Abstract
International
Financial Reporting Standards (IFRS) is being giver global recognition, with a
view to ensuring consistency, in financial reporting. Arguably, the adoption of
International Financial Reporting Standard, (IFRS) makes the conduct of international
business easier as it facilitates the raising of fund in the capital
market. The objective of this paper is
to evaluate the implications of the adoption of international financial
standards (IFRS) on corporate governance practice. The paper examines empirical literature to
identify the effects of the adoption international financial reporting
standards on the existing corporate governance. The paper concludes that IFRS
will positively strengthen the exiting
corporate governance practices in Nigeria financial sector by giving room for
transparent reporting of financial information.
CHAPTER ONE
INTRODUCTION
1.1 Background
of the study
Prior to the advent of International
financial reporting standard (IFRS) as a global reporting standard, every
country has it’s own standard accounting practice version of generally accepted
accounting principle (GAAP).
In Nigeria, the preparation of
entity’s financial statement was hitherto, based on her local statement of
Accounting standards (SASs) issued by Nigeria Accounting Standard board (NASB).
The statement of Accounting Standard which is a blue print from GAAP, usually
contain references at the concluding part of the standards to the effect that
each of the SASs accord substantially with the equivalent International
Accounting standard, Ogbonnaya (20040. this implies that, before the adoption
of IFRS as a global financial reporting standard, Nigeria’s Local statement of
accounting standard was prepared based on the International Accounting standard
(IAS). Despite the foregoing differences exist between Nigeria’s SASs and the
International Accounting Standards (IAS). The 203 & 204 World Bank’s report
on the observance of standards and code (ROSc) in Nigeria (p.8); showed that
there is a gap when SASs are compared with their International equivalent. It
was found that even though; Nigeria’s SASs are based on IAS, the Accounting
Statements are outdated, and does not meet the needs of a modern financial
system. In the words of Folajimi (2011), the SAS does not inspire. Investor’s
confidence, and hence, present obstacles to the growth and internalization of
Nigeria’s banking sector.
In the light of the above, financial
Statements are reconciled with different Nation’s Accounting Standards, hence
the need for a Universally accepted accounting Standard. IFRS sprang from the
need to harmonize the work of International Accounting standard committee
(IASC) and International Accounting standard Board (IASB) into a common
framework for global adoption Ojeka (2011).
With the globalization of the
capital market, there is the need for Nigeria to harmonize her accounting
standards in order to ensure comparability and reliability of accounting
Information. IFRS has been accepted as the basics for reporting in major emerging
international market. It is included in the financial stability forum (FSF) as
one of the key standards for sound financial system and used by the world bank
as part of it’s standards and codes initiative (SCI) Folajimi (2011). With the universal adoption of IFRS as a
global standard for preparation of financial do cross border business.
Today, more than 100 countries of the world
have adopted IFRS as a global financial reporting standard. In Nigeria, the adoption of IFRS is expected
to take place in four phases beginning with the public listed companies in
2011, significant public interest entities in 2012, other public interest
entities in 2013, and small and medium scale entities in 2014.
1.2 Reporting
Format Between GAAP and IFRS
There are differences in the reporting
format between the generally accepted accenting principle and the international
financial reporting format: INCOME STATEMENT IFRS. There is no prescribed format for the income
statement. The entity should select a
method of presenting its expenses by either function or nature. Generally IFRS requires a minimum format of
presentation of the following items on the face of the income statement:
1. Revenue
2. Finance cost
3. Share
of post –tax result of associates and joint ventures associated for using the
equity.
4. Method
5. Tax expenses
6. Post
tax gains or loss attributable to the
results and to re-measurement of discontinued operations.
7. Profit and loss account for the period.
The portion of profit attributable to
the minority interest and to the parent entity is separately disclosed on the
face of the income statement as allocations of profit or loss for the period.
GAAP:
Presentation of Income statement is done in one of two formats.
1. A
single step format where all expenses are classified by function and are
deducted from total income to give income before tax.
2. A
multiple step format where cost of sales I deducted from sales to show grow
profit and other income and expense are then presented to give income before
tax.
1.3 Statement
of Problem
Recently, the central Bank of
Nigeria (CBN) rescued Eight commercial banks after the consolidations exercise.
The consolidation of banks in Nigeria perhaps, contributed to restore the
confidence of the investing public in the banking industry. On the other hand,
the recent development in the banking industry that affected the eight
commercial banks which had been given a clean bill of health by the apex bank
is perhaps an indication of weakness in corporate governance and risk
management practices.
In the same vein, some of the
rescued banks hide multibillion naira losses in deferred taxes. Business
(2011).
This is done to deceive investors
and the general public who accept accounting Information as contained in the entity’s
financial statements as the ultimate truth. Indeed, the present accounting
systems of most banks is such that a lot of things are hidden which analysts
will not be able to see Sanusi (2010).
The worrisome reality is that Nigeria is yet to
embrace with the global trends in accounting principles. Before the
introduction of IFRS in Nigeria, perhaps, there has been in existence the code
corporate governance and code of best practices, yet the country has marguably
witnessed cases of banks and institutional failures arising from problems of
technical financial distress, unprofessional and unethical practice and
standards.
It therefore, makes a research sense
to find out, whether the corporate governance practices have failed, and if
not, what is likely the effect of the adoption of IFRS on the existing
corporate governance practices in Nigeria Banking Sector.
It is base don the above stated
problems and question, that this study seeks to address.
1.3 Objectives
of the Study
The board objective of this study is
to analyze the implications of the adoption of International finical reporting
standards on corporate governance in the banking sector in Nigeria which the
specific objectives include;
(i) To
determine the effectiveness of corporate governance practices in Nigeria.
(ii) To
ascertain the influence of IFRS adoption on the existing corporate governance
practices.
CHAPTER TWO
2.0 REVIEW OF RELATED LITERATURE
2.1 Introduction
The acquisition of non-performing
loans (NPL) by AMCON and injection of equity into the rescued banks in order to
bring their net Asset value back up to Zero is an indication that the banking
Industry is not yet stable.
However, the adoption of
International financial reporting standards is a measure to achieving the
harmonization of accounting polices so that comparison of financial information
will be easier and more meaningful
across jurisdictions Sanusi (2011).
This chapter focuses on the
conceptual, empirical and theoretical literatures regarding International
financial reporting standards and its implications on the code of corporate
governance practices in Nigeria banks.
A lot of work have been documented
by scholars and intellectuals in the area of study, but the review was selected
based on information form articles from
learned journals, seminar papers, reports, magazines, newspapers and other
relevant materials.
The
issue reviewed include:
Corporate governance in the Nigeria financial sector,
Implications of IFRS adoption on corporate governance practices IFRS adoption,
Implications on management accounting and Taxation, and Impact of the
Implementation of IFRS on key financial measures of UK firms and volatility
effect.
2.2 Concept
of Corporate Governance
For Sulaiman (2003), corporate
governance is the frame work for accountable decision making as well as the
structures that turn decision into actions in organization. He further added
that, it is a combination of processes structures and relationships through
which business corporations are directed and controlled.
Oyediran (2003) posits that,
corporate governance is the way and manner in which the affairs of companies
are conducted by those charged with that duty.
The governance of limited liability
companies in Nigeria is the responsibility of the Board of directors who
oversees the activities of the Executives.
Dozie (2003) observes that corporate
governance is characterized by transparency, accountability, probity and the
protections of stakeholder’s right. He further posits that corporate governance
refers to the manner in which the power of a corporations is exercised in the
management of it’s total portfolio of economic and socio resource with the aim
of increasing shareholders value and safeguarding the interests of other stake
holders in the context of its corporate mission. From the above definitions,
the concept of corporate governance implies rules and regulations which ensures
that a company is managed in a transparent and accountable way so as to ensure
the survival of the enterprise.
Generally, the objective of
corporate governance is to strengthen the confidence of the investor sin the
business.
2.3 Academic
Review
Adeyemi and Adesoji (2010) carried
out a study on the efficacy of internal and external audit in corporate
governance in Nigeria financial sector. He reported that weak internal controls
were evident in the sector due to the overbearing influence of the chairman,
particularly in family controlled firms and the existence o a rubber stamp
board. The researcher used secondary data and simple statistics to express the
quantitative aspect of the data.
At the foreign scene Joana and Ivy
(2011) conducted a study on Accounting evidence from relative performance
evolution around IFRS adoption. They reported that, with greater globalization
and accounting convergence, firms likely increasingly turn to foreign peers as
benchmark for managers. According to them, changes in ownership composition can
influence corporate governance practices. Although, there was no systematic
evidence to support this. Their study was specific to continental European
firms and may not be generalizable to other setting.
Foloyimi (2011) equally carried out
a study on IFRS adoption: Implications on management Accounting and Taxation in
Nigeria Economy. He reported that Implementation of IFRS will ensure segment
reporting of management accounts for inflow of direct investment, it will give
room for good corporate governance for transparent reporting of financial
statements. According to Lius, the global reporting Language will ensure that
investors fund are moved easily within the global market. He used chi-square
statistical method to analyze the result of the survey.
George
(2010) conducted study on IFRS adoption and financial statements effects, the
case of UK firms. He reported that HRS implementation has favourably affected
the overall financial performance and position of firms. The study compares the
financial numbers reported under UK GAAP in the pre-official adoption period,
is 2004 with the IFRS re-stated numbers reported in 2004. The logistic
regression that is employed uses dummy variable as the dependent variable which
is dichotomous and takes two values, ie 1 for firms reporting IFRS re-stated
financial numbers in 2004 and O for firms reporting their accounting figures
under UK GAAP in 2004. He used a multiple regression model in his analysis.
2.4 Theoretical
Framework
The theoretical framework guiding
this study is Institutional Theory (IT).
Institutional theory is defined as a
way or though or action of some prevalence or performance which is embedded in
the habits of a group or the customs of a people Burns x Scapens (2006) in the
light of above definition, the researchers drew an understanding of accounting
processes as being rule-based or based on how things should be done, and
routine based highlighting how things are actually done. He further explained
that, routilization involves the concept of the formulation of rules to
mutually acceptable ways of compliance ending with routines.
However, despite the fact that IFRS
changes are principle based, set of accounting standards, their implementation
into the working process of a company can be argued to be subject to a process
of institutionalization. This implies that institutional theory is used as a
means of describing the processes/phases which countries must follow, in order
to fully adopt IFRS as a global reporting standard. The existing routines and
institutions shape the selection and implementation process of the new IFRS
standard change Tiina Tamena p99 (2011).
2.5 LINK
BETWEEN IFRS AND CORPORATE GOVERNANCE
Watt (1986) observed that the
adoption of IFRS may have some direct impact on corporate sector. He maintained
that agency shareholders can be substantially reduced through implementation of
IFRS managers to act more in the interest of the shareholder.
In the light of the above, if can be
established that there is a nexus between IFRS and corporate governance in
Nigerian Financial sector. Both IFRS and Corporate governance code
provide-transparent information that not only inspire the confidence of
investors but also enables shareholders to judge whether or not their interests
are served.
CHAPTER THREE
3.0 Discussion
3.1 Introduction
This chapter presents the discussion
of strategies that could be adopted in accomplishing the stated objectives. It
equally presents the discussion of the theoretical framework upon which this
study is based.
3.2 Discussion
on the strategies for accomplishing the stated objectives.
(i) In determining the effectiveness of
corporate governance practices in Nigeria financial sector, this objective
could be accomplished by analyzing the opinions of respondents using chi-square method.
(ii) In ascertaining the influence of IFRS as
option adoption on the existing corporate governance practices, this objective
could be accomplished by analyzing information obtained through secondary data
using chi-square.
3.3 Discussion
of the Stated Theoretical Framework
In assessing the impact of
International financial reporting standard adoption (IFRS) on corporate
governance, Institutional theory is chosen. The choice of this theory is due to
its applicability to the study of IFRS adoption. It is used to describe the
processes that must be followed in order to successfully adopt the new accounting
standard. In the light of the above, Burns and scapens (2000) noted that, the
existing routines and institutions shape the selection and implementation
process of the new IFRS standard changes, meaning that the changes are path
dependent. Understanding the current process in the organization is thus
necessary for understanding the changes that need to be made. When the new
rules and routines become the unquestionable form of management control, they
can be said to be institutionalized.
However, institutional theory is
suitable for this study because, it gives a holistic understanding of the
organization in question and its current processes. This is because, every
organization are usually have an Accounting manual which describes the rules
and routines of the organization for reporting which represents an institution.
Routinization refers to what an
Institutional theorist would call Institutionalization Tiina Tanimenpaa (2011)Notwithstanding
the strength of Institutional theory, the theory is saddled with developmental
stages which makes the idea slow.
3.4 Discussion
of the Reviewed Literature
Regarding the work of Adeyemi and Adesoi (2010) on
corporate governance in the Nigeria financial sector: The efficiency of
Internal control and External Audit, the methodology they adopted was sound.
They relied heavily on secondary sources of data using simple percentages in
canalizing the data.
For Folajimi (2011) the researcher made use of both
theoretical He employed strategies sampling method is selecting the sample size
of the study.
With regards to the work of Latridis (2010) on IFRS
adoption and financial statement effects: the UK case. The researcher used
logistic regression to analyze the data.
3.5 GAPS
in the Literature
The gap in the literature is based
on the fact that most of the existing literatures placed emphasis on the
implications of International financial reporting standards (IFRS) adoption on
the economy. There is yet inadequate studies on the implication of IFRS
adoption on the existing corporate governance practices in the Nigeria
financial sector.
Conclusion
In the light of the mandatory adoption of
International financial reporting standards (IFRS) in Nigeria, this study
investigates the implications of IFRS adoption on the existing corporate
governance practices in Nigeria financial sector.
From the academic review, the
results of the study showed that IFRS implementation will positively impact on
the existing corporate governance culture in Nigeria financial sector. This is
because the mandatory IFRS adoption would reduce information asymmetry, and
would smooth the communication between managers, shareholders, lenders and
other interested parties (Bushman and Smith 2001)
However, with the mandatory adoption
of the global accounting framework, (IFRS)Accountants of entities would have
to; be fully responsive in the use of information technology (IT) applying real
time operations in the production of
accounting information in the bid to achieving the objectives of IFRS in
Nigeria.