2010). IFRS comes with a lot of changes in way and manner the information contained in the company’s financial statements are reported. For instance, the introduction of fair value principle, which is regarded as the most important implication of IFRS, motivates more debate on the adoption of the standards. More clearly, IFRS required the usage of fair value contrary to the book value as used by Nigerian GAAP. It is believed that fair value provides up-to-date information about assets as it reflects their real value. However, impairment test is carried on goodwill under IFRS, while it expected to be amortized under NGAAP. This implies that managers have more flexibility under IFRS and may intend to use their accounting decisions to manipulate impairment test of goodwill which could affect the quality of reported earnings.

Furthermore, NGAAP allows convertible debts to be recorded as long-term debt, while the IFRS records convertible bonds separately into the equity component and the debt components. IFRS which is a principle-based accounting method gives managers significant flexibility and discretion and leave more room for earnings manipulation than rule-based accounting standards (NGAAP).

Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Impact of International Financial Reporting Standard Earning Management in Nigeria Public Sector.

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1.3 Statement of Problem

The effect of IFRS adoption on earnings management has been a subject of concern in the accounting and financial literatures. Empirical accounting researches have been conducted to examine the effects of IFRS adoption and determine the extent to which IFRS provide additional relevant information and improve the information content of financial statement prepared in line with these standards. Prior studies have so far presented mixed results as some studies found an improvement in financial reporting quality after IFRS adoption and widely support the hypothesis that earnings management declined considerably after IFRS adoption. However, this view has not been fully supported by all academicians, regulators and the business communities as their evidence fail to support the hypothesis that IFRS reduce the level of earnings manipulation. For instance, Barth, Landsman and Lang (2008) describe IFRS standards as been of lower quality than the local GAAP. IFRS only represent pure accounting changes and are not sufficient to provide the expected benefits. It is obviously a fundamental fact that IFRS comes with a lot of changes in way and manner the information contained in the company’s financial statements are reported and the prior literature have provided mixed evidence on the impact of IFRS adoption. However, the fundamental question that is yet to be resolved in the literature is whether the IFRS adoption has significant impact earnings management of non-financial quoted companies in Nigeria.

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1.4 Aim and Objectives of Study

The aim of the study is to scrutinize the Impact of International Financial Reporting Standard Earning Management in Nigeria Public Sector. In achieving this aim, the following specific objectives were laid out as follows to:

1. Determine the difference in earnings management between pre and post adoption period of the IFRS in quoted manufacturing companies in Nigeria.
2. Examine the relationship between earnings management and performance of quoted manufacturing companies in Nigeria before and after the adoption of IFRS.
3. Investigate the effect of IFRS adoption on earnings management of Nigerian non-financial quoted companies.
4. Test whether the effect of IFRS adoption on earnings management is influenced by audit quality of Nigerian non-financial quoted companies.
5. Test whether the effect of IFRS adoption on earnings management is influenced by firm size of Nigerian non-financial quoted companies.

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1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• What is the difference in earnings management between pre and post adoption period of the IFRS in quoted manufacturing companies in Nigeria?
• What is the relationship between earnings management and financial performance of quoted manufacturing companies in Nigeria before the adoption of IFRS?
• To what extent does financial performance affect earnings management in quoted manufacturing companies in Nigeria after the adoption of IFRS?
• What is the difference in earnings management between pre and post adoption period of the IFRS in quoted manufacturing companies in Nigeria?
• What is the relationship between earnings management and financial performance of quoted manufacturing companies in Nigeria before the adoption of IFRS?

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1.6 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

• H₀1: There is no significant relationship between earnings management and financial performance of quoted manufacturing companies in Nigeria before the adoption of IFRS.
• H₀2: There is no significant difference in earnings management between pre and post adoption period of the IFRS in quoted manufacturing companies in Nigeria.
• H₀3: There is no significant relationship between earnings management and financial performance of quoted manufacturing companies in Nigeria after the adoption of IFRS.

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1.7 Significance of Study

This study will be relevant to researchers in identifying the reasons why quoted manufacturing companies in Nigeria engage in earnings management. Regulatory authorities of financial reporting and investors in Nigeria may find it useful in appreciating the extent to which IFRS has helped in eliminating earnings management practices and the justification for its adoption in terms of volume of work and associated cost of adoption in Nigeria. The study will also fill a relevant gap in the literature on earnings management.

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1.8 Scope of Study

The study focuses on the Impact of International Financial Reporting Standard Earning Management in Nigeria Public Sector using Bauchi State as a case study.

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1.9 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Research material: availability of research material is a major setback to the scope of the study.
3. Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
4. 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).