ADOPTION OF IFRS ON AUDIT REPORT QUALITY IN NIGERIA

ABSTRACT

The study tends to enhance transparency, disclosure and comparability. It is evident that the implementation of IFRS reinforces stock market liquidity and leads to lower cost of capital and transaction costs, higher market value and better reputation. In view of the need to utilize accurate data for this research, primary data were obtained through a structured questionnaire to elicit responses from respondents to meet the requirements of this research. The data for the foregoing study were obtained from primary source. The primary (data was the major source which comprised questionnaires which were administered to the respondents. Based on the statistical test (Z – Test) used in the testing of the hypotheses, it was discovered that there was a positive relationship between adoption of IFRS and audit reports quality in Nigeria. In view of the findings of the research, the researcher recommended that there should be more emphasis on awareness of IFRS adoption among accountants/auditors in Nigeria, which could be achieved by using the print media, radio and television. It was also recommended that the FRCN (Financial Reporting Council of Nigeria) should be more equipped to enable them conduct adequate awareness and compliance with IFRS and they should further explain the similarities and differences between IFRS and GAAP.

TABLE OF CONTENTS

Title Page                                                                                i

Certification                                                                            ii

Dedication                                                                              iii

Acknowledgement                                                                  iv

Abstract                                                                                  v

Table of Contents                                                                   vi

Chapter One: Introduction

1. Background to the Study                                                      1
2. Statement of Problem                                                             4
3. Research Questions                                                               5
4. Objectives of the Study                                                          5

1.5    Statement of Hypotheses                                                       6

1.6    Significance of the Study                                                       6

1.7    Scope of the Study                                                                 7

1. Limitation of the Study                                                          8
2. Definition of Terms                                                                8

Chapter Two: Literature Review

2.1    Introduction                                                                           10

2.2    Overview of IFRS                                                                    10

2.3    Audit Committee and International Financial

Reporting Standard (IFRS)                                                    18

2.4    Financial Statement Effects on IFRS Implementation         22

2.5    Definition and Meaning of Audit Report Quality                  24

2.6    Review of Theoretical Literature                                           36

2.7    The Effect of IFRS Adoption on Financial Disclosure 41

Chapter Three: Research Method and Design

3.1    Introduction                                                                           56

3.2    Research Design                                                                    56

3.3    Description of Population of the Study                                57

3.4    The Sample Size                                                           58

3.5    Sampling Technique                                                              58

3.6    Sources of Data Collection                                                    58

3.7    Method of Data Presentation                                       59

3.8    Method of Data Analysis                                                       60

Chapter Four: Data Presentation, Analysis and Interpretation

1. Introduction                                                                           61

4.2    Data Presentation                                                                  61

4.3    Data Analysis                                                                         62

4.4    Test of Hypothesis                                                                  76

Chapter Five: Summary of Findings, Conclusion and Recommendations

1. Introduction                                                                           83
2. Summary of Findings                                                             83
3. Conclusion                                                                             83
4. Recommendations                                                                 84

References                                                                              86

Appendix I                                                                               90

Appendix II                                                                            91

CHAPTER ONE

INTRODUCTION

Background to the Study

Accounting is the language of business while financial reporting is the medium through which the language is communicated. Accounting and financial reporting are regulated by Generally Accepted Accounting Principles (GAAP) comprising of accounting standards, company law, stock market regulations, and so on. GAAP for accounting and financial reporting gives answers to differences in business communication between countries. The global GAAP that is seeking to uni1 accounting and financial reporting world is the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards (IASs; International Financial Reporting Standards (IFRSs); Standing Interpretations Committee (SIC5) pronouncements; and International Financial Reporting Interpretations Committee (IFRICs) guidelines (Ikpefan and Akande, 2012).

Essien-Akpan (2011) opine that financial report apart from stating the financial position of an organization, provides 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. 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. He further stated that useful accounting information derived from qualitative financial reports help in efficient allocation of resources by reducing dissemination of information asymmetry and improving pricing of securities. 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. They added that, the implementation of IFRS would reduce information irregularity and strengthens the communication link between all stakeholders. It also reduces the cost of preparing different version of financial statements where an organization is a multi-national. Accounting standards ensures that important matters regarding preparation and presentation of financial statements as well as auditing same are not left to whim of the preparers and auditors. Before IFRS adoption era, most countries had their own standards with local bodies responsible for developing and issuance.

According to Tanko (2012), international financial reporting standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements. He observed that just like every other system, IFRS is a systematic approach that promotes understandability, reliability, relevance and comparability. He added that IFRS was founded by contributions from major accounting firms, private financial institutions and industrial companies, central and development banks national funding regimes, and other international and professional organizations throughout the world.

This study therefore intends to investigate the adoption of IFRS and audit report quality in Nigeria.

