THE IMPACT OF IFRS ADOPTION AND BANKING REFORM ON EARNING MANAGEMENT

Introduction

1.1 Background of the Study

Globalization of capital markets requires a unified global accounting, reporting and disclosure set of standards. As a result of increasing volume of cross border capital flows and the growing number of foreign direct investments via mergers and acquisitions in the globalization era, the need for the harmonization of different practices in accounting and the acceptance of worldwide standards has arisen. This worldwide standard is International financial reporting standards (IFRS). Although, there has been series of contentions as regarding the impact of this standard on the quality of financial statements, but this study will provide a clear understanding of their relationship.

International Financial Reporting Standards (IFRS) is a set of principle − based issued and established by International Accounting Standards Board (IASB) and generally accepted by different countries around the world to ensure comparability and transparency in accounting practice (Desoky and Mousa, 2014).The establishment of such standards by IASB aimed at achieving harmonization and promotion of financial practices to ensure consistency in reporting format across countries which should minimize cost of processing financial information to investors and improving efficiency of capital markets (Wen et al, 2011). Recently around the world more than 120 countries and reporting jurisdictions required domestic listed companies to prepare their financial statements in accordance with IFRS (Mousa and Desoky, 2014). The adoption and implementation of IFRS has been one of the most important events in accounting history of different countries around the world which induce significant changes in the financial practices (Kousenidis, et al, 2010). However, changes are found to vary among countries and reported to be more serious in countries that had a code-law accounting system (Ball et al., 2000). Before implementation of IFRS, existed accounting system affected by severe government and legalistic influences which is in contrast with a common-law accounting system countries like North America (Kousenidis, et al, 2010). In a common law accounting system there is a proper description of IFRS and accounting is mainly affected by the market practitioners (Ball et al., 2000). With growing acceptance of IFRS by different countries around the world, many researchers aimed to find out empirically whether the new accounting standards has improved the quality of financial statements that is reported to the users. Furthermore, banks’ ability to engender economic growth and development depends on the health, soundness and stability of the system. The need for a strong, reliable and viable banking system is underscored by the fact that the industry is one of the few sectors in which the shareholders’ fund is only a small proportion of the liabilities of the enterprise. It is, therefore, not surprising that the banking industry is one of the most regulated sectors in any economy. It is against this background that the Central Bank of Nigeria, in the maiden address of its current Governor, Prof. Charles Soludo, outlined the first phase of its banking sector reforms designed to ensure a diversified, strong and reliable banking industry. The primary objective of the reforms is to guarantee an efficient and sound financial system. The reforms are designed to enable the banking system develop the required resilience to support the economic development of the nation by efficiently performing its functions as the fulcrum of financial intermediation (Lemo, 2005). Thus, the reforms were to ensure the safety of depositors’ money, position banks to play active developmental roles in the Nigerian economy, and become major players in the sub-regional, regional and global financial markets. The key elements of the 13-point reform programme include: Minimum capital base of N25 billion with a deadline of 31st December, 2005; Consolidation of banking institutions through mergers and acquisitions; Phased withdrawal of public sector funds from banks, beginning from July, 2004; Adoption of a risk-focused and rule-based regulatory framework; Zero tolerance for weak corporate governance, misconduct and lack of transparency.

On the other hand Earnings management has been an issue of continuous concern for several years for regulatory bodies and accounting practitioners. For example, Hadani, Goranova and Khan (2011) argue that earnings management increases information asymmetry and negatively impacts the quality of financial reports. Earnings management is said to be the reasons for low quality of reported information. It is the choice of a manager among accounting policies which allow achieving some specific objectives (Scott, 2003). Managers use flexibilities within the accounting standard to choose accounting methods, policies and estimates in reporting process to reflect firm’s future prospect (Shehu, 2013).Thus the very nature of accounting accruals gives managers a great deal of discretion in determining the earnings in any given period. Managers can apply legal and permitted accounting methods or practices which inevitably impacting negatively on earnings quality Presently, many countries have replaced national accounting Standards by IFRS in order to make local accounting system more transparent, reliable, relevant, understandable and more importantly to enhance financial reporting quality. However, the process of IFRS implementation varies significantly from country to country due to political, cultural, economic, legal and institutional factors. Nigeria and many developing countries are characterized by weak institutions and volatile economic and political environment which are not very conducive for effective implementation of IFRS (Tanko, 2012). It is to this regard that study examines the impact of IFRS adoption and banking reform on earning management using first bank as the case study.

1.2 Statement Of The Problem

The Nigerian banking sector witnessed dramatic growth post-consolidation. However, neither the industry nor the regulators were sufficiently prepared to sustain and monitor the sector’s explosive growth. Prevailing sentiment and economic prevailing attitude all encouraged this rapid growth, creating a blind spot to the risks building up in the system. Empirical accounting researches have been conducted to examine the impact of IFRS adoption and banking reform on earning management 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 (Cai, Courtesney & Rahman, 2008; Aussenegg, Inwinkl & Schneider, 2008).

1.3 Aim And Objectives Of Study

The main aim of the research work is to determine the impact of IFRS adoption and banking reform on earning management.

Other specific objectives of the study are:

1. To examine the impact of International Financial Reporting Standards IFRS on the rate of reform in First Bank Plc Nigeria.
2. To examine the benefits of International Financial Reporting Standards IFRS in First Bank Plc Nig.
3. To analyze the relationship between International Financial Reporting Standards IFRS and earning management in first bank Nigeria Plc.

1.4 Research Question

The study came up with research questions so as to ascertain the above stated objectives of the study. The research questions for the study are:

1. What is the impact of International Financial Reporting Standards IFRS on the rate of reform in First Bank Plc Nigeria?
2. What are the benefits of International Financial Reporting Standards IFRS in First Bank Plc Nig?
3. What is the relationship between International Financial Reporting Standards IFRS and earning management in first bank Nigeria Plc?

1.5 Statement Of Research Hypothesis

Hypothesis 1

• H0: there is no significant relationship between International Financial Reporting Standards IFRS and earning management in first bank Nigeria Plc
• H1: there is significant relationship between International Financial Reporting Standards IFRS and earning management in first bank Nigeria Plc

Hypothesis 2

• H0: International Financial Reporting Standards IFRS has no impact on the rate of reform in First Bank Plc Nigeria
• H1: International Financial Reporting Standards IFRS has impact on the rate of reform in First Bank Plc Nigeria

1.6 Significance Of Study

The following provided a functional significance for this study:

1. The findings from this study will be very useful for business managers particularly banks in the understanding of the relationship between international financial reporting standards IFRS, Banking reforms and earning management.
2. This research will be a contribution to the body of literature in the area of international financial reporting standards IFRS and Banking reforms and earning management in Nigerian banks, thereby constituting the empirical literature for future research in the subject area.

1.7 Scope Of The Study

This study is limited to First Banks Plc in Nigeria. It will also cover the relationship between international financial reporting standards IFRS, banking reforms and earning management in Nigerian banks.

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.

1.9 Definition Of Terms

Bank Reform:

Make changes in first bank in order to improve the performance.