Adoption Of International Financial Reporting Standards And Earnings Management In Quoted Manufacturing Companies In Nigeria

Adoption Of International Financial Reporting Standards And Earnings Management In Quoted Manufacturing Companies In Nigeria

ABSTRACT

This study investigated the effect of the incorporation of the International Financial Reporting Standards (IFRS) on earnings management in Nigerian publicly traded manufacturing companies. The study utilized published financial statements prepared according to the Nigerian Statements of Accounting Standards (SAS) and restated financial statements using IFRS guidelines for 20 publicly traded companies. Earnings management variables included discretionary accruals, while performance proxies included leverage, cash flow, growth, return on assets (ROA), scale, and loss. Multiple regression was used to investigate the relationship between earnings management and performance, while the t-test was used to examine the impact of IFRS adoption on earnings management. Tests of multicollinearity revealed that the correlation between the variables was insufficient to skew the results of the multiple regression. The results indicated that the decline in earnings management following the implementation of IFRS was not statistically significant. Before and after the implementation of IFRS, the relationship between earnings management and the financial performance of manufacturing companies in Nigeria was significant. The research revealed that accounting standards alone do not enhance the quality of financial reports. It was suggested that managers should receive more training on IFRS adoption and guidelines.

Keywords: International Financial Reporting Standards, Earnings Management, Discretionary Accruals, Performance

INTRODUCTION

The performance of a company can be gleaned from the evaluation of the information contained in its accounting reports. Managers owe a duty to the various stakeholders, particularly investors, to prepare accounting reports that accurately and fairly portray the business transactions for the specified period. According to BPP Learning Media (2012), financial reports must accurately depict the economic phenomena that they purport to represent in words and numbers.

However, when businesses are performing poorly, managers may be compelled to use accounting techniques to inflate the firm’s apparent performance (Jones & Jones, 2011). Adopting accounting policies that serve the interests of management, managers take advantage of the flexibility of accounting rules, which enables them to determine the direction of accounting reports. This is one of the reasons why accounting numbers can be manipulated to generate various accounting information from the same business data.

Earnings management is the manipulation of accounting information to accomplish a desired objective.

According to Jawad and Xia (2015), earnings management is a type of innovative accounting. Earnings management entails taking deceptive actions to present financial statements that benefit or safeguard management interests. According to Akhgar (2012), earnings management is the practice of misrepresenting or reducing the transparency of financial reports using deception. When accounting data is inaccurate, the evaluation of a company’s financial performance will be skewed.

When firms engage in earnings management, the accounting reports do not accurately reflect the business transactions they purport to represent.

Accounting standards are introduced by regulatory bodies of accounting practices in order to guarantee high-quality financial information that will eliminate or substantially reduce earnings management. Accounting standards are authoritative statements of best accounting practices pertaining to measurements, remedies, and disclosures of accounting transactions (Shil, Das, & Pramanick, 2009). Biddle and Hilary (2006), cited by McNichols and Stubbs (2008), discovered that improved accounting information reduces the information asymmetry between managers and external capital providers. Information asymmetry occurs when one party to a contract has more information than the other, resulting in an information imbalance. Information imbalance enables managers to manipulate accounting numbers to maintain or increase the market value of the company.International Financial Reporting Standards (IFRS) were developed by the International Accounting Standards Board (IASB) to reduce information asymmetry between financial reports prepared in various countries.

In 2012, Nigeria adopted IFRS to supplant the Nigerian Statements of Accounting Standards (SAS) for publicly traded companies. Okafor and Ogiedu (2011) discovered evidence that IFRS have the potential to yield greater benefits, such as better information for equity holders and regulators, improved comparability and transparency of results, enhanced business performance management, and an impact on other business functions besides financial reporting. In light of the findings of Okafor and Ogiedu (2011), this study investigates the influence of IFRS on earnings management in Nigerian manufacturing companies.

EXPRESSION OF THE PROBLEM

The implementation of IFRS is intended to enhance the quality of financial reporting by increasing disclosure, thereby enhancing accountability and transparency. According to Barth, Landsman, and Lang (2008), cited in Santos and Cavalcante (2014), the concepts and recognition, measurement, and disclosure criteria established by the IFRS provide higher information quality, which impacts the utility of accounting information generated. High-quality accounting data will ensure that earnings management is eliminated or drastically reduced. Despite the fact that Onalo, Lizan, and Kaseri (2015) examined the effects of changes in accounting standards on earnings management in Malaysia and Nigeria, the study was primarily concerned with the banking industry. Inasmuch as the banking industry is highly regulated, the results may not be pertinent to other industries.

In addition, the findings of previous researchers regarding the effect of IFRS on earnings management are contradictory, rendering research on the topic inconclusive. While Jeno (2011) reported that earnings management decreased after the post-adoption period in Hungary, Xu (2014) found evidence that IFRS adoption did not reduce the level of earnings management and that earnings manipulation increased after the adoption of new accounting standards among private firms in the United Kingdom.

To the best of this researcher’s knowledge, no empirical study has confirmed that the adoption of IFRS has eliminated or substantially reduced earnings management in the manufacturing sector of the Nigerian economy and its effects on financial performance. This study aims to address this deficiency by investigating the impact of the IFRS on earnings management in quoted Nigerian manufacturing companies.

PURPOSE OF THE STUDY

This study’s primary objective is to investigate the impact of IFRS adoption on earnings management in quoted Nigerian manufacturing companies. Specifically, the investigation seeks to accomplish the following:

establish the difference in earnings management between the pre-adoption and post-adoption IFRS periods for quoted Nigerian manufacturing companies.

Before and after the adoption of IFRS, investigate the relationship between earnings management and the performance of quoted manufacturing companies in Nigeria.

RESEARCH QUESTIONS

Based on the operationalized variables developed in the conceptual model, the following concerns were raised for this study:

What is the difference in earnings management between before and after the adoption of IFRS in Nigerian publicly traded manufacturing companies?

Before the adoption of IFRS, what was the relationship between earnings management and the financial performance of publicly traded manufacturing companies in Nigeria?

After the adoption of IFRS, to what extent does financial performance influence earnings management in Nigerian publicly traded manufacturing companies?

HYPOTHESES

For the investigation, the following null hypotheses were formulated:

H01: There is no significant difference in earnings management between the pre-adoption and post-adoption IFRS periods for quoted manufacturing firms in Nigeria.

Before the implementation of IFRS, there is no correlation between earnings management and the financial performance of publicly traded manufacturing companies in Nigeria.

After the implementation of IFRS, there is no correlation between earnings management and the financial performance of publicly traded manufacturing companies in Nigeria.

SCOPE OF THE RESEARCH

This study investigates the effect of IFRS adoption on earnings management in quoted manufacturing companies in Nigeria, using the operational offices in Rivers State as evidence. For the analysis, published financial statements prepared in accordance with Nigerian accounting standards (SAS) and restated financial statements using IFRS guidelines were utilized. This is to enable effective comparisons of the outcomes of identical activities.

THE IMPORTANCE OF THE STUDY

Researchers will find this study useful in determining why quoted manufacturing companies in Nigeria engage in earnings management. Regulatory authorities of financial reporting and investors in Nigeria may find it beneficial to comprehend the extent to which IFRS has aided in eradicating earnings management practices and the justification for its adoption in terms of the volume of work and costs associated with its adoption in Nigeria. The study will also address an important lacuna in the earnings management literature.