AN EMPIRICAL ANALYSIS OF THE NEXUS BETWEEN STATUTORY REGULATORY AGENCIES AND THE QUALITY OF ACCOUNTING PRACTICE IN NIGERIA

CHAPTER ONE

BACKGROUND OF THE STUDY

1.1 Introduction

Nigeria’s position as the largest economy in Africa makes it a cynosure of many investors and the economy is on the boardroom agendas of many companies worldwide. Paul, Francis, Ben-Caleb, and Olayinka (2020), thus, the dissemination of timely and reliable accounting information becomes an essential ingredient for making and evaluating the decisions about the allocation of scarce financial resources and by extension, attracting foreign direct investments (FDIs) and further development of the Nigerian Stock Exchange into an efficient and vibrant stock market which in turn has become an engine for economic growth and development. However, the magnitude of the corporate failures in the last few years indicates that the accounting information failed to represent the ’economic substance’ of the companies faithfully in terms of relevance, reliability, and comparability. The accrual accounting system under both General Acceptable Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) permits considerable discretion in recognizing the timing and amount of operating revenue and expenditure (Kothari, Leone, & Wasley, 2018). The exercise of choice and professional judgment in accounting is often abused by failing to disclose useful information and manipulation  of accounting numbers. The essence is to present better operating performance (or understate profit to reduce tax) and a healthier financial position. Consequently, users of accounting information are deceived into making wrong economic decisions, which are inimical to the  preservation of   corporate investments (Osisioma & Enahoro, 2019; Akenbor & Ibanichuka, 2019). Most of the financial reports could not provide timely information to the users and the ’going concern’ threats to the business were hardly revealed. This phenomenon sharpens the concerns of the investors and other stakeholders regarding accounting irregularities and the quality of financial reports. In particular, concerns were raised about the earnings management, bad corporate governance, and weak institutional framework in the corporate institutions (World Bank, 2011). Frequent financial scandals do not only undermine the integrity of the preparers of the accounts but also lead to loss of confidence in those who are supposed to give credence to the reports and enforce compliance. This situation is exacerbated by the fact that cases of quality accounting referred to the appropriate professional bodies in Nigeria for disciplinary action were not resolved favorably for the investors’ confidence to be restored (Bakre, 2018)..  Statutory regulatory agencies are to serve as an external control mechanism in ensuring that financial information provides a fair view of the company’s performance and financial position, free of any unethical practice and suitable for all stakeholders’ needs. This is done through the formulation of rules, compliance, and enforcement. Therefore, designing and executing a macro-financial reporting template for a country is important. Otherwise, there is a tendency for firms to use different accounting rules, principles, or methods to generate different sets of financial statements that hardly pass the comparability test (Addis, 2019). Surprisingly, the regulatory reforms of recent years have failed to eliminate or reduce the firms’ quality accounting practices. One critical observation is that the corporate governance codes in Nigeria were developed using the Anglo-Saxon template without considering the peculiarities in the business environment. The Anglo-Saxon governance codes cannot be applied to Nigeria, where there is a culture of impunity, disrespect for the rule of law, and weak legal and institutional framework. several previous works on quality accounting practices used internal corporate governance mechanisms as proxies, whereas the market failures of recent years have made self-regulation through the board of directors ineffective. Those charged with governance (directors) who are supposed to engender good corporate governance have been culpable in most financial scandals (Post, Mahon, 2018). The major criticism against the Securities and Exchange Commission (SEC) and Financial Reporting Council of Nigeria (FRCN) codes of corporate governance  is that they ultimately rely on self-regulation, and therefore lack mandate for implementation because compliance is voluntary (comply or explain). Moreover, the extant literature showed that the relationship between corporate governance mechanisms and creative accounting practices in a turbulent period is not a priori clear because of the deliberate action of the directors to make internal corporate governance mechanisms ineffective (Constantatos, 2018). Despite the increasing importance of regulatory agencies, few studies had investigated the relationship between regulatory agencies and quality of accounting practices in Nigeria. The objective of the study is to investigate the impact of statutory regulatory agencies on quality of accounting practices in Nigeria.

1.2 Statement of the Research Problem

The quality of accounting practice (QAP) in Nigerian listed firms  has received much attention in recent years. For example, the World Bank (2019), in its Report of the Observance of Standards and Codes (ROSC) observed several deficiencies in the standard of accounting and auditing practice in Nigeria. The most prominent of these deficiencies concern the perceived poor institutional weaknesses in regulation, compliance, enforcement of accounting standards/ rules and dearth of professional accountants in the private sector. The report recommended several measures which should be adopted in order to improve the quality of accounting practice. Most of the measures emphasized the role key institutions (tertiary, legislative, legal, regulatory and professional) should play in the transformation process. In response thereof, new and revised laws and regulations were enacted to implement some of the recommendations of the World Bank. Despite these initiatives, concern and criticisms about the quality of accounting practice in organizations in Nigeria have continued unabated with divergent views among the public, corporate management, auditors and government agencies.   At the core of the issues agitating the minds of the stakeholders are whether the provisions and requirements of statutory regulatory agencies lead to more or less transparent accounting practice. Or whether they lead to situations where everyone looks for loopholes and the regulators have to constantly create new rules to plug them. If so much fraud occurs in spite of these agencies and regulations, stakeholders are wondering whether we need more regulations or whether the regulations are failing and therefore we need less of them.