Statement of Problem

The adoption of IFRS tends to enhance transparency, disclosure and comparability. It is evident that the implementation of IFRS reinforces stock market liquidity and leads to lower cost of capital and transaction costs, higher market value and better reputation. The higher disclosure requirements and financial reporting quality that stem from IFRS imply that the adoption of IFRS would give a positive signal to investors as information asymmetry and agency costs tend to diminish. It appears, therefore, that firms that adopt IFRS would tend to display lower potential for earnings management. Less subjectivity would lead to fewer opportunities to influence reported earnings and bonuses and/or mislead investors. Hence, in countries with strong investor protection mechanisms, such as the UK, the costs of IFRS adoption would tend to be lower because the level of earnings management is lower as managers are less inclined to manipulate the reported accounting figures. In contrast, in countries with weak investor protection mechanisms, the scope for earnings management would tend to be higher and the quality of financial reporting lower, implying that the costs of adopting IFRS would be higher.

Research Questions

In the light of the above, the following research questions are raised:

1. Is there positive relationship between adoption of IFRS and audit reports quality in Nigeria?
2. Is there significant relationship between adoption of IFRS and credibility of audit report?
3. Is there significant relationship between adoption of IFRS and credibility of financial statement?

Objectives of the Study

The objective of this study is to examine the adoption of IFRS and audit report quality in Nigeria.

The specific objectives are:

1.      To determine if there is positive relationship between adoption of IFRS and audit reports quality in Nigeria.

2.      To examine if there is significant relationship between adoption of IFRS and credibility of audit report.

3.      To find out if there is significant relationship between adoption of IFRS and credibility of financial statement.

  Statement of Hypotheses

The following hypotheses have been formulated to serve as a base for this research.

Hypothesis 1

Ho:   There is no positive relationship between adoption of IFRS and audit reports quality in Nigeria.

HI:     There is a positive relationship between adoption of IFRS and audit reports quality in Nigeria.

Hypothesis 2

Ho:   There is no significant relationship between adoption of IFRS and credibility of audit report.

HI:     There is a significant relationship between adoption of IFRS and credibility of audit report.

Hypothesis 3

Ho:   There is no significant relationship between adoption of IFRS and credibility of financial statement.

HI:     There is a significant relationship between adoption of IFRS and credibility of financial statement.

Significance of the Study

It is expected that this study would consolidate existing literature on the issues - surrounding the relationship between adoption of IFRS and audit report quality and thus boosting the empirical evidence from Nigeria. Furthermore, given the empirical nature of the study, the outcome of this study would aid policy makers and regulatory bodies in economic modeling and policy simulation with respect to the selected variables examined in the study.

The result of the study would be of benefits to investment analysts, investors and corporations in examining the effectiveness of IFRS on audit report quality.

It will also be useful in stimulating public discourse given the dearth of empirical researches in this area from emerging economies like Nigeria.

Finally, it would also add to the available literature on the area of study while also providing a platform for other researchers who may want to further this study.

 Scope of the Study

The study is undertaken to examine adoption of IFRS and audit report quality in Nigeria. The population of the study is the entire quoted companies operating in Nigeria, while the sample size is restricted to some selected staff of five banks quoted in the Nigeria Stock Exchange.

Limitation of the Study

The major constraints of this project are sourcing enough materials for this buildup. This is as a result of newness of the subject of research. Also, the uncooperative attitude of some respondent greatly affected the adequate collection of data from the fieldwork.

1. Definition of Terms

Audit: Audit is a Latin word meaning “he hears”. It is a process carries out by qualified persons called auditors, whereby the account of business organization including charities, trust and professional firms are subjected to scrutiny in such details as to accuracy, truth and fairness.

Auditing: Auditing is an independent examination of and the expression of opinion on accounts of companies as presented by management to an appointed auditor in pursuance of that appointment, and in keeping with any reliant legislature and other requirements, whether in his opinion the account show a true and fair view and had be prepared in accordance with Law.

Financial Statement: The term “financial statement” covers the Balance Sheet, Income Statement or Profit and Loss Accounts, Statements and explanatory materials, which are identified as being part of financial statement.

Culture: Culture is defined as the collective programming of the mind that differentiates one member of a group or society from the others.

Audit Report: This is the means by which the auditors express their opinion on the truth and fairness of the company’s financial statement.

Audit Report Quality:  Audit report quality is the probability that financial statements contain no material misstatements. It is also is an increasing function of an auditor’s ability to detect accounting misstatements and auditor independence as assessed by the market.

Auditor’s Quality: Auditor’s quality is defined as the overall audit service quality of a certain audit firm.

Accounting: This is concerned with the keeping of records of daily transactions entered into in the day-to-day management of a business organization.