ABSTRACT
The objective of this paper is to
evaluate the implications of the adoption of International financial Reporting
Standard (IFRS) on corporate governance practices. The paper examines empirical literature with a view to identifying the effects of the adoption of
International financial reporting standard on the existing corporate
governance. Based on the papers reviewed, it was found that IFRS adopting will
positively strengthen the existing corporate governance practices in the
Nigeria Banking sector by giving room for transparent reporting of financial
information. The implication of the findings is that the mandatory adoption of
IFRS as a global financial reporting standard will enhance consistency and
comparability of accounting information.
CHAPTER
ONE
Introduction
1.1 Background of the study
Prior
to the advent of International financial reporting standard (IFRS) as a has its
own standard accounting practice version of the Generally accepted Accounting
principle (GAAP).
In
Nigeria the preparation of entity’s financial statement was hitherto based on
her Local Statement of Accounting Standard (SAS) issued by the Nigeria
Accounting standard Board (NASB). The statement of Accounting Standard which is
a blueprint from GAAP usually contain references at the concluding part the
standard to the effect that each SASS accord. Substantially with the equivalent
International Accounting Standard (Ogbonnaya 2004). 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 the Nigeria statement of Accounting
Standard (SAS) and the International Accounting standard (IAS). Olowo-Okere et al., (2004) observe that there is a
gap when statements of accounting are compared with their international
equivalents. It was concluded that even though Nigeria statements of Accounting
standards are based on the international Accounting Standards the accounting
statements are outdated and does not meet with the needs of a modern financial
system. In the words of Folajimi (2011), the statement of accounting standard
does not inspire investors confidence, and hence, present obstacles to the
growth and international of Nigeria banking sector.
In
the bid to eliminate the existing differences in financial reporting, the
European Union in 2002, chose International financial Reporting Standard (IFRS)
as a the common financial reporting language for listed companies from 2005.
this radical step was one element of the creation of a single capital market
min Europe and promised more comparable financial reporting across Europe and
increase transparency, leading to lower cost of capital for companies” (Jeka
2011).
Also,
on September 18, 2002, the financial Accounting standard Board (FASB) in the
United States, and the International Accounting standard Board (IASB) met in
Norwalk with a view to creating a single set of universal accounting standard.
The Board has been studying the differences and offering solutions with a view
to reducing the inconsistencies in order to create a single set of high quality
standard that would be suitable for global businesses (http://www.american
essays.com).
In
Nigeria the story is not different, Nigeria has made road map on how to
effectively adopt International financial Reporting Standard (IFRS) as a
universal financial reporting standard. The adoption of International Financial
Reporting Standard (IFRS) is expected to take place in three phases beginning
with publicity listed entitles and significant public interest entities in
January 1, 2012. Other public interest entities, in January 1, 2013 and small
and medium-sized entities (SMES) by January 2014. (Martins-Kuye 2010).
However,
with the establishment of financial Reporting council of Nigeria. (FRCN) in
2011, the council would take over and improve upon the functions of the former
Nigerian accounting Standard Board (NASB) in order to make Nigeria to meet
internationally accepted standard and codes of corporate financial reporting
undoubtedly, the establishment of the financial reporting council of Nigeria
has indicated to a large extent that Nigeria is fully prepared to be part of
the global change in financial reporting standard.
1.2 Statement of Problem
Recently,
the central Bank of Nigeria rescued eight commercial Banks after the
consolidation exercise. The consolidation of banks in Nigeria contributed to
restore the confidence of the investing public in the banking Industry.
Unfortunately, the cases of the now revitalized spring bank PLC and Wema Bank
PLC are well known. Both Banks were victims of poor corporate Government
Standard, (Awoyemi Olufemi 2009).
In
the same veins some of the rescued Banks hide multibillion naira Losses in
differed taxes (Business Day 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. In 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 that Nigeria is yet to embrace the global
trends in accounting principle. Bore the introduction of IFRS in Nigeria, the
central Bank of Nigeria had introduced
the code of corporate governance for Banks in Nigeria (Awoyemi Olufemi 2009),
yet the country has unarguably witnessed case of banks and institutional
failures resulting from non compliance with the provisions of corporate
governance practices.
It
is against this background, that this paper seeks to find out the effect of the
mandatory adoption of IFRS on the existing corporate governance practices in
Nigeria banking sector.
1.3 Objectives of the Study
The
broad objective of this study is to analyze the
implications of the adoption of International financial reporting standard
on corporate governance in the banking sector, with a view to determining whether
the adoption of IFRS would strengthen the existing corporate governance or not.
The specific objectives includes,
1.
To
determine to what extent directors of banks comply governance with respect to
adequate disclosure of relevant information.
2.
To
ascertain the impact of the mandatory LFRS adoption on the existing corporate
governance practices in Nigeria banking sector.
3.
To
ascertain the benefits of adopting IFRS as a global financial reporting
standard.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
The acquisition of non performing loans
(NPL) by Asset management company of Nigeria (AMCON) and injection of equity
into the rescued banks in order to bring their net asset value back to zero is
an indication that the banking industry is not yet stable (Business Day, 2011).
However, the adoption of international
financial reporting standard is a measure to achieving the harmonization of
accounting policies so that comparisons of financial information will be easier
and more meaningful across jurisdiction (Sanusi 2011),
This chapter focuses on the conceptual,
empirical and theoretical literature regarding international financial
reporting standard and its implications
on the code of corporate governance practices in Nigeria banks.
A lot of work has been documented by
scholars and intellectuals in the area of study, but the review was selected
based on information from articles from learned journals, seminar papers,
reports, magazines, newspapers and other relevant materials.
The issues reviewed include corporate governance
in Nigeria.
2.1 Concept of Corporate Governance.
For Suleiman (2003), corporate
governance is the framework for accountable decision making as well as the
structures that turn decision into actions in organization. He further added
that it is a combination 0f 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. For him 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 protection of shareholders rights. He further
posits that corporate governance refers to the manner in which the power of a
corporation is exercised in the management of it’s total portfolio of economic
and sociological resource with the aim of increasing shareholder value and
safeguarding the interests of other stakeholders in the context of it’s
corporate mission. From the above definitions, corporate governance implies
rules and regulations which ensure that a company is managed in a transparent
and accountable manner so as to ensure the survival of the enterprise.
Generally,
the objective of corporate governance is to strengthen the confidence of
investors in the business.
2.2 Empirical review
Adeyemi
and Adesojji (2011) carried out a study on the efficacy of internal and Exteral
audit in corporate governance in Nigeria financial sector. They 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
existent of a rubber stamp board. They researchers 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, form relative performance evolution around IFRS adoption. They found
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. They used simple statistical method to analyze the result.
Folajimo
(2011) equally carried out a study on IFRS adoption. Implications on management
Accounting and taxation in Nigeria Economy. He reported that implementations 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 him, 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) concocted study on FRS adoption and financial statement effects the case
of UK firms. He reported that IFRS implementation has favourably affected the
overall financial performance and positions of firms. The study compared the
financial performance and positions of firms. The study compared the financial
numbers reported under UK GAAP in the pre-official adoption period 2004 with
the IFRS re-stated numbers reported in 2004. the logistic regression that is
employed uses dummy variables as the dependent variable which is dichotomous
and takes two values i.e, “I” for the firms reporting IFRS re-stated financial
numbers in 2004 and ‘O’” for firms reporting their accounting figures under UK
GAAP is 2004. He used a multiple regression model in his analysis.
2.3 Theoretical Framework
The
theoretical framework guiding this study is Efficient market hypothesis (EMH).
The efficient market hypothesis suggests that all information that has a
bearing on the value of stocks, bounds and other financial assets will be used
to value price of those assets Nwite (2005).
EMH
theory which is associated with the idea of a random walk was propounded by
engine Fama (1970). He opines that
security markets were extremely efficient in reflecting information about
individual stocks and the market as a whole. EMH is not an investment theory perse but a philosophy
guiding decision making.
However,
in line with the EMH theory the adoption of HRS enables financial information to be compared easily by
investors with companies in related business; so as to inform their decision.
CHAPTER
THREE
DISCUSSION
This chapter presents the discussion of
strategies adopted in accomplishing the stated objectives. It equally presents
the discussion of the theoretical framework upon which this study is based.
3.1 Discussion
on the Strategies for Accomplishing the Stated Objectives
i. Indenturing the extent directors of
Banks comply with the code of corporate governance, this objective is
accomplished by analyzing the opinions of the respondents using chi-square
method.
ii. In ascertaining the impact of mandatory
IFRS adoption on the existing corporate governance practices in Nigeria Banking
sector, the objective is accomplished by analyzing the information obtained
through secondary data using chi-square method.
iii. In ascertaining the benefits of adopting
IFRS as a global financial reporting standard, this objective is accomplished
using the same method as stated above.
3.2 Discussion
on the Stated Theoretical Framework
In
assessing the implication of International financial reporting standard (IFRS)
on corporate governance, Efficient market hypothesis (EmH) is chosen. The
choice of this theory is due to it’s suitability and importance in decision
making as state din Nwite (2005), when an individual wants to invest, he will
first seek out information. Investments are driven by the quality of market
information. This is because, good financial information that makes investment
decision efficient depends largely on the qualitative and quantitative
characteristics of information such as relevance, reliability, comparability,
full disclosure of important accounting policies. The underling rationale
behind the introduction of IFRS is to enhance comparability of reliable
accounting information by investors.
CONCLUSION
This
study investigates the implications of international financial reporting standard
(IFRS) adopting on existing corporate Banking sector.
From
the academic review, the results of the study showed that IFRS adoption 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 smooth the communication between managers,
shareholders, lenders and other interested parties (Bushman and smith 2001).
With the mandatory adoption of the global accounting framework, 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.