To our knowledge, only a few empirical studies have directly examined the relationship between regulations and the quality of accounting practice in Nigeria. Thus, the central problem of this study is to empirically examine whether or not statutory regulatory agencies significantly impact the quality of accounting practice with reference to the qualitative characteristics of accounting information-Relevance, Reliability and Comparability of financial reporting. In addition, the study also investigated whether regulatory attributes influence the level of impact which statutory regulatory agencies have on the quality of accounting practice in Nigeria.

1.3 Objectives of the Research

The main objective of this study is to examine the nexus between statutory regulatory agencies and the quality of accounting practice in Nigeria. The specific objectives are stated as follows:

(i) To examine the impact of statutory regulatory agencies on the quality of accounting practice in   Nigeria.

(ii) To ascertain whether or not there is any significant difference in the quality of accounting practice in Nigeria following the pronouncements of the FRCN.

(iii)  To verify the impact of regulatory agencies activities on the quality of accounting practice in   Nigeria.

(iv) To assess whether or not there is any significant impact of regulatory attributes on the quality of   accounting practice in Nigeria.

1.4 Research Questions

In order to achieve the objectives of this research study, an attempt was made to provide answers to the following research questions

           (i). To what extent has regulatory agencies and statutes significantly influenced the quality of   accounting practice in Nigeria?

           (ii). To what extent has the quality of accounting practice been significantly influenced by the   promulgation of FRCN?

           (iii). What significant impact do regulatory agencies enforcement activities have on the quality of    accounting practice in Nigeria?       

           (iv). What significant impact do regulatory attributes have on the quality of accounting practice in        Nigeria?

1.5 Research Hypotheses

To achieve the objectives of this study, the following hypotheses were stated in null form.  

(i)  H_0:   Statutory regulatory agencies have no significant impact on the quality of accounting practice  in Nigeria.

(ii) H_0:  There is no significant difference in the quality of accounting practice in Nigeria following the  pronouncement of the FRCN.

(iii) H_0: There is no significant distinction in the quality of accounting practice among industrial sectors in Nigeria.

(iv) H_0:  There is no significant impact of regulatory attributes on the quality of accounting practice in Nigeria.

1.6 Significance of the Study

The use of statutory regulatory agencies to improve accounting practice by enforcing compliance with accounting standards is becoming popular.  Evidence from prior studies have shown the benefits of governmental intervention in the financial reporting process either by way of administrative agency controls or by enactment of specific legislative instruments (Inchausti,  2019; Walker and Mack, 2018). This process is desirable for the overall growth of the Nigerian economy. The major significance of this study is to aid the understanding of the impact which statutory regulatory agencies have on the quality of accounting practice in Nigeria with the ultimate aim of regulatory growth. The study will therefore be significant in the following ways:

(i). It will be useful to professional accounting organizations/bodies, national governments, investors (local and international), international organizations such as the World Bank and others who are constantly looking for ways to promote accountability in the use of resources entrusted to individuals or organizations. (ii). It will also be useful to accounting practitioners in that it will aid their understanding of the impact of statutory regulatory agencies on accounting practice in Nigeria. (iii)  It will assist government to ascertain the statutory regulatory agencies impact on the quality of accounting practice in Nigeria. (vi) This study is different from others which have focused solely on environmental factors impacting on the development of accounting profession/practices and (v). it will be relevant in determining whether more of less of regulations are needed in order to improve the quality of accounting practice in Nigeria.

1.7 Scope of the Study

The geographical scope of this study is south south Nigeria. The study focused on the following agencies and regulations with implications for accounting practice- Central Bank of Nigeria, (CBN), Corporate Affairs Commission, (CAC), Securities and Exchange Commission, (SEC), The Professional Accounting Bodies in Nigeria (The Institute of Chartered Accountants of Nigeria (ICAN)  and the Association of National Accountants of Nigeria (ANAN), National Insurance Commission, (NIC), Financial Reporting Council of Nigeria (FRCN), Companies and Allied Matters Act (CAMA), and the Banks and Other Financial Institutions Act (BOFIA).  The choice of these agencies and regulations was based on their relevance to financial reporting as observed by the World Bank (2004).  The study  covered the period 2012 to 2020 divided into two separate periods as follows-1 January 2012 to 31 December 2015 [as the pre- FRCN Act –self regulation period] and 1 January 2017 to 31 December 2020 [as the post-FRCN Act- statutory regulation period]. This means four consecutive years immediately before and after the effective date of the FRCN Act 2011.

The empirical analysis was carried out using data from selected companies quoted on the Nigerian Stock Exchange. Also, the views of compilers as well as users of accounting information were sought.  The Financial officers in some selected companies quoted on the Nigeria Stock Exchange represented the compilers while Investment analysts represented the users. The compilers and users were chosen for the study as respondents because their perception must be understood and managed before the effect of any agency or regulations can begin to have a broader appeal to other stakeholders. However, the investment analysts were chosen, first, because they are identified in the literature as the principal users of financial reports (Schipper, 2011; Bercel, 2014; Capstaff, Paudyal and Rees, 2010; Healy and Palepu, 2011; Clement and Tse, 2013; Mangena, 2014). Secondly, the work of investment analysts requires that they have the accounting knowledge to enable them analyze the reports and make decisions (Baker, 2018). Thus, the provision of information that meets the needs of the investment analysts is considered as also meeting most of the needs of other users.

